Federal Commissioner of Taxation v Swansea Services Pty Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 139 of 2009)
Judgment date: 24 April 2009
Date published: 28 September 2012
Decision outcome: Adverse

Summary of decision:
Outlines whether the applicant was carrying on an enterprise for the purposes of s. 9-20 of the GST Act.

Overview of facts:
This was an appeal from the decision of the AAT that the applicant was at relevant times carrying on an enterprise and thus entitled to GST registration. The unchallenged evidence was that: 1. All of the shares in the applicant were owned by an individual who controls a group of companies ("the group") which has a successful and substantial real estate development business. 2. The applicant's only activity since 1997 has been the acquisition of paintings and antiques. From 1997 to November 2005 approximately $4.8 million had been spent. This comprised 225 antique items and 87 paintings. 3. Sales were very minor. None occurred until Nov 2002. Only 3 items were sold in the period 1997 to Nov 2005. In that same period painting sales totalled $46,000 and antique sales totalled $60,000. 4. Most artworks were kept at either of two private residences which were owned by the group. A small number were on display at the group's business premises. 5. The applicant had no written business plan but evidence was given that: • the purpose and intention of acquiring artworks had always been based on the view that the artworks were to have an inherent appreciating value; • the investment may be turned to account when it was appropriate to do so at a profit; • artwork was not purchased as a hobby or recreational pursuit; • the Swansea Collection has been built up as a sound financial investment, all the works in which were for sale at the right price; • the applicant was striving to improve the quality of the collection to museum quality; and • as better quality paintings came on the market, the Applicant would sell the B grade paintings in order continually to raise the quality of the collection as a whole. This was to be done by way of off-market transactions or by way of purchase at auctions. 6. Evidence was also given that the policy was to build one of the finest collections of art in Australia and that the strategy included an expectation that items would double in value every 7 years. If they failed that test, they would be disposed of and replaced with better quality items. 7. It was admitted in evidence on behalf of the Applicant that except in the case of the few specific items actually sold, no active steps had been taken to market or sell any artwork. 8. The applicant did not have any employees and did not have a bank account. 9. Comprehensive accounting records were maintained. These records were maintained by "group" employees. 10. Until 2004, the applicant's purchases were funded by interest free loans from the Applicant's director and the group. In that year, those borrowings were supplemented by a $1 million commercial bill facility secured by the group. | 1. All of the shares in the applicant were owned by an individual who controls a group of companies ("the group") which has a successful and substantial real estate development business. 2. The applicant's only activity since 1997 has been the acquisition of paintings and antiques. From 1997 to November 2005 approximately $4.8 million had been spent. This comprised 225 antique items and 87 paintings. 3. Sales were very minor. None occurred until Nov 2002. Only 3 items were sold in the period 1997 to Nov 2005. In that same period painting sales totalled $46,000 and antique sales totalled $60,000. 4. Most artworks were kept at either of two private residences which were owned by the group. A small number were on display at the group's business premises. 5. The applicant had no written business plan but evidence was given that: • the purpose and intention of acquiring artworks had always been based on the view that the artworks were to have an inherent appreciating value; • the investment may be turned to account when it was appropriate to do so at a profit; • artwork was not purchased as a hobby or recreational pursuit; • the Swansea Collection has been built up as a sound financial investment, all the works in which were for sale at the right price; • the applicant was striving to improve the quality of the collection to museum quality; and • as better quality paintings came on the market, the Applicant would sell the B grade paintings in order continually to raise the quality of the collection as a whole. This was to be done by way of off-market transactions or by way of purchase at auctions. 6. Evidence was also given that the policy was to build one of the finest collections of art in Australia and that the strategy included an expectation that items would double in value every 7 years. If they failed that test, they would be disposed of and replaced with better quality items. 7. It was admitted in evidence on behalf of the Applicant that except in the case of the few specific items actually sold, no active steps had been taken to market or sell any artwork. 8. The applicant did not have any employees and did not have a bank account. 9. Comprehensive accounting records were maintained. These records were maintained by "group" employees. 10. Until 2004, the applicant's purchases were funded by interest free loans from the Applicant's director and the group. In that year, those borrowings were supplemented by a $1 million commercial bill facility secured by the group. | • the purpose and intention of acquiring artworks had always been based on the view that the artworks were to have an inherent appreciating value; • the investment may be turned to account when it was appropriate to do so at a profit; • artwork was not purchased as a hobby or recreational pursuit; • the Swansea Collection has been built up as a sound financial investment, all the works in which were for sale at the right price; • the applicant was striving to improve the quality of the collection to museum quality; and • as better quality paintings came on the market, the Applicant would sell the B grade paintings in order continually to raise the quality of the collection as a whole. This was to be done by way of off-market transactions or by way of purchase at auctions. | Issues decided by the court | 1. Whether an enterprise, for the purposes of s.9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is being carried on is not a pure question of law sufficient to attract the jurisdiction of the Federal Court, pursuant to s.44 of the Administrative Appeals Tribunal Act. | 2. There was evidence on which the Tribunal could properly base its decision that the applicant was carrying on an enterprise and thus entitled to be registered for GST purposes. Although there was no dispute in relation to most of the factual background, the one contentious primary factual issue (i.e. whether the Applicant intended to sell the artwork for a profit) was decided by the Tribunal in the Applicant's favour. It was entitled to do this even if reasonable minds might disagree. | 3. As to investment activity, there is nothing in the legislation that indicates that investment activities would not amount to the carrying on of an enterprise. Accordingly, even if the activities of the applicant can be properly characterised as being in relation to a strategy of " long term investment " that does not necessarily preclude those activities from amounting to the carrying on of an enterprise. | 4. The words " in the form of " in the definition of "enterprise" in s.9-20 of the GST Act do not support the suggestion that "form" will prevail over "substance". Rather they just extend the reach of "enterprise" to activities which are in the form of a business but would not, in the ordinary meaning of "business", be considered such. His Honour stated that: " But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. "

Issues decided:
1. Whether an enterprise, for the purposes of s.9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), is being carried on is not a pure question of law sufficient to attract the jurisdiction of the Federal Court, pursuant to s.44 of the Administrative Appeals Tribunal Act. 2. There was evidence on which the Tribunal could properly base its decision that the applicant was carrying on an enterprise and thus entitled to be registered for GST purposes. Although there was no dispute in relation to most of the factual background, the one contentious primary factual issue (i.e. whether the Applicant intended to sell the artwork for a profit) was decided by the Tribunal in the Applicant's favour. It was entitled to do this even if reasonable minds might disagree. 3. As to investment activity, there is nothing in the legislation that indicates that investment activities would not amount to the carrying on of an enterprise. Accordingly, even if the activities of the applicant can be properly characterised as being in relation to a strategy of " long term investment " that does not necessarily preclude those activities from amounting to the carrying on of an enterprise. 4. The words " in the form of " in the definition of "enterprise" in s.9-20 of the GST Act do not support the suggestion that "form" will prevail over "substance". Rather they just extend the reach of "enterprise" to activities which are in the form of a business but would not, in the ordinary meaning of "business", be considered such. His Honour stated that: " But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. "

ATO view of decision:
The Commissioner has decided not to appeal this decision generally on the basis that: "...it was open for the Tribunal to take into account the entirety of the transactional history together with explanations regarding that history, its context and statements (both contemporaneously with the events in question and in the hearing) as to the corporate objective. ... the conclusion that it reached was open to it with or without the subjective evidence of purpose. As there was a reasonable basis for the factual finding reached and no other error is demonstrated, the conclusion should not be disturbed." (paragraph 4 of the Federal Court decision) | The decision in this case does not mean that in every situation involving companies engaged in collection of artworks or other valuable items, a conclusion would be reached that an enterprise was being carried on and that the entity would be entitled to register. | As is commonly the case with the question of whether a business or adventure or concern in the nature of trade is being carried on, it is necessary to weigh up all the facts and evidence in each case having regard to a range of factors. The Commissioner considers it unlikely that there would be many entities engaged in the kind of activity carried out and on the scale and with the degree of sophistication of the Applicant in this case. In this regard McKerracher J's comment at paragraph 101 of the decision that " Had the Commissioner succeeded in establishing that Swansea was simply a vehicle for [the director's] hobby, the position may have been different ...." should be noted.

Administrative treatment:
Implications on current Public Rulings & Determinations | The Commissioner has reviewed and amended MT 2006/1, taking into account this decision.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 9-20 23-10 23-15 23-55(2) Administrative Appeals Tribunal Act 1975 44(1)
Case references: HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126 2005 ATC 4571 60 ATR 106 FCT v Cooper (1991) 29 FCR 177 21 ATR 1616 91 ATC 4396 Toyama Pty Ltd v Landmark Building Developments Pty Ltd [2006] NSWSC 83 2006 ATC 4160 62 ATR 73 Spassked v Commissioner of Taxation (2003) 136 FCR 441 2003 ATC 5099 54 ATR 546
Subject references: GST Enterprise GST Registration