Aurora Developments Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (QUD 251 of 2008; QUD 252 of 2008)
Judgment date: 18 March 2011
Date published: 25 March 2013

Summary of decision:
Outlines the ATO response to this case as to whether a residential development site is supplied GST-free as a going concern; there was a failure to take reasonable care; and the validity of a penalty assessment if the penalty is subsequently reduced.

Overview of facts:
The applicant carried on a business of land development. Initially it was the applicant's intention to develop the parcel of land in question as a multi-faceted residential and care facility and later this changed to a comprehensive residential community. This was to be done in conjunction with other related entities similarly developing adjacent land. The applicant marketed and sold various types of housing off the plan. However, in the period between May and July 2003, the applicant elected to withdraw from its development project for the land and notified the purchasers of the termination of their contracts. | The applicant subsequently undertook to prepare the land for sale en globo to a single purchaser. The applicant entered into a contract of sale for the development site with Australand related entities. The settlement date was 2 July 2004. It was agreed in writing that the supply was a GST-free supply of a going concern. | Prior to completion, and pursuant to the contract of sale, the applicant was required to undertake certain works (the Annexure C works) and to supply development material as specified in the contract. The Annexure C works involved among other things: • the demolition and removal of existing construction works including the sales office; • the construction or completion of certain earthworks including pre-loading and filling the land; • the removal of infrastructure services such as sewer, water, electrical and gas. | • the demolition and removal of existing construction works including the sales office; • the construction or completion of certain earthworks including pre-loading and filling the land; • the removal of infrastructure services such as sewer, water, electrical and gas. | The applicant completed its business activity statement for the tax period 1 July to 31 July 2004 on the basis that the sale of the land was GST-free as the supply of a going concern. Therefore, the business activity statement for July 2004 did not include GST of $2,151,851 in relation to that supply. The Commissioner issued an assessment accordingly. | The applicant was assessed to penalty for the July 2004 tax period for failing to take reasonable care. That base penalty amount was increased by an uplift amount. The penalty assessed for that tax period was subsequently reduced by the uplift amount to give effect to the Commissioner's decision to allow, in part, the applicant's objection to the penalty assessment. | Issues decided by the court | The issues decided by the Court were: (i) whether the sale of a residential development site was GST-free as the supply of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act); and (ii) in relation to that supply, whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period; and (iii) in relation to the penalty assessment for failing to take reasonable care, whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety. | (i) whether the sale of a residential development site was GST-free as the supply of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act); and (ii) in relation to that supply, whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period; and (iii) in relation to the penalty assessment for failing to take reasonable care, whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety. | Whether the sale of the residential development site was GST-free as the supply of a going concern under section 38-325 of the GST Act - Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232 | The Court (paragraphs 253-4) found it was necessary to first identify an enterprise or a project enterprise within the business enterprise (paragraphs 259-60) to determine if the enterprise is or will be carried on until the day of the supply and to determine if all of the things necessary for the continued operation of that enterprise have been supplied. Section 38-325 is not satisfied if the recipient is supplied with only the things that the recipient considers necessary to enable it to undertake its enterprise. | The Court (paragraph 241) determined that the 'proper construction of the contract having regard to its text, the surrounding circumstances known to the parties and the purpose and object of the transaction' was not to 'effect a sale of an enterprise consisting of a development characterised by all of the documentation that had characterised the Aurora enterprise' up until such time as the decision was taken to withdraw from that development. | By the contract date (2 October 2003) the applicant was found (paragraph 261) to no longer be engaged in the development of the land according to the "Development Material" as defined in the contract. Instead, the applicant 'was engaged in an en globo sale of the land as part of its general business undertaking and it assumed a contractual obligation to undertake the Annexure C works required to be done by Australand'. The Annexure C works undertaken by the applicant were not a continuation of the applicant's development project. | The Court (paragraph 255) held that the day of supply for the purposes of subsection 38-325(2) was 2 July 2004 (i.e. the settlement date). That there is a contract date and a later supply date was considered entirely consistent with the language of subsection 38-325(2) as it 'contemplates "an arrangement" under which a supply date occurs (by which time all things necessary for the continued operation of the enterprise had been supplied) and, that until the supply date, the supplier continues to carry on the enterprise'. | The supply of the land by the applicant was a supply for the purposes of section 9-10 of the GST Act and a taxable supply for the purposes of section 9-5 of the GST Act. It was not a GST-free supply. | The matter was remitted to the Commissioner as the Commissioner had previously accepted that the applicant could rely on the margin scheme provisions if the Court found that it was not a GST-free supply of a going concern. | Whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period - Aurora Developments Pty Ltd v Commissioner of Taxation (No. 2) [2011] FCA 1090 | The Court held that the applicant did not take reasonable care in completing its business activity statement. | Although the applicant had relied upon advice from its accountants the applicant failed to take reasonable care to disclose to the accountants material matters concerning its withdrawal from the land development project. The applicant failed to obtain an advice from the accountants 'directed to it specifically which addressed the question of whether the going concern provisions of the GST Act applied to all the acts material to that question, so as to enable a careful formulation' of the business activity statement for the relevant tax period (paragraph 108). | Whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety - Aurora Developments Pty Ltd v Commissioner of Taxation (No. 2) [2011] FCA 1090 | The Court found that the Commissioner has the power to allow an objection in part which has the effect of varying or reducing the penalty assessment. | In relation to section 14ZY of the Taxation Administration Act 1953 (TAA 1953), the Court stated that the provision 'seems to confer an express power to allow an objection in part which has the effect of varying or reducing the penalty assessment' (paragraph 110). | It was also accepted that the power conferred under Division 284, Schedule 1 of the TAA 1953 'includes a power to make, grant or issue an instrument for the purposes of s 33(3) [of the Acts Interpretation Act 1901 ] and, subject to any contrary intention contained in the Act, s 33(3) has the effect of conferring a power to repeal, rescind, revoke, amend or vary any instrument consisting of a notice of assessment determining the amount of penalty and the due date for penalty (s 298-15 [Schedule 1, TAA 1953])' (paragraph 118).

Issues decided:
The issues decided by the Court were: (i) whether the sale of a residential development site was GST-free as the supply of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act); and (ii) in relation to that supply, whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period; and (iii) in relation to the penalty assessment for failing to take reasonable care, whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety. (i) whether the sale of a residential development site was GST-free as the supply of a going concern under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act); and (ii) in relation to that supply, whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period; and (iii) in relation to the penalty assessment for failing to take reasonable care, whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety. | Whether the sale of the residential development site was GST-free as the supply of a going concern under section 38-325 of the GST Act - Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232: The Court (paragraphs 253-4) found it was necessary to first identify an enterprise or a project enterprise within the business enterprise (paragraphs 259-60) to determine if the enterprise is or will be carried on until the day of the supply and to determine if all of the things necessary for the continued operation of that enterprise have been supplied. Section 38-325 is not satisfied if the recipient is supplied with only the things that the recipient considers necessary to enable it to undertake its enterprise. The Court (paragraph 241) determined that the 'proper construction of the contract having regard to its text, the surrounding circumstances known to the parties and the purpose and object of the transaction' was not to 'effect a sale of an enterprise consisting of a development characterised by all of the documentation that had characterised the Aurora enterprise' up until such time as the decision was taken to withdraw from that development. By the contract date (2 October 2003) the applicant was found (paragraph 261) to no longer be engaged in the development of the land according to the "Development Material" as defined in the contract. Instead, the applicant 'was engaged in an en globo sale of the land as part of its general business undertaking and it assumed a contractual obligation to undertake the Annexure C works required to be done by Australand'. The Annexure C works undertaken by the applicant were not a continuation of the applicant's development project. The Court (paragraph 255) held that the day of supply for the purposes of subsection 38-325(2) was 2 July 2004 (i.e. the settlement date). That there is a contract date and a later supply date was considered entirely consistent with the language of subsection 38-325(2) as it 'contemplates "an arrangement" under which a supply date occurs (by which time all things necessary for the continued operation of the enterprise had been supplied) and, that until the supply date, the supplier continues to carry on the enterprise'. The supply of the land by the applicant was a supply for the purposes of section 9-10 of the GST Act and a taxable supply for the purposes of section 9-5 of the GST Act. It was not a GST-free supply. The matter was remitted to the Commissioner as the Commissioner had previously accepted that the applicant could rely on the margin scheme provisions if the Court found that it was not a GST-free supply of a going concern. | Whether the applicant failed to take reasonable care in making or formulating its business activity statement for the relevant tax period - Aurora Developments Pty Ltd v Commissioner of Taxation (No. 2) [2011] FCA 1090: The Court held that the applicant did not take reasonable care in completing its business activity statement. Although the applicant had relied upon advice from its accountants the applicant failed to take reasonable care to disclose to the accountants material matters concerning its withdrawal from the land development project. The applicant failed to obtain an advice from the accountants 'directed to it specifically which addressed the question of whether the going concern provisions of the GST Act applied to all the acts material to that question, so as to enable a careful formulation' of the business activity statement for the relevant tax period (paragraph 108). | Whether the Commissioner has the power to vary (reduce) the penalty assessed following the issue of the penalty assessment or whether the assessment must be set aside in its entirety - Aurora Developments Pty Ltd v Commissioner of Taxation (No. 2) [2011] FCA 1090: The Court found that the Commissioner has the power to allow an objection in part which has the effect of varying or reducing the penalty assessment. In relation to section 14ZY of the Taxation Administration Act 1953 (TAA 1953), the Court stated that the provision 'seems to confer an express power to allow an objection in part which has the effect of varying or reducing the penalty assessment' (paragraph 110). It was also accepted that the power conferred under Division 284, Schedule 1 of the TAA 1953 'includes a power to make, grant or issue an instrument for the purposes of s 33(3) [of the Acts Interpretation Act 1901 ] and, subject to any contrary intention contained in the Act, s 33(3) has the effect of conferring a power to repeal, rescind, revoke, amend or vary any instrument consisting of a notice of assessment determining the amount of penalty and the due date for penalty (s 298-15 [Schedule 1, TAA 1953])' (paragraph 118).

ATO view of decision:
The ATO view in GST Ruling GSTR 2002/5 accords with the Court's decision in relation to the going concern issue. | The ATO's administrative practice concerning the reduction of penalty imposed under Division 284, Schedule 1 of the TAA 1953, to give effect to an objection decision, is also in accordance with the Court's decision.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | GST Rulings GSTR 2002/5 and 2005/5 have been updated to reflect the Court's decision in Aurora Developments Pty Ltd v Commissioner of Taxation [2011] FCA 232. | It was not considered necessary to update Miscellaneous Taxation Ruling MT 2008/1 in relation to Aurora Developments Pty Ltd v Commissioner of Taxation (No.2) [2011] FCA 1090.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 (Cth) 38-325 Taxation Administration Act 1953 14ZY Division 284 of Schedule 1 Acts Interpretation Act 1901 subsection 33(3)
Case references: Azevedo v Secretary Department of Primary Industries and Energy [1992] FCA 106 106 ALR 683 Brady King Pty Ltd v Federal Commissioner of Taxation [2008] FCAFC 118 (2008) 168 FCR 558 2008 ATC 20-034 69 ATR 670 Collector of Customs (NSW) v Brian Lawlor Automotive Pty Ltd [1979] FCA 21 Flaherty v Secretary, Department of Health and Ageing and Others [2010] FCAFC 67 Heslehurst v Government of New Zealand [2002] FCA 429 Kajewski v Federal Commissioner of Taxation [2003] FCA 258 2003 ATC 4375 52 ATR 455 MLC Ltd v Commissioner of Taxation [2002] FCA 1491 2002 ATC 5105 51 ATR 283 North Ryde RSL v Commissioner of Taxation [2002] FCA 313 2002 ATC 4293 49 ATR 579 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 R v Ng [2002] VSCA 108 Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 [2004] HCA 52
Subject references: GST-free supply of a going concern Land development Penalty assessment Reasonable care