Tax Compliance: When Evidence Doesn’t Match Taxpayer’s Data

Tax Compliance: The Problem When the Evidence Doesn’t Match What the Taxpayer Tells the ATO

Posted: February 6 2024

Due to the Australian Taxation Office's (ATO) notable investigation of business transactions nationwide, there has been a noticeable increase in the number of tax audits during the most recent fiscal year.

Furthermore, the ATO is utilising the most recent technical advancements, as seen by the functionality of its upgraded data matching software. When processing tax returns, this allows the ATO to compare the disclosed data with records obtained from pertinent organisations.

Tax Compliance: The Problem When the Evidence Doesn’t Match What the Taxpayer Tells the ATO

Common Issue in Tax Compliance

A recent Administrative Appeals Tribunal (AAT) case emphasises how crucial it is to make sure the supporting documentation for your tax stance is there.

The issue arises when the taxpayer tells the ATO something different from the evidence.

The issue involves heritage farmland that was first bought for $1.6 million, sold for $4.25 million seven years later, and the GST debt that the ATO is currently pursuing related to the sale.

Sutton Farms, a 1.47-hectare property in Western Australia with a huge barn, living quarters, and an uninhabitable homestead, was acquired by the taxpayer in 2013.

The taxpayer rezoned the land over a period of seven years, completed sewage, water, and electrical work, and obtained conditional subdivision approval to divide the land into four lots with intentions for a subsequent subdivision into about fifteen lots.  A $1 million bank loan and an additional $1.5 million from his brother-in-law funded the project.

The taxpayer claimed that they intended to use the property as their home, give his son and daughter the subdivided lots to use as their own homes, and use the final subdivided lot as a memorial to another child who had died away, even though the property was never used for this purpose.

The property was eventually sold in 2020 for $4.25 million at a profit as a single lot without being subdivided.

The taxpayer raised an objection when the ATO audited the transaction and sent an assessment notice for GST on the selling transaction. The taxpayer contended that the subdivision application had no commercial purpose and that Sutton Farms was meant to be used as a family property.  Since the sale was not conducted in the course of a business, GST should not be applicable. Nonetheless, a number of elements and contradictions undermined the taxpayer's case:

Reports from the local media detailing the taxpayer's intention to commercialise the land, "with the plans to add 8 – 10 finger jetties in the adjacent canal, turn the barn into an art studio, and lease it out as a restaurant, wine bar, or coffee house."

Declarations submitted to the ATO during the dispute's objection phase, which showed the taxpayer intended to partition the land and sell some of these lots to pay back loans to the taxpayer's brother-in-law; and

GST credits for the initial development expenses were requested. Additionally, the accountant for the taxpayer represented the ATO that the GST credits were claimed due to the property's planned subdivision and sale of many lots, which constituted an enterprise.

The taxpayer's issue comes from the fact that, while not developing the land as he had initially planned and selling it as a single lot, he behaved during the ownership term as though the initiative were a business endeavour with a clearly defined commercial goal.

The Significance of Objective Evidence

It can be challenging to determine how a property sale should be treated tax-wise because there are a lot of variables to take into account. This frequently includes the taxpayer's goal or aim when purchasing real estate. But just declaring your purpose is insufficient; it must be backed up by verifiable facts. This could include the conditions of the loan, your correspondence with advisors and real estate brokers, the method your expenses have been paid for, or your discussion with a journalist.

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About Lan Nguyen

Lan is the Founder and Chief Strategist at Success Accounting Group, Melbourne based CA firm. In a matter of short 8 years she has built up a reputable Chartered accounting firm with 3 offices and a team of 6 professional accountants and support team members. Her mission is to provide Innovative and Strategic Financial advice to help her customers make smarter financial decisions today for a brighter future.

Success Accounting Group is for established business owners who would like help to grow a sustained business. As a business owner you understand what drives your business success with our accounting team taking care of the rest.

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