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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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THE GST FOOD EXEMPTION ________________________________________________________________________________
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 term "activity or series of activities" is not defined in the ABN Act. or series of activities. To determine whether an activity or series of activities amounts to a business.13 Fraser J stated: ['Activity'] is a word of considerable breadth. 17 ABN Act. 11233 (HC) ("Newman"). Entities can undertake a wide range of activities with varying degrees of interrelationship. of the entity need to be identified to determine whether or not an enterprise is being carried on by the entity. "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 1999.15 MT 2000/1 provides a number of examples of the operation of the term "activity"."11 MT 2000/1 outlines the view of the ATO concerning the meaning of certain key words and phrases used to define an enterprise. 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. paras 86-93.14 It is possible that more than one enterprise is being carried on by an entity..THE GST FOOD EXEMPTION ________________________________________________________________________________ 2. 16 MT 2000/1.16 2. para 58. 2. The meaning of "enterprise". s 41 provides that "business includes any profession. 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). constitute an enterprise. animal or group choses to do. The relevant activity. employment. 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. s 9-20(2)(b).2 "Business" An entity carrying on a "business" is carrying on an enterprise. It As indicated in part 1. an 'activity' is essentially an act or series of acts that an entity chooses to do.. Hobbies and recreation are discussed in Taxation Ruling TR 97/11. para 57.' (emphasis added). to establish that there is one enterprise in order for an entity to be entitled to an ABN. a pursuit' and (in the plural) 'things that a person. is 'an occupation. This essentially is a question of fact. however. 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. Based on the New Zealand experience. for which an "activity" must exist. 15 GSTA. A hobby. however. as defined in the ABN Act. it will be necessary for the activity to be considered against the various indicators of "business" established in case law. the equivalent concept to an "enterprise" in New Zealand is a "taxable Goods and Services Tax Determination GSTD 2000/8 ("GSTD 2000/8"). Indeed. It is only necessary. 12 11 NOVEMBER/DECEMBER 2000 442 . activity or private recreational pursuit will not. MT 2000/1. MT 2000/1 states: . 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)). trade. I think. s 38 ("the ABN Act"). The nearest. is considered in MT 2000/1. 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.12 activity". vocation or calling but does not include occupation as an employee". The meaning of an 'activity. 13 (1994) 16 NZTC 11229. the term "activity or series of activities" will be given a broad construction.1 "Activity or Series of Activities" An enterprise may be comprised of one activity or a series of activities. s 6(1) ("ITAA36").

Isolated transactions fall into this category. must have a reasonable expectation of profit or gain for that activity. in the absence of other factors.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). The definition of "taxable activity" specifically refers to an activity that is. or a partnership of individuals. is that many non-profit organisations. 25 Ibid para 31. s 41 to mean "a natural person".4 "An Individual. According to MT 2000/1: Trade commonly means operations of a commercial character where goods or services are provided to customers for reward. See note 9 above. para 30. However. 23 GSTA. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. the activity in question does not have to be carried out for the purpose of profit making. in the ATO's view. 21 GSTD 2000/8. clubs and associations will meet the definition of an enterprise. Some activities do not make profits or gains in the short term. The fact that the asset is 18 19 MT 2000/1. 22 This term is defined in the ABN Act. However. s 9-20 refer to an activity "in the form of" a business or adventure or concern in the nature of trade.3 "In the Form of" The ABN Act. than the term "enterprise". the phrase contemplates "a broader set of activities". s 195-1 provides that the term "partnership" has the same meaning as the term in the Income Tax Assessment Act 1997 (Cth). para 7. While TR 97/11 considers the carrying on of a primary production business."24 The requirement of a reasonable expectation of profit or gain: … is not limited to specific years and may cover a number of periods. and partnerships of individuals. Ibid para 27. s 995-1 ("ITAA97").21 2. to be an enterprise. or series of activities. 20 Ibid para 27 and 75-78. or series of activities. 26 NZ GSTA. the period to be covered by the test must be relevant to the nature of the activity undertaken.18 2. or a Partnership [of Individuals]. The ATO states that 22 23 a reasonable expectation "requires more than a possibility. the sale of the family home. para 61. broader in its potential application to individuals.25 There is no such equivalent requirement in the definition of "taxable activity" in the NZ GSTA. Taxation Ruling TR 97/11 ("TR 97/11") considers the meaning of business as used in ITAA36. car and other assets are not. 2. 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.THE GST FOOD EXEMPTION ________________________________________________________________________________ is not proposed to discuss the concept of business in this article. Without a Reasonable Expectation of Profit or Gain" An individual. adventures or concerns in the nature of trade. carrying out an activity. For NZ GST purposes. NOVEMBER/DECEMBER 2000 443 . s 6. if the activity or activities had been done for profit.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. 24 MT 2000/1. 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". s 38 and the GSTA. carried on "whether or not for a pecuniary profit"26 and is therefore."20 The effect of the phrase. According to the ATO.

1985. that United Kingdom authority on the concept may play a part in the interpretation and application of the concept by the ATO. 97 ATC 4945 at 4961: See also the discussion in R W Parsons.27 (emphasis added) (McClelland v FC of T (1970) 120 CLR 487 at 495. para 69. Sydney. Second. (1970) 2 ATR 21 at 26. para 24 and 25. 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. Income Taxation in Australia (1985) 162. 31 Ibid para 68. to be held as income producing assets or to be held for the pleasure or enjoyment of the person. rather. 30 Ibid.34 (emphasis added) MT 2000/1. the Australian income tax legislation does not refer to the concept of an adventure or concern in the nature of trade. In respect of the former distinction (between "business" and "investment"). the United Kingdom law proving to be "a useful starting point" in considering the meaning of the phrase. on the other hand: … may be an occasional or one-off transaction that does not amount to a business. 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'. 28 27 NOVEMBER/DECEMBER 2000 444 . 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. are more likely to be purchased for investment purposes rather than trading purposes: see Johnston v Heath [1970] 3 All ER 915. 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". 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).29 An adventure or concern in the nature of trade. according to MT 2000/1. para 69 and 70. will generally include a trade that is carried out on a regular or continuous basis. AB v FC of T 97 ATC 4945.32 The ATO states that assets are categorised as either trading assets or investment assets in the United Kingdom cases. 32 FC of T v The Myer Emporium Ltd 87 ATC 4363."28 A business. 70 ATC 4115 at 4120). 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. 29 Ibid para 67. Income Taxation in Australia. I respectfully agree.33 Assets which: … are purchased with the intention of holding them for a reasonable period of time.31 A number of Australian decisions are also noted in MT 2000/1. That is the view of Jacobs J in AB v FC of T (1997) 37 ATR 225 at 242. 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.30 The ATO states that. Investment assets may be used by entities in carrying on enterprises. To determine whether or not the use of these assets constitutes an enterprise. given the reference in s 38(1)(a) of the ABN Act to an activity or activities done "in the form of a business". FC of T v Whitfords Beach Pty Ltd 82 ATC 4031 ("Whitfords Beach"): McClelland v FC of T 70 ATC 4115 ("McClelland"). of itself. 33 MT 2000/1. as noted here. it is an English concept. First. Ibid para 64. But it is clearly a relevant distinction in the context of an isolated venture": RW Parsons. The Law Book Company Limited.THE GST FOOD EXEMPTION ________________________________________________________________________________ sold at a profit does not. 34 MT 2000/1. 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. result in the activity being commercial in nature.

above n 33. 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. family cars and other private assets. can change from investment to trade or from trade to investment."37 This phrase is essentially taken from the passage in the Privy Council's judgment in McClelland. and also of resale as a commercial commodity": J Pearce. 39 Parsons.35 As already noted. para 71. the relevant transaction(s) "should have the characteristics of a business deal.44 The character of an asset.42 While this last statement is true. 163 (in respect of both land and shares). On the other hand. business plant and machinery. 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. Johnston v Heath 46 TC 463 ("Johnston") (in respect of the sale of land). 45 MT 2000/1.47 According to the ATO these cases show that in order for an adventure or concern in the nature of Ibid para 63.. 47 Edwards (Inspector of Taxes) & Anor v Bairstow 36 TC 207. The author believes that the "indicators of a business" will have only limited relevance to the characterisation of many "occasional" or "oneoff" transactions. when the same transaction in another kind of property may yield such an inference.[land] is capable both of retention for use and occupation. "The Characteristics of Trade in Relation to Property Deals" (1962) British Tax Review 144. such as shares and land. Wisdom v Chamberlain [1969] 1 All ER 332. MT 2000/1 observes41 that certain types of assets.. cannot be held at the same time for both purposes: Simmons (as liquidator of Lionel Simmons Properties) v IRC. above n 33. the family home. Ibid para 67. or as an investment. 38 70 ATC 4115. can be purchased for either investment purposes or trading purposes. 162. 40 MT 2000/1.THE GST FOOD EXEMPTION ________________________________________________________________________________ The phrase "indicators of a business" is a reference to the factors outlined in TR 97/11. 44 [1980] 2 All ER 798 ("Simmons") and MT 2000/1. 41 Ibid.40 The realisation of these investment assets does not amount to trade. 163. The ATO state that investment assets include rental properties. 4120. such as repetition and permanency. it should be kept in perspective.38 already quoted in this article (as cited by MT 2000/1). while it is held. An isolated transaction in land or shares does not necessarily yield an objective inference of profit purpose. As noted by Parsons39 the phrase in McClelland is not "exactly definitive" (nor is it particularly helpful). [1955] 3 All ER 48 ("Edwards") (concerning the sale of a cotton spinning plant).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. 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. para 71.43 Assets that are capable of being purchased for either investment or trading purposes. which by their very "one-off" nature will not display the characteristics of a business outlined in TR 97/11. 146 and Parsons. 37 Ibid para 74. 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.) 36 35 NOVEMBER/DECEMBER 2000 445 . above n 33. MT 2000/1 adds that to constitute an adventure or concern in the nature of trade. 46 Ibid para 72. para 71. 42 This view is supported by United Kingdom commentators such as Pearce who comments that ". 43 Parsons.

50 Pearce. the level of development work. the actual position was made clear by the House of Lords in Edwards51 and can be stated in three propositions (or steps). 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. In determining the nature of a transaction. the subdivision of a 2. in the United Kingdom context. Case S70 (1996) 17 NZTC 7431. Ibid para 74. would constitute "the mere realisation of a private asset"55 rather than an adventure or concern in the nature of trade. 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. above n 42. 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. roading contractors etc). there is still. The view of the ATO is that the transaction has a commercial flavour because of the way it was undertaken (employment of engineers. the time and effort involved. include an elusive factor that is more than purpose to profit. Third. 51 36 TC 207. 144. above n 33. The above two examples 48 49 MT 2000/1.52 First. "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. 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. NOVEMBER/DECEMBER 2000 446 . 53 Parsons. 52 Pearce. Case T40 (1997) 18 NZTC 8267: and Case T60 (1998) 18 NZTC 8449. therefore. 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.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. Second. the determination of whether a trade or an adventure or concern in the nature of trade exists should not. by the Commissioners) as to whether the facts found in the first step constitute a trade as construed from the second step. 10 ("TIB"). 162. for example. 55 Ibid. In the second example (Example 12). inter alia.5 hectare lot into two lots and sale of the second lot. the construction of the word "trade" used in the (income) tax legislation is a question of law. 144-145. produce a "random" or arbitrary result. however. The New Zealand courts similarly place much emphasis on the level of development work. According to Pearce. 54 MT 2000/1. above n 42. an inference involving fact and law must be drawn (again in the United Kingdom context. MT 2000/1 provides. Based on Pearce's propositions. the primary facts and secondary conclusions of fact from the case are questions of fact (to be found. para 74 (Example 11 and Example 12).THE GST FOOD EXEMPTION ________________________________________________________________________________ trade to exist.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.53 To illustrate the concept of an adventure or concern in the nature of trade. 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.54 In the first example (Example 11). the level of financial investment and the commerciality of the transaction: Inland Revenue Department Tax Information Bulletin (1995) 7:2. para 73. [1955] 3 All ER 48. 56 Ibid. two contrasting examples of land subdivisions. the number of sales of subdivided land. by the Commissioners)."48 In concluding its discussion of "an adventure or concern in the nature of trade" in MT 2000/1. see. The greater the development work etc the more likely that a taxable activity exists.

60 In addition to the six recognised by the Radcliffe Report." (emphasis added) These provisions have remained essentially unchanged in the various United Kingdom Income Tax Acts since last century.inlandrevenue. IM125a lists the following three additional badges: (i) (ii) the source of finance. More generally. The term "trade" is defined in s 832(1) of the ICTA to include "every trade.gov. 59 Available at [http://www. The Radcliffe Report identified (from case law) six relevant considerations (or "badges of trade") to determine whether a transaction of purchase and sale. supplementary work on or in connection with the property realised. and motive." IM124a outlines some recent views on the meaning of trade. 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. The United Kingdom Inland Revenue Inspectors Manual ("IM")59 lists nine badges. above n 6. The application of these principles to the subdivision and sale of land is also considered in part 3. 58 57 NOVEMBER/DECEMBER 2000 447 . should be treated as a trading transaction.61 These nine badges are MT 2000/1. THE "BADGES OF TRADE" 3. would the conclusion in Example 11 differ if the taxpayers had sold both lots (at auction) or subdivided the 2. which had generated a profit or gain. the circumstances that were responsible for the realisation. Those badges are: (i) (ii) (iii) the subject-matter of the realisation.58 (vi) These badges are not exhaustive.1 Background Schedule D of the United Kingdom Income and Corporation Taxes Act 1988 ("ICTA") taxes the profits or gains of a "trade". The report concluded that there should be no single fixed rule for determining the existence of a trade. para 74. For example. (iii) IM 125 comments that the nine badges are a summary of the present classification of the badges of trade.5 hectare block into three or four or five sections and sold all the sections. and method of acquisition. (iv) (v) 3. These examples leave many unanswered questions. adventure or concern in the nature of trade. para 116. existence of similar trading transactions or interests. Radcliffe Report.uk]. 60 See IM125a. the length of period of ownership. the frequency or number of similar trans-actions by the same person. 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. 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. manufacture.THE GST FOOD EXEMPTION ________________________________________________________________________________ are at such different ends of the spectrum that their practical application to actual circumstances will be limited.

Note. "[T]he butcher. isolated transactions and speculative adventures can be taxable under Schedule D. 1976). 63 62 NOVEMBER/DECEMBER 2000 448 . See. 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. statutory definition of trade: PG Whiteman and DC Milne. 5. "The definition [of trade] in Section 832(1) is quite broad and even circular in some respects. "It has been suggested that only 'concern' is qualified by the words 'in the nature of trade' so that adventure stands alone.THE GST FOOD EXEMPTION ________________________________________________________________________________ reviewed and discussed in part 3. It will be rare to find a case that is. 66 Ibid. Edwards 36 TC 207. Accordingly. an exact match."65 4. the transaction(s) must have a commercial purpose. The profit must be of an income nature. that they are carrying on a 'trade'. 6. the comments of Pearce referred to in part 2 of this article.3 of this article. not every such transaction or adventure that produces a profit will be so taxable. In addition to the badges of trade. The question of whether a trade exists is a question of fact. however.2 Preliminary Observations by the Inland Revenue The United Kingodom Inland Revenue makes the following points concerning the concept of trade: 1. IM122."64 3. No specific problems are. 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. identified in IM2603. may not be a full blown trade can nevertheless be taxable [under Schedule D]. not a capital accretion.69 IM121. 69 1M2603. 67 IM123a. 64 Ibid. 3. in ordinary language. Whiteman and Milne also note the circular and somewhat unhelpful. However. the baker and the candlestick maker all know. 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. on the facts. Usually there will be no dispute as to whether or not a trade exists.68 8. for example. But it does make clear that activities that. Whiteman and Wheatcroft on Income Tax (2nd ed. Difficult taxation problems can arise with land transactions. 65 IM122b. "so as not to be unquestionably 'trading'. without getting into semantics. 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."63 The meaning of the word "trade" can be an issue where in some way the activities are out of the ordinary. 7.62 2. [1955] 3 All ER 48. however. 256 (para 5-17). However the Courts have often used the phrase 'adventure in the nature of trade' to describe the test …"66 which makes activities taxable.

70 that these types of assets are acquired other than as a subject of trade. purchased one million rolls of toilet paper. 392 ("Reinhold"). 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."(at 502-503). which in the words of the Lord President (Normand) was "greatly in excess of what could be used by himself.THE GST FOOD EXEMPTION ________________________________________________________________________________ 3. Pearce concludes where land is unsuitable for occupation by the taxpayer or for retention as an income-producing investment. See. above n 65. those forms of property. para 116. 75 IM 126g. Fraser 24 TC 498. 78 Whiteman and Milne. the purchase and sale of four houses was held not to be an adventure in the nature of trade. 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. any intended benefit to the owner of the asset can only come from the realisation of the asset. This case involved the purchase and sale of a large quantity of whisky by the taxpayer. 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. therefore. This test has been decisive in a number of cases where the property purchased and subsequently sold yielded no income or personal enjoyment. be considered alongside the expenses associated with the transaction.. the asset may have been acquired on terms which are uneconomic as an investment.74 Investment assets yield income without having to be turned over or traded to do so.71 In these cases the "commodity itself stamps the transaction as a trading venture". Thus. 71 70 NOVEMBER/DECEMBER 2000 449 . a commodity which yields no pride of possession. which cannot be turned to account except by a process of realisation . The income. The transaction was taxable. for example. The court considered it important that prima facie the property was a form of investment capable of yielding an income. who was in Berlin on business connected with a cinema company."75 The Inland Revenue76 comments that the income yielded by the "investment asset" must. such as commodities or manufactured articles which are normally the subject of trading. where the property purchased is of an investment type (ie "something normally used to produce an annual return"). 72 IRC v Reinhold 34 TC 389. 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. 77 See for example Cooke v Haddock 39 TC 64 where the interest charges on the rental property far exceeded the rental received.73 it is less likely that the courts will consider its acquisition and sale to be in the nature of trade. 76 IM 126h. 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. 74 In Reinhold. Again. 256 (para 5-17). however. which would allow the loan to be repaid.78 In a similar vein. his family and friends.1 The Subject-Matter of the Realisation While almost any form of property can be acquired to be dealt in. Neither the purchaser nor any purchaser from him was likely to require such a quantity for his private use".3. are only very exceptionally the subject of investment. above n 6. See also Rutledge v IRC 14 TC 490 ("Rutledge") where the taxpayer.77 In this context. In this scenario.72 On the other hand. where the purchase of property is financed by borrowing. The consignment was subsequently sold to one person at a considerable profit. merely reduces the outgoings until the surplus on sale is available. on which interest is payable. 73 Ibid.3 The Nine Badges of Trade 3.. The very nature of these assets provides an initial presumption Radcliffe Report.

especially where the purchase price has been paid out of the sale price. above n 42. above n 42. In Sharples v Rees 13TC 366. 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. 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. the taxpayer's residence. 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"). 83 IM126h."84 The Inland Revenue. 146. 82 IM126h. 80 Fraser 24 TC 498. In order to avoid a finding of trade in this situation. 84 Pearce.79 The subject-matter of the transaction in question can also be relevant to the extent that it is. "The intention to use or occupy the property is not . 148. yielded a pride of possession.88 The land would be classified as an investment asset rather than a trading asset. The owner may well make the purchase hoping for an accretion in value and even a realised surplus in due course. rented or lived in pending development. In these circumstances the The Inland Revenue comment that land. Pearce suggests that the taxpayer would need to show that they could have provided the purchase price without selling the property. This point is similarly made by the ATO in respect of land and shares (MT 2000/1.. the land has either yielded a return (as a farm or rental property) or. above n 42. 79 NOVEMBER/DECEMBER 2000 450 . 87 Fraser 24 TC 498. in the case of a private residence. in IM2606.82 Further. 146.80 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. and has been occupied as. 502. para 71). for example by evidence that the funds could have been supplied by raising a mortgage. But that hope and expectation will not make the transaction a trading matter unless there are other significant indications of a trading intention. 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.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). these other significant indications could include frequency and number of similar transactions (the third badge). land can be held as an investment and yield no income or be yielding income and still be trading stock.85 Clearly in these circumstances. 81 IM126i. 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. 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. In the author's view. can function either as an investment or as trading stock.83 Pearce.86 which would distinguish the land from whisky87 and toilet paper. similarly state that the relevant consideration in respect of the character of land to be "… was it amenity land for the purchaser. property that the taxpayer usually deals in. 88 Rutledge 14 TC 490. suitable for long term investment or ripe for immediate development?" The author suggests that in the case of the sale and subdivision of land. or is not. 85 This is unless the property has been either temporarily farmed.THE GST FOOD EXEMPTION ________________________________________________________________________________ purchased. more than most assets. 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..

But there are many exceptions from this as a universal rule. prior to the subdivision. 92 Whiteman and Milne. above n 6. Case P10 (1992) 14 NZTC 4066. Case T40 (1997) 18 NZTC 8267. however. by the taxpayers concerned either as private residences or as farms. implies turning over assets for profit. Accordingly. property meant to be dealt in is realised within a short time after acquisition. particularly. 94 IM126x. this badge will indicate that no trade will exist in many cases. This was. and may lead to the inference of a more important indication of trading.THE GST FOOD EXEMPTION ________________________________________________________________________________ commodity itself does not stamp the transaction as a trading venture. and Wakelin v C of IR (1997) 18 NZTC 13182 ("Wakelin") (which concerned the subdivision of land previously used as a residence). above n 65. If a farm property. such as the length of ownership (the second badge). Other badges could also indicate the existence of trade in these circumstances. The land was held for only a short period (18 months) before subdivision commenced. a pre- Tout v Cook (1991) 13 NZTC 8053. however. para 116. 392 ("Marson"). the ultimate finding will depend on a consideration of all the relevant facts of each case. As always. In this case. a long period between acquisition and sale will only negative a finding of trading where other factors do not lead to an opposite conclusion. in none of the cases that have come before the New Zealand courts was the property acquired for the purpose of subdivision.89 the relevant New Zealand decisions have concerned properties that were used. a builder. has only been owned and farmed for a short interval before subdivision. the taxpayer purchased the property intending to subdivide and sell some of the land.90 With the one exception noted. Case P54 (1992) 14 NZTC 4379 (which concerned land acquired as a holiday retreat for the beneficiaries of a trust). a view shared by others.91 The Radcliffe Report clearly thought that this was not a particularly strong indicator. frequency and number of similar transactions (the third badge) and motive (the sixth badge). ran into financial difficulties and needed funds. 89 NOVEMBER/DECEMBER 2000 451 .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 . and to build a house on the balance of the land. above n 65. Case P64 (1992) 14 NZTC 4455. while prior activities such as farming on the land may suggest that the land was not acquired as the subject of trade. the taxpayer's intention in respect of the land amounting to an adventure in the nature of trade. 91 Radcliffe Report. The short period of ownership was a factor in favour of trading in Wisdom 45 TC 92. This is on the basis that. 257 (para 5-18). apart from one case.94 IM2606 considers that the length of time that land is held and. 90 See. hence the subdivision and sale of part of the land. 257 (para 5-18) comment "This test is not of great value. In Newman (1995) 17 NZTC 12097 (CA) the land was acquired for the purpose of building a home for the builder and his family. 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. 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. Case P76 (1992) 14 NZTC 4512. for example.3.trading.2 The Length of Period of Ownership Generally speaking. for example. after-all. because the taxpayer. 3.92 Despite this. including an old house on the property." 93 See also comments by the Vice Chancellor in Marson v Morton 59 TC 381. Case T60 (1998) 18 NZTC 8449 (all concerning the subdivision of land previously farmed).": Whiteman and Milne. evidence of supervening trading (the fourth badge) may support a finding of trade. Case S70 (1996) 17 NZTC 7431. at the moment of acquisition. whether there may have been. 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. Case P83 (1992) 14 NZTC 4553. this may indicate the farming was a secondary activity.

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. indicate otherwise. Conversely.that did not mean that it was not carried on continuously. on and off. were suggestive of a trade. Case P83 (1992) 14 NZTC 4553. Case S70 (1996) 17 NZTC 7431. In these cases the land. 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. For instance. needs to be applied in conjunction with other badges. having no immediate intention of sale. If that is so. as with the first badge. 97 (1997) 18 NZTC 13182. 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. From the date of the acquisition of the land to the sale of the last lot. The house property was sold in 1995. the farm land subdivided had been owned and farmed by a company. more than any other. The five bare blocks were sold between 1991 and 1994. In Case P10 (1992) 14 NZTC 4066.98 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. such as the level of development and associated work (the fourth badge) may. The activity was also carried on regularly. Case P76 (1992) 14 NZTC 4512. 96 Whiteman and Milne. however. 95 NOVEMBER/DECEMBER 2000 452 . Case T40 (1997) 18 NZTC 8267. Case T60 (1998) 18 NZTC 8449. The company was wound up in 1985 and the farm land was transferred to the main shareholder as a capital distribution. This was despite the fact that the activity occurred in fits and starts . 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. The period of ownership by the company is unspecified. over a number of years. The person has the good fortune to sell the property at a profit. prior to the commencement of subdivision. 99 See Case P54 (1992) 14 NZTC 4379. However. While no one badge can be applied in isolation. The length of ownership would indicate no adventure or concern in the nature of trade existed. in the author's view. the subdivision itself taking approximately nine years from its commencement to the sale of the last lot. In this case. Mr Wakelin commenced the subdivision intending to see it through to completion. He instructed a surveyor in 1985 to subdivide the land. yet arguably an adventure in the nature of trade may exist. in this case. and Wakelin (1997) 18 NZTC 13182. this badge.THE GST FOOD EXEMPTION ________________________________________________________________________________ arranged sale relevant to establishing whether trading exists in the context of land transactions. The subdivision was carried out. this badge may indicate that no trade will exist in many cases.99 These cases may provide some indication of the various scenarios that will commonly arise in Australia. The main shareholder commenced the subdivision of the farm land in 1985. In isolation. Neither are details of the length of ownership reported in Case P64 (1992) 14 NZTC 4455. the circumstances of the sale (the fifth badge) and the motive of the taxpayer (the sixth badge) would indicate that no trade existed. 98 The subdivision did constitute a "taxable activity" under the NZ GSTA. a block of land was acquired in 1976. 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. 258 (para 5-18). due to the short period of ownership. The land was subsequently subdivided into six lots. Mr Wakelin had owned the land for almost twenty years.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. See for example Eames v Stepnell Properties Ltd 43 TC 678. including a section with the house on it. The New Zealand High Court case Wakelin97 is one such example on the facts. had been held for at least five years. an individual may purchase a residential property. this badge would indicate that an adventure in the nature of trade existed. property may be held for a long time. This all had to be in place before she could carry out her contract with the vendor of the property. The owner commenced building his house on the land in 1979. above n 65. 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. Consideration of other badges.

para 74. there is no repetition or frequency of activity. 103 MT 2000/1. for example. Fraser 24 TC 498. then he becomes a trader and the profits of the transactions. para 116. The subdivision was straightforward. In that example (Example 11). all else being equal.THE GST FOOD EXEMPTION ________________________________________________________________________________ 3." No details are provided in the example as to the level of development and associated work required. each set not in itself constituting a trade.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. 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.7 hectare section into two lots. According to MT 2000/1. The subdivision is an isolated transaction. be considered in relation to the subjectmatter. The first example in MT 2000/1 confirms this view. The test of frequency of like transactions must. which involves no development work. it constitutes "the mere realisation of a private asset. but if it is repeated and becomes systematic. one of which was retained by the taxpayer (to build his residence). Radcliffe Report. As an aside.3.103 This conclusion could change if. to subdivide the land. Thus 10 transactions every year would. 10 have likewise concluded that such an activity is not a "taxable activity" for New Zealand GST purposes. 101 100 NOVEMBER/DECEMBER 2000 453 . 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. Where sets of operations. if any. above n 6. 102 IM126e. See. and presenting the appearance of habitual and continuous activity. not taxable so long as they remain isolated. are carried out on occasions not widely separated in time. The New Zealand courts (see Newman (1995) 17 NZTC 12097 (CA) and the New Zealand Inland Revenue Department in TIB. the subdivision of a 2.100 … it is well known that one transaction of buying and selling a thing does not make a man a trader. Newman concerned the subdivision of a 2.5 hectare block into two lots and sale of the second lot. other than the fact that the survey and subdivision is approved. not involving any development work on the property. above n 56.101 The Inland Revenue state: Although an isolated transaction can amount to a trade the systematic repetition of a transaction is a pointer towards trading. 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. be more likely to amount to trading than say 2 transactions every year. 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). in the view of the ATO would not constitute an adventure in the nature of trade. for example. however. is unlikely to constitute an adventure or concern in the nature of trade. para 74. 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. 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]. 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.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 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..108 In Rellim Ltd v Vise109 a company acquired a number of houses.106 four similar transactions constituted a trade.107 Lord Hanworth MR observed in the case: When. considered separately and apart. although the members of the syndicate were not always the same. Six years later. The director's participation in these transactions constituted a trade. The courts have interpreted "regularly" as being concerned with repeated exercises and "continuously". yet when you have that transaction repeated. Bathgate DCJ IM126e. 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. the farm and two of the houses were disposed of by five separate sales.111 The two words are complementary. 105 104 NOVEMBER/DECEMBER 2000 454 . For example. 269. in Case N27 (1991) 13 NZTC 3229. the issue for determination in respect of the third badge.112 for example. the land. In Pickford v Quirke. you come to look at four successive transactions you may hold that what was. 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. a farm and 13 acres of land by four separate purchases. In Case N27. be strengthened if the purchase and subdivision of land is undertaken in a systematic and organised way and at relatively close intervals of time. The company. not once nor twice but three times. 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". 107 In Pickford. As indicated in part 1. above n 65. a transaction to which the words 'trade or concern in the nature of trade' could not be applied. you may draw a completely different inference from those incidents taken together. While the New Zealand test (of a "taxable activity") is clearly a different statutory test to the test for an "enterprise" in Australia. where such transactions occur over a period. Bathgate DCJ said that "continuously" means the "activity has not ceased in a permanent sense. in part due to the number of similar transactions. 106 13 TC 251 ("Pickford"). the term "regular" bares some similarity to the third badge. In addition. 110 See note 9 above. 109 32 TC 254. however. at least. 108 Pickford 13 TC 251. the author does not consider that the term is directly relevant to the consideration 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. 112 Case N27 (1991) 13 NZTC 3229. 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. 3238. that the profits derived were trading profits. The director in question was subsequently involved in three similar transactions. at a profit to the syndicate. once acquired sold its assets to another company. 260 (para 5-20).". a director of a spinning company formed a syndicate to purchase shares of a mill-owning company. on the other hand. to be concerned with an ongoing project or projects. Whiteman and Milne. It was held. 111 Based on the New Zealand courts interpretation of the phrase "continuously". or has not been interrupted in a significant way .THE GST FOOD EXEMPTION ________________________________________________________________________________ When a taxpayer is involved in more than one subdivision.. however.

Chris. above n 56. The lots are sold at auction. 13 (Example 5).A Practical Guide (6th ed. to be of a habitual nature and character"113 (emphasis added). if the taxpayer in Example 12 had instead subdivided the land into three or four or ten blocks. of the first property. the taxpayer. The TIB cites the example of a taxpayer. The ATO refers to the action of Bob as "activities" rather than one overall subdivision activity. GST . water and electricity. They have a commercial flavour because of the way the subdivision was undertaken. is that the undertaking of three similar straightforward subdivisions over (what appears to be) an eighteen month to two-year period. TIB. be treated with caution in the Australian context. he hires an engineer and contractor to build access roads for the lots and to install services such as sewerage. For example. The land is subdivided into two sections and sold two months later. 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. on this view such an activity. In this example (Example 12). The New Zealand authority on the term "regular" may therefore. which he also subdivides into two sections and then sells both lots. the taxpayer's overall activity of subdividing is "regular" in nature because the process is repeated over time. Soon after the sale he purchases a similar property. No further guidance on this aspect of the third badge is provided in MT2000/1.116 Accordingly. para 1301. 117 MT 2000/1. installation of water. therefore.115 In one sense. however. 118 A McKenzie.114 There is another aspect of the application of this badge to the subdivision of land that requires consideration . and. While. engineering reports. that involves only minor work and cost will not constitute a taxable activity. 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. para 74. Chris repeats the same exercise a year later. Bob. 114 113 NOVEMBER/DECEMBER 2000 455 . It is not repeated. 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. Ibid 3239. or occurrence of action. as for the first example in MT2000/1? Where a block of land is subdivided into a number of sections. The view of the New Zealand Inland Revenue Department ("IRD").THE GST FOOD EXEMPTION ________________________________________________________________________________ stated that "regularly" embodies "a steadiness or uniformity of action. be relevant to a consideration of the third badge. how many sections (ie how much "repetition") are necessary to constitute a trade etc? As a general principle in New Zealand. and subdivision. 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. or at generally uniform intervals. there could be many sizeable isolated subdivisions which would not be subject to GST because of their "one-off" nature.118 This principle is. in the view of the IRD. The alternative view. primarily based on the fact that the activity is not carried on "continuously" (rather than "regularly") and should. who after researching the property market purchases an allotment of bare beachfront land which he intends to subdivide.117 If this view were not to be adopted. the subdivision of land into three additional sections. however. Chris would be carrying on a taxable activity of subdivision from the time of the purchase. as well as obtaining the services of lawyers and real estate agents. The ATO state that these activities are in the form of an adventure or concern in the nature of trade. each activity may not amount to a "continuous" activity. 1998).that of the "one-off" subdivision of one block of land into a number of allotments and the sale of those allotments. would that still constitute "an adventure or concern in the nature of trade" or rather "the mere realisation of a private asset". 116 These acts could include arranging survey plans. inherits a farm from his parents. as outlined in an example in a Tax Information Bulletin. power and telephone lines. in that sense these "subdivisional acts" are repeated. is sufficiently regular in nature to constitute a "taxable activity" and be subject to GST. so that it recurs or is repeated at fairly fixed times. 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. such a subdivision is an isolated or "one-off" activity.

para 116. one subdivision per year (ie in years two.121 the participation of a director in four similar transactions constituted a trade. Rather the intention was to profit only from the subdivision of the part originally sold and to retain the balance. in Pickford. Assume that a taxpayer undertakes a simple subdivision of an allotment into two sections and sells those sections (in year one). the fact that the dwelling has been used as the taxpayer's residence is not fatal to a trading contention (MacMahon). the suggestion tends the other way. The taxpayer would not therefore register for. The repetition of this subdivision activity may mean that the four subdivisions together constitute an adventure in the nature of trade and an "enterprise". 3. above n 56. on its own constitute a trade. 120 Leach v Pogson 40 TC 585. Three similar subdivisions are undertaken in the subsequent three years. 122 Radcliffe Report. provided that the residential home (and curtilage) do not form part of the assets of another taxable activity carried out by that person": TIB.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.THE GST FOOD EXEMPTION ________________________________________________________________________________ Where an isolated subdivision does constitute an adventure or concern in the nature of trade. The Inland Revenue. GST will not apply. when the first subdivision occurred. This could have major GST implications. if the person later sells the residential home (and curtilage). three and four). But if nothing at all is done. It is unlikely that this subdivision on its own would constitute an adventure in the nature of trade. No guidance is provided in the examples referred to in MT 2000/1 or in the ruling generally on this point. 121 13 TC 251.four subdivisions.3. in IM2616. In order for the subsequent sale of this block not to be subject to the GST. 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 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. even though the earlier transaction did not. above n 6. no trade existed. but also for failing to account for the GST on all. nor account for. 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.) This last feature could have a significant impact when applied to taxpayers involved in subdividing land.122 The IRD in this scenario consider "that only the newly-subdivided allotments form part of that person's taxable activity. 12. and would not. that sale is not made in the course or furtherance of the taxable activity of subdivision. there is some evidence of dealing. perhaps that part containing a residence. not only for the taxpayer in failing to register for the GST in year one. states that in respect of the sale of a dwelling (not in the context of a subdivision specifically). Where a residence exists.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. For when there is an organised effort to obtain profit there is a source of taxable income.120 Thus. or if any special exertions are made to find or attract purchasers. and part of the land is retained. Therefore. 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. 119 NOVEMBER/DECEMBER 2000 456 . 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. GST on the sale proceeds. The allotment containing the original home is separate from the taxable activity of subdivision and sale. from the Inland Revenue's perspective. and sold at a later date. such as the opening of an office or large-scale advertising.

THE GST FOOD EXEMPTION ________________________________________________________________________________ Thus.. The proceeds were not taxable. in Case T60 (1998) 18 NZTC 8449.. however. to a trading argument. Rowlatt J indicated that the case was not far from the line (from being a trade). 132 Likewise. 126 [1974] 1 WLR 556 ("Taylor"). 125 Whiteman and Milne. The taxpayer did not offer the property for sale. were carrying on a trade. the taxpayers. planning permission for ninety dwellings on the property. he is only properly developing and realising his land. 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. the taxpayers subdivided and sold their farm." 128 7 TC 629 ("Alberni Land"). 131 Ibid 7433. the expenditure is consistent merely with a landowner wishing to realise his asset at the best possible price. however. they were merely realising their land at the best possible price and therefore. The company spent money in clearing the land. Rather. the Court held that: If a land-owner. The line was not. crossed. yet within the larger single transaction there were a number of smaller connected transactions undertaken as a result of converting the vessel. above n 65. after an appeal.132 IRC v Livingston 11 TC 538. the activity was not trading. no trade would exist. as real estate agents advised it would be easier to sell the farm in subdivided lots.123 In cases concerning real property transactions. It may however provide evidence of intention and thus add weight.128 that the conclusion would not have been any different. forming roads and in procuring a railway company to bring a line to open up the area. and over four months converted it into a steam drifter and sold it at a profit."127 It is unclear whether the conclusion would have been the same had the taxpayer undertaken the actual subdivision himself.131 The taxpayers subsequently proceeded with the subdivision when no buyer could be found for the entire block.100. In Alberni Land. procured suitable road access and obtained. in certain circumstances. finding his property appreciating in value. sells part of it."125 In Taylor v Good. based on Rand v Alberni Land. rather than selling it as one block. was impracticable. Taking the New Zealand decision Case S70130 as an example. who wished to sell their property as a whole. in itself. at least an argument. The Inland Revenue (IM2615). 130 (1996) 17 NZTC 7431. which he accepted.124 "If. however. emphasis has been placed on expenditure incurred to enhance the value of the land as an indicator of trading. however. 261 (para 5-23). and uses part of his money still further to develop the remaining parts. 127 Ibid 560. There is. 123 NOVEMBER/DECEMBER 2000 457 . This work was held to be merely enhancing the value of the land or simply realising it. in respect of this case. decided to prepare a scheme plan of subdivision into four lots (plus the house lot) "to enhance the value of the property".126 the taxpayer purchased a house which held long-standing sentimental connections for him for £5. and so on. It became evident that this. In the language of the United Kingdom cases. He intended originally to live in the property with his wife and family. Some land was sold and the proceeds were put back into the remaining land.000 for the property. three individuals who purchased a cargo vessel. define a transaction as a trading transaction . It is interesting to note that this was an isolated transaction.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. He prepared plans for a development. he is not carrying on a trade or business. comment that: "The obtaining of planning permission prior to sale does not. this will not be treated as an indication of trading. rather was ultimately offered £54. a number of land owning individuals formed a company through which to realise their interests in the land. 129 Ibid 638-639. 124 See IRC v Toll Property Co Ltd 34 TC 13 as distinguished in Reinhold 34 TC 389.

This concept is based on dicta from several cases including Taylor [1974] 1 WLR 556. or jewels. the division of land into plots. whether of land. 138 42 TC 662 ("Pilkington"). entered into the business of buying and selling land.857 derived in 1903 by the company from the sale of land. NOVEMBER/DECEMBER 2000 458 . although he may have expended money on them in getting them up for sale. or pictures.that of the developer/purchas-er. inter alia. 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.134 In respect of land. The Inland Revenue comments: Development only of the infrastructure (for example. the construction of access roads. It surrendered to the Crown its territory and rights in exchange for. This would be opening the door very wide to modern property developers. a right to claim. 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. but he does this as owner. whenever a property owner develops his land by making roads and laying sewers and selling plots. The company was required to pay a proportionate share of the survey expenses. The lands subsequently granted from time to time were sold. or the decision of Rowlatt J. within fifty years.137 This statement is based on The Hudson's Bay Company Ltd v Stevens.138 where Salmon LJ commented: I do not read the decision of this Court in Hudson's Bay Co v Stevens. a landowner may lay out part of his estate with roads and sewers and sell it in lots for building. a twentieth share in certain lands from time to time as the lands were settled. not as a land speculator. he sells as owner.136 The taxpayer company. the greater the change in the character of the land. owned large tracts of land in North America. Such development merely enhances the value of the capital asset in the owner's chosen market place . The case concerned the taxation of £177.135 The Company are doing no more than an ordinary landowner does who is minded to sell from time to time. selling his own property. 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. 139 Ibid 673. This Company is not a Company incorporated for the purpose of dealing in land It would be different if a landowner. he can never be carrying on a trade.THE GST FOOD EXEMPTION ________________________________________________________________________________ The Inland Revenue133 refers to the concept of supervening trading. but the case of the owner. 136 5 TC 424 ("Hudson's Bay"). in Rand v Alberni Land Co Ltd as laying down a proposition of law to the effect that. not as trader. the stronger the argument that there has been supervening trading. 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. 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. is entirely different. 135 IM2614. 137 Ibid 436. established by Royal Charter in 1670. as purchasers offer. 437-438. an individual.

Motive is never irrelevant in any of these cases. financial pressures resulted in the property being subdivided and the rear lot being sold. 3. which may include infrastructure such as construction of roads etc. para 116. that land is subdivided when the taxpayer is short of money or due to some other The test of trading is an objective test. above n 6. The taxpayer had decided to sell the investment houses for reasons unconnected with his trade (relating to rent control.140 reason(s).) 144 Whiteman and Milne. prima facie would not constitute an adventure in the nature of trade. of land originally acquired as an investment asset or residence. is that the acquirer's intention at the Radcliffe Report.141 when a builder sold houses which he had built and had held as an investment for many years. See note 95 above. the investment houses remained outside his trade. and even. 145 "In nine cases out of ten .145 It was stated by the Privy Council in Iswera146 that if a taxpayer's " acts are equivocal. In the context of land subdivisions. above n 65. 141 140 NOVEMBER/DECEMBER 2000 459 ." Pearce. 146 Iswera [1965] 1 WLR 663. (The Radcliffe Report.6 Motive There are cases in which the purpose of the transaction and sale is clearly discernible. will be characterised as the taxpayer simply maximising the assets realisable value and not as an adventure in the nature of trade. 147 An equivocal case was described in Kirkham v Williams 64 TC 253 (per Nourse LJ) as one in which "the facts. his purpose or object may be a very material factor when weighing the total effect of all the circumstances. 147. it may be... such as a sudden emergency or opportunity calling for ready money."if he [the taxpayer] adopts commercial methods his motives may be immaterial.3. however. however. 251 (para 5-12). the taxpayers were motivated to sell their properties due to health concerns.": IM127a.3. 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.7 hectare as a lifestyle block for himself and his family."147 The Inland Revenue's view. 142 In Newman (1995) 17 NZTC 12097 (CA) the builder had purchased 2. 148 IM2607. This statement needs to be qualified by adding there may be other badges present. where viewed on their own.143 No trade was therefore found to exist in West v Phillips. such as the second badge (frequency) which could still indicate that a trade exists.5 The Circumstances that were Responsible for the Realisation There may be some explanation. 668. The Commissioners had found that the houses became trading stock when the builder set up a sales organisation to dispose of them.. para 116. In Case P64 (1992) 14 NZTC 4455 and Case S70 (1996) 17 NZTC 7431.THE GST FOOD EXEMPTION ________________________________________________________________________________ If the ATO and Australian courts adopt the approach of the United Kingdom judiciary (and Inland Revenue) many subdivisions. above n 6. evidence of a trading activity.. . the presence or absence of an intention to make a profit is not conclusive of a finding of trading .142 The sale of sections in these circumstances. However.[do] not tell you whether the land acquired was acquired as trading stock or a capital asset. 143 Radcliffe Report. found that this inference of a change in intention was unjustified. for example. Accordingly. The taxpayers in Case T60 (1998) 18 NZTC 8449 similarly decided to sell their farm (by subdividing it) as a result of financial difficulties. 38 TC 207 ("West"). the United Kingdom cases and the Inland Revenue Inspectors Manual all use the terms "motive" and "intention" synonymously. above n 42. On appeal the Court. increased taxation and the rising cost of repairs) and therefore."144 A profit seeking motive is. that negatives the idea that any plan of dealing prompted the original purchase. 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.148 where land is concerned. 3. in the face of his own evidence. if necessary.

it must be determined if one of these motives is a trading motive. There was insufficient evidence to show that the taxpayer had intended to hold the land as anything other than as an investment. Gibbs CJ and Mason J in effect "treated the case as if there had been a new acquisition of the land by the company. to constitute an enterprise there must be "a reasonable expectation of profit or gain". is not conclusive. In Pilkington. was not engaged in an adventure in the nature of trade. Case P54 (1992) 14 NZTC 4379 was concerned with a subdivision undertaken by the trustees of a trust. 164. above n 33. Of the New Zealand cases cited (see notes 89 and 90) only one. the various blocks of land involved were either originally In the income tax context. which consisted of real property. and sold some of her land in order to raise funds to buy the share owned by her brother. this badge will have limited application in the Australian context. 156 GSTA. the Privy Council held that a taxpayer who had inherited land with her brother. such as acquiring land to provide accommodation for an existing trade and for eventual development and resale at a profit. IM127b states first. Parsons comments that in Whitfords Beach 82 ATC 4031. Pilkington can be contrasted with McClelland 70 ATC 4115.150 an intention sometime in the future to dispose of land at a profit does not automatically entail an intention to trade. 150 IM2608. this time for the purpose of development and sale.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 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. "If there had been no change in shareholding in Whitfords Beach. In the New Zealand cases. Case P54 (1992) 14 NZTC 4379. especially in the sole borderline cases. He went on and constructed roads on the land and installed drains and services and went about selling the sections. it must be considered to what extent that motive colours the whole transaction as being a trading transaction. 151 Reinhold 34 TC 389. there can be little doubt that if there had not been such an intention the majority of the Court would have reversed the Commissioners. 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. the sole executor acquired his sister's interest.153 executor and his sister were entitled to his father's residuary estate. above n 65. indeed.149 Further.THE GST FOOD EXEMPTION ________________________________________________________________________________ moment the land was acquired is of crucial importance. 153 42 TC 662. But for this intention. did not involve a subdivision undertaken by an individual or partnership of individuals (husband and wife). and the old shareholders had moved the company to undertake the development. s 9-20(2)(c). the Court indicated in Pilkington that the transaction would not have constituted a trade. 154 Whiteman and Milne. 155 See note 147 above.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. in the interim. and." In his view. After a difference of opinion concerning the disposal of the property. 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 that case. To be taxable. 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. or series of activities.154 Where there are dual motives. The executor argued that the sales were merely realisations of inherited property. 265 (para 5-25). 152 Marson 59 TC 381. the land may produce no investment income.152 Motive may be important. Second. Where either category of taxpayer carries out an activity. The "motive" of the taxpayer may be of particular importance where the taxpayer's acts are "equivocal". the circumstances would presumably have been held by all judges to be a mere advantageous realisation": Parsons. 149 NOVEMBER/DECEMBER 2000 460 . The fact that.155 The presence or absence of a profit making motive will also be especially important for individuals and partnerships of individuals. it is therefore necessary to identify an intention to trade at the moment of the acquisition of the land.

3. for a farm to be purchased with large external debt financing. 3. At the outset. 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.3. Such a rise never eventuates and the taxpayer cannot service the debt and is therefore required to sell. there was a motive to subdivide. 159 34 TC 385. unclear what importance the ATO and Australian courts will accord to these tests. Case P64 (1992) 14 NZTC 4455. as it is normal practice to borrow to fund the purchase of a property. 157 NOVEMBER/DECEMBER 2000 461 .161 As an example of this badge. The existence of loan finance will not necessarily indicate the presence of a trade. 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. while being evidence of trade. This did not amount to a trade when other factors were taken into account. and Case T60 (1998) 18 NZTC 8449. [This may indicate trade]. Case P83 (1992) 14 NZTC 4553. respectively.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. 161 IM126v. due to the presence of other badges (circumstances responsible for the realisation and lack of profit motive). will not necessarily make the particular transaction an adventure in the nature of trade. 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). on what terms. Case P76 (1992) 14 NZTC 4512. The debt was never incurred in respect of the subdivision and. the Inland Revenue cite Wisdom162 where the taxpayer purchased and subsequently sold silver bullion. and if it was. whether it be a farm. In Reinhold.9 below. Case P10 (1992) 14 NZTC 4066. The first of these is the source of finance. Finally. The Inland Revenue in IM2606 state that where land is concerned. 162 45 TC 92. It is not inconceivable. there arguably will not be an adventure or concern in the nature of trade. it is therefore. even if further debt was incurred to subdivide the land. or commercial or residential property.THE GST FOOD EXEMPTION ________________________________________________________________________________ farmed by the taxpayer157 or the taxpayer resided on the property prior to its subdivision. at the moment the particular property was acquired. which in this case would normally be used for investment. for example. 158 Case S70 (1996) 17 NZTC 7431. It is submitted that this test should be used with caution.8 and 3. Case T40 (1997) 18 NZTC 8267.158 In these types of situations it will be difficult to infer that. 160 The second ("Existence of similar trading transactions or interests") and third ("Method of acquisition") are discussed at paras 3. in the expectation of a rise in future produce prices. The terms and level of any external finance could also send the wrong signals as to whether trade existed. The most effective method for the taxpayer to sell the farm and repay the debt may be to subdivide the farm. in particular the nature of the commodity. Wakelin (1997) 18 NZTC 13182. the presence of a disclosed intention to trade.160 This test and the following two tests were not part of the badges identified in the Radcliffe Report. it is relevant to consider whether a loan was necessary to fund the purchase of land.3.159 the taxpayer admitted that he had bought and sold four houses intending to make a profit.

interesting to observe that of the New Zealand cases referred to already in this article. 169 MT 2000/1.3. In the second example in MT 2000/1. This will depend on the nature of the asset. for example. the link between the borrowing and subdivision may also indicate a trade. conducted another subdivision and returned GST on the proceeds of that subdivision to the IRD. any admitted "trade" of the taxpayer. 167 See Hudson's Bay 5 TC 424.169 where. Williams v Davies 26 TC 371. 164 Marson 59 TC 381. in the view of the ATO.167 According to IM126z. Clearly the subdivision work in that example was sufficient to displace any presumption against trade as a result of the farm being inherited. Work done on the asset may assist the inference. prior to the subdivision the subject of the case. 287 (per Megarry J).3. the application of this badge will depend on the individual facts of each situation. It may equally.THE GST FOOD EXEMPTION ________________________________________________________________________________ In respect of the subdivision of land. In the case of land. 163 NOVEMBER/DECEMBER 2000 462 . for an asset acquired by gift or inheritance to become the subject of trade. except for Newman165 where the taxpayer was a builder. perhaps through documentation or. the subdivided land was inherited. See. however. however. It is. and before sale. for the revenue authority and taxpayer alike will be whether.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. a transaction which is similar to those of the taxpayer's admitted trade. See note 117 above.166 3. the subdivisions were not similar to. 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. and McClelland 70 ATC 4115. funds are borrowed to acquire the land. simply support a finding that the taxpayer is wishing to realise the value of his or her land at the best possible price. however. The issue. The Court said there was a special onus on him to show that the properties were investments and not trading stock. may also be a trade. an adventure or concern in the nature of trade would exist. para 74 (Example 12). The Inland Revenue in IM2617 reiterates this special onus on builders.163 Similarly. 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.168 The Inland Revenue further states that the change of intention must be demonstrable. 166 In Case P54 (1992) 14 NZTC 4379. 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. this arguably will be the main indicator of any changed intention in respect of inherited or gifted land. or connected with. it must be shown that at some point subsequent to acquisition. 168 Taylor 49 TC 277. 165 Newman (1995) 17 NZTC 12097 (CA).8 Existence of Similar Trading Transactions or Interests: IM126L Under this badge. in fact."164 In respect of the subdivision and sale of land. the asset became trading stock or an adventure in the nature of trade (ie there is supervening trading). in the absence of such overt indications. 3. 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. the trustees of the family trust had. 391. the United Kingdom courts have also considered possible connections that the particular transaction under review has with the taxpayer's main trade. however. Where the taxpayer already owns land and monies are borrowed to fund the subdivision of land. the inference of change will have to come from other sources.

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. (1983) Current Taxation 27. Many activities.172 Yet. however. we are told." 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. 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. unlike whisky or toilet paper. para 68. 172 A Alston. such as isolated transactions by their very "one-off" nature will. for example. But it can also be applied in reverse where. Authorities seem to go in pairs. 161.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. is that the United Kingdom regards the existence of a trade in a particular case as a question of fact. 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. except where the taxpayer is a developer or dealer in land. the one appearing to stand for some proposition. 174 Ibid. is considered to be probably the most useful and to be a strong indicator in a number of cases. lack the requisite repetition and organisation to be in the form of a business.THE GST FOOD EXEMPTION ________________________________________________________________________________ 4. which must find an error of law. the issue therefore becomes whether there is an adventure or concern in the nature of trade. the other contradicting that proposition. 30. 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. the subject-matter of the realisation." With this in mind. 176 Supplementary work on or in connection with the property realised. raises issues that the ATO and Australian courts will need to consider. and it follows from the United Kingdom system of appeals that a court. Parsons. "Isolated transactions and the badges of trade Part 2". especially where the activity conducted constitutes a business. cannot upset the finding by the Commissioners. The subdivision of land is one such example.171 Of the six badges identified in the Radcliffe Report."173 The second badge: the length of time of ownership . Each badge however. the first badge. as land can yield income or "pride of possession". above n 33. The explanation of the seeming contradictions. In order for an "enterprise" to exist when isolated transactions are carried on. 175 The frequency or number of similar transactions by the same person. or is conducted in the form of a business. NOVEMBER/DECEMBER 2000 463 . Alston comments that badges two through six are "vague and riddled with exceptions. 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. CONCLUSION Whether a person is carrying on an "enterprise" for the purposes of the GSTA will often be clear. this first badge may not prove to be such a strong indicator in the case of the subdivision and sale of subdivided land. in applying the t h i r d b ad g e . while recognising the distinction between continuing business activities and an isolated venture. 173 Ibid.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. For example. have not sought to formulate that distinction. when determining whether an "enterprise" exists. 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.

if so. above n 172. Two badges may be present. 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. 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. It remains to be seen what weight is accorded to the remaining three badges of trade (source of finance. 67. above n 42. for an enterprise to exist there must be "a reasonable expectation of profit or gain". On the other hand. 180 Pearce. 178 Not all badges will be present in every case. and it turns out that this is erroneous. if the taxpayer registers as an enterprise for GST purposes this may well foreclose any arguments that. NOVEMBER/DECEMBER 2000 464 . On the one hand. at best be seen as "signposts" indicating the potential characterisation of a transaction. existence of similar trading transactions and the method of acquisition).motive. Of the six badges outlined in the Radcliffe Report: Perhaps the least useful is the sixth . Alberni Land 7 TC 629 and Pilkington 42 TC 662. and so do not give rise to assessable income. It is unclear whether the ATO and Australian courts will equate this phrase to motive and. They are "merely various factors which alone or in combination have been held decisive in different cases. the subject matter of the transaction overrode that admission. "Beware . 30. 163 after citing Taylor [1974] 1 WLR 556. for income tax purposes. 145. yet contradict each other. The badges should therefore. if it is contended that the particular activities are not an adventure or concern in the nature of trade." 178 Alston. Mason J (163-164) reached the same conclusion after accepting Fox's Case and rejecting Scottish Australian Mining.the GST is not as discrete as it appears to be" (1999) 34 Taxation in Australia 66." 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. possibly without the ability to claim input tax credits. As it is usually inferred from existing circumstances. if the taxpayer was required to be registered. "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. is not evident in the cases. 179 34 TC 385. 181 Author unspecified. Due in part to the many different factual 177 Parsons.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. then not only will the taxpayer be liable to income tax but also. whether they will distinguish between motive and intention. above n 33."180 The uncertain application of the concept of "an adventure or concern in the nature of trade" will place practitioners in an awkward position. In Reinhold.181 In respect of individuals and partnerships of individuals. one of the other badges must be present before it can be taken into account. to a GST liability. 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 188.179 despite the taxpayer admitting an intention (motive) to profit from buying and selling four houses. there is a mere realisation).THE GST FOOD EXEMPTION ________________________________________________________________________________ necessary to constitute a trade? With the fourth badge.

both in respect of the subdivision of land and with "one-off" transactions generally. and is thus carried on continuously. 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. He was formerly an Assistant Tax Manager in the Christchurch office of Price Waterhouse (now PriceWaterhouseCoopers). Andrew J Maples is a Lecturer in Taxation and Business Law with the Department of Accountancy. University of Canterbury. that tax practitioners. NZ. 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. NOVEMBER/DECEMBER 2000 465 . 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. the ATO and Australian courts alike will struggle to determine when an adventure or concern in the nature of trade exists.182 It is suggested in conclusion that in Australia also. Finance and Information Systems. Christchurch. lawyer and real estate agent. Rather. requiring an overall view of the relevant activity to be taken.THE GST FOOD EXEMPTION ________________________________________________________________________________ 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. The Court specifically stated that it was not desirable for it to issue guidelines on what subdivisions did comprise a "taxable activity". the Court stated the test of whether there is a taxable activity is one of fact and degree. The New Zealand Court of Appeal in Newman (1995) 17 NZTC 12097 rejected this approach.