Ellyse Perry makes headlines for having played both soccer and cricket for Australia – a rarity in our modern, highly specialised world. Trivia buffs may recall Graeme Hughes as the last man to play both cricket and rugby league for New South Wales. But that was in the 1970s, before either State of Origin or pyjama cricket were invented. Today’s article is about whether our tax law accepts businesses playing two sports at once. More particularly, does conducting business as a property developer forever taint every property you buy as being held on revenue account?
The matter is FLZY v Commissioner of Taxation in the Administrative Appeals Tribunal and deals with a gain on the $72m sale of an office building in Canberra. The $20m question was whether the 50% general capital gains tax discount could be applied to the $40m gain. The gain becomes impressive indeed when you realise that he just sold the carpark. We’re dealing with a taxpayer who is clearly at the top of his game.
A person’s business history is important to clarifying intention, so this story starts in 1964 when Ivan Domazet migrated to Australia, settling in Canberra. He started work as a glazier, then a painter before becoming a builder – starting his own business in 1969 buying land that he used to sell house and land packages. Ivan clearly did well for himself as he moved on to bigger and better things. The scope of his activities encompassed the full gambit building and development activity across both the residential and commercial sectors. This included a range of “build and sell”, “buy and hold” and “build and hold” business models. The Tribunal takes time to cover the history of one property in particular in terms of background.
In 1985 the group acquired a property used for student accommodation, which Ivan expanded to a 142 room complex with associated recreational facilities. Further work in 1995 expanded the facility to 209 rooms, including extra dining and conference facilities. The property became known as Hotel Heritage and was sold in 2007. This provides clear background of the taxpayer holding at property on capital account (noting the pattern of twice continuing to hold the asset post-refurbishment).
The building subject to the present case came into Ivan’s possession in 1999 when he acquired the Sirius office building in Canberra plus a two level carpark across the road. The Sirius was no doubt a hot house of intellectual activity because, like many buildings in Canberra, the Sirius and the carpark were both leased to the public service. When those leases expired in 2002, the government entered a new lease for the Sirius but choose not to continue leasing the carpark (a small win for those advocating public transport!).
Ivan faced a rather difficult situation in finding other uses for the carpark. Under quirks in the rather bureaucratic Canberra, the carpark hadn’t been built according to local building codes and thus could only be occupied by government departments. Conversion costs to comply would have been too great, so Ivan had to look for other uses. To cut a long story short the carpark was unoccupied between 2002 and 2005 when a development proposal was approved to convert the carpark to an office. The Civil Aviation Safety Authority (CASA) signed a 15 year lease as anchor tenants some months after construction began.
In September 2005 a local real estate agent presented Ivan and his team with a paper discussing three strategic “Disposal Options” for the building. The Tribunal accepted the taxpayers evidence that they didn’t commission the paper, but that it came unsolicited from an agent with above-average initiative (also the same agent whom originally sold them the property). The taxpayers rejected an offer of $63m in August 2006, before accepting $70m in August 2006 in what the taxpayers felt was an overheated Canberra market. The property was actually sold soon after completion in July 2007 for $72.3m, being the originally agreed $70m plus adjustments.
We thus have a property acquired in 1999, leased for three years as a carpark, then spent three years vacant before a further two years being redeveloped as an office before being sold. The issue was whether the sale was on capital or revenue account.
The ATO position was that the sale was on revenue account. The taxpayers were in the business of property development and the purchase, development and sale of a property of this scale within an eight year period was what the ATO considered within the ordinary scope of a developer. They saw no scope within the developer’s business model for such a property being held on capital account. In our terms, you can play one sport only.
The Tribunal found the ATO characterisation of the taxpayer operating a single business as being too “simplistic”. In contrast they made the taxpayers business sound like a junior athletics carnival – finding that the taxpayer operated not just two, but five separate business models simultaneously:
- The acquisition, development and sale of residential properties.
- The acquisition and development of residential properties held on capital account for rent.
- Acquisition, development and sale of commercial properties.
- Acquisition of commercial properties held on capital account for rent.
- Acquisition and development of commercial properties held on capital account for rent.
In this case the Tribunal held that the business model relevant to the property being sold started out as business model 4 above, before transitioning to model 5 – both being on capital account. The decision supports the view that a property developer can simultaneously hold some property assets on capital account whilst also conducting a property development business. In contrast Ellyse ultimately had to choose one sport – with her focus on a career in cricket meaning she passed by the opportunity to represent Australia in soccer at next months Rio Olympics.
For those needing assistance in the sport of Australian taxation law, please contact Sean at email@example.com .