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Taxpayers S and G v Fiji Revenue and Customs Authority [2012] FJTT 20; Income Tax Appeal 8.2007 (23 November 2012)

IN THE STATUTORY TRIBUNAL, FIJI ISLANDS
SITTING AS THE TAX TRIBUNAL

Income Tax Appeal No 8 of 2007
Value Added Tax Appeal No 8 of 2007

BETWEEN:

TAXPAYERS S AND G AND THEIR DIVING BUSINESS
Applicants

AND:

FIJI REVENUE & CUSTOMS AUTHORITY
Respondent

Counsel: Ms M Tikoisuva, Mitchell Keil Lawyers for the Applicants
Ms R Malani and Mr S Vukica, FRCA Legal Unit, for the Respondent

Date of Hearing: Friday 14 September 2012
Date of Judgment: Friday 23 November 2012

JUDGMENT

INCOME TAX ACT (CAP 201) – Section 11 – Sale and disposition of property; VALUED ADDED TAX – Section 15 Value Added Tax Decree 1991 – Taxable Supply of Goods

Background

1. This an application for review against the Objection Decision of the Respondent Authority dated 29 January 2007, that partially allowed an objection of the Taxpayers to income tax assessments issued by the Authority for the Year 2006, but disallowed the claim from their diving business, that the sale of a property within the Sekoula Estate, Ra, was exempt supply for the purposes of the Value Added Tax Decree 1991.
   
2. At the request of the parties, the two separate applications for review have been joined.
   
3. The Agreed Facts that have been provided by the parties are as follows:
   
   • The Applicants purchased a residential property and business from Mr and Ms B, in July 2004, pursuant to an Agreement for Sale and Purchase dated 25 November 2003.
     
   • The property was used as a residence and was not used in the business prior to and at the time of purchase by the Applicants.
     
   • At the time of purchase the Applicants intended to convert the Property into a guest house and operate the same in conjunction with the Business as an integrated dive operation and accommodation facility.
     
   • The Applicants obtained a Foreign Investment Certificate from the Fiji Islands Trade & Investment Bureau to conduct the business of a dive and accommodation operation comprising the business and the property.
     
   • The Applicants applied to the Ra Rural Local Authority for a common lodging housing licence for the Property and their application was refused.
     
   • The refusal meant that the Applicants could not use the Property as an accommodation facility for guests and they therefore could not operate the business of an integrated dive operation and accommodation facility from the Property.
     
   • The Applicants as a consequence developed guest accommodation facilities on another property they owned at Volivoli Road, Ra and relocated the operation of the Business to this property so as to achieve their objective for an integrated dive operation and accommodation facility.
     
   • The Applicants sold the Property in August 2006 pursuant to a Sale and Purchase Agreement dated 25 May 2006, as it could not be used in the Business.
     
   • The property the subject of this dispute, was occupied and used as a residence by the Applicants' son and his wife and was not used for guest accommodation from the date of purchase to the date of sale.
     
   • The Applicants did not apply for Value Added Tax input credits when they purchased the property.
     

The Impact of Section 11 of the Income Tax Act (Cap 201)

4. The first issue to consider is whether the profit gained by the taxpayers as a result of the sale of the property, was in fact income for the purposes of Section 11 of the Income Tax Act (Cap 201).
   
5. In Taxpayer A v Fiji Revenue & Customs Authority [2012] FJTT3, this Tribunal set out the manner in which Section 11 of the Income Tax Act (Cap 201) should be interpreted.
   
6. The definition of total income commences at Section 11 and that is the appropriate starting point.
   
7. In The Commissioner of Inland Revenue v Pacific Mercantile Ltd[1], the Court of Appeal, stated:
   

As pointed out by Kermode J, the proviso in Section 11(a) contains three limbs which are

(1) That it was a business profit or gain from a dealing in property;

(2) That it was a profit or gain from sale of property acquired for the purpose of selling or otherwise disposing of it;

(3) That it was a profit or gain derived from the carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit.

8. A quick analysis of Section 11(a) of the Act, makes it clear that the description of at least this 'first limb', was very much shorthand. While Kermode J's, characterisation is:
   

That it was a business profit or gain from dealing in property;

The precise language of the legislation remains. That is:

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the business of the taxpayer comprises dealing in such property; (my emphasis)

9. The emphasis of the inquiry must be whether the business of the taxpayer comprises dealing in such property. That is the language of the legislation from which two questions unfold. The first being whether any profit or gain accrues or derives from the sale or other disposition or any interest therein. The second question that follows, is whether or not the business of the taxpayer comprises dealing in such property?
   
10. To resolve that second question, Section 2 of the Act provides assistance, where it sets out a non-exhaustive definition of "dealing in property" and "dealing in real and personal property".
    
11. That definition was introduced into the legislation with the introduction of the Income Tax Act 1974[2]
    
12. And while the Second Reading Speech of that time is not to distract from the plain meaning of the law, the intent of the legislature by introducing the definition at Section 2, was made clear by the then Minister for Finance when he stated:
    

The additions are aimed at clarifying the law and also to bring within the scope of the taxing statute certain transactions connected with land where there would seem to be a profit motive. "Dealing in property" seeks to cover three types of transaction:-

(1) where subdivision takes place after acquisition;

(2) where permission is given for development after acquisition; and

(3) where land scheduled for development is sold within 3 years of acquisition.

The definition also seeks to cover transactions made by way of transfer of shares......[3]

13. More relevantly to this case, the 'second limb' reads fully:
    

any profit or gain accrued or derived from the sale or other disposition of any real or personal property or any interest therein, if the property was acquired for the purpose of selling or otherwise disposing of the ownership of it

14. Here in cases such as Steinberg [4], the case law dictates that there must be in place a purpose of resale to gain a profit and that purpose must be present at the time of the acquisition.
    
15. Finally, the remaining category of case, deals with any profit or gain derived from the carrying on or carrying out of any undertaking or scheme entered into or devised for the purpose of making a profit.
    
16. In Lowe v Commissioner of Inland Revenue[5], Richardson J defined the words "scheme" to connote a plan or purpose which is coherent and has some unity of conception. He defined "undertaking" as a project or enterprise organized and directed to an end result.
    
17. There is a further exclusionary provision to Section 11(a). It provides that none of these three illustrative examples shall be considered to contribute to total income, where the profit or gain derived from a transaction of purchase and sale which does not form part of a series of transactions and which do not form part of a series of transactions. Though it should be noted in McClelland v Commissioner of Taxation,[6] the Privy Council concluded that a single transaction can fall within the notion of assessable income, where the undertaking or scheme exhibits features that give it the character of a business deal.[7]
    

The Case of the Taxpayers

18. The case of the taxpayers can be described fairly simply.
    
19. On 25 November 2003, the Taxpayers entered into a Sale and Purchase Agreement to purchase a diving business and freehold property at Nananu-I-Ra Island, Rakiraki.
    
20. According to the evidence given by the Taxpayers at hearing, the purpose of the purchase was to develop a diving business, including a common lodging house to accommodate divers.
    
21. Yet the property in question was located on a residential lot affected by a restrictive covenant that prohibited the operation of any commercial activity.[8]
    
22. According to the Taxpayers, neither was aware of a restricted covenant in place. Taxpayer S stated in his evidence, "when we purchased the property (we) had no intention to sell it". Taxpayer G claimed that they found out later, that the developer of the estate had placed a covenant on the property.
    
23. The taxpayers claimed that they had expended approximately $120,000.00FJ preparing the accommodation, as suitable for shared accommodation and had commenced operating the business in the ground floor of the premises.
    
24. After completing the renovation of property and on the basis that they were not able to obtain approval to operate home stay accommodation for divers on that site, the Taxpayers sold the property in May 2006, for $1,000,000.00
    

Conclusions Drawn by Tribunal

25. Unfortunately for the Taxpayers, I cannot find that their purpose in acquiring the property was for any other reason than to dispose of the property after the renovations were completed.
    
26. The Taxpayers claimed that they were not aware of any encumbrance preventing them from operating a guesthouse on the property.
    
27. I am not prepared to accept that fact.
    
28. Clause 5 of the Sale and Purchase Agreement clearly states:
    

The Sale and Purchase of the Property and Business is not conditional on the Purchasers obtaining approval from the relevant authorities in Fiji to operate a guesthouse on the Property.

29. Clause 8 of the Agreement states that the property and business are sold free of leases, mortgages, charges and encumbrances whatsoever save...Restrictive Covenant No 293996A.
    
30. It is abundantly clear that there was a restrictive covenant in place and that the property was not being sold, assuming that approval to operate a guesthouse would be forthcoming.
    
31. On balance, it is more likely than not that the Taxpayers purpose was very much a short-term one. Any simple enquiry would have uncovered the existence of an encumbrance. So much would have been patently clear to lawyers charged with the task of facilitating the transaction.
    
32. The existence of a purpose specific clause within the Agreement, proves the existence of such knowledge in my view.
    
33. The Respondent's witness was the Principal Auditor. She advised the tribunal that business expense deductions were allowed to the Taxpayer for the cost of renovations. In the circumstances, I find that this was the short term acquisition and disposal of a property by a business, with a view to making profit or gain. It seemed to achieve that purpose. In my view, the proceeds of sale fall within the definition of "total income" for the purposes of Section 11 of the Act.
    
34. For the above reasons the application in Income Tax Appeal No 8 of 2007, must fail. The application is dismissed.
    

Does the Sale of the Property Constitute a Taxable Supply?

35. The Taxpayers are also seeking relief from the Respondent's imposition of value added tax, charged in accordance with Section 15 of the Value Added Tax Decree 1991.
    
36. Section 15 of the Decree as it then was, provides:
    

(1) Subject to the provisions of this Decree, the tax shall be charged in accordance with the provisions of this Decree at the rate of twelve and a half percent on the supply (but not including an exempt supply) in Fiji of goods and services on or after the 1st day of July 1992, by a registered person in the course or furtherance of a taxable activity carried on by that person, by reference to the value of that supply.

(2) Where, but for this subsection, a supply of goods and services would be charged with tax under subsection (1) or this Section, any such supply shall be charged at the rate of zero percent where that supply is a zero-rated supply.

37. The issues for analysis, rely on the following deconstruction of the provision:-
    
    • Has there been a supply of goods
    • By a Registered Person
    • In the course or furtherance of a taxable activity.
      
38. The evidence of the Principal Tax Auditor of the Authority was that the venture was an activity taken in pursuit of the taxable activity of the business.
    
39. At first blush that proposition seems somewhat hard to understand, however a closer examination of the legislation proves otherwise. Firstly, it is not in dispute that the business of the Taxpayers is one amenable to Section 22 of the Decree.
    
40. According to the evidence of Taxpayer G, the business is engaged in the provision of diving activities that include such things as lessons, organised dives and related activities. This in my mind is the "taxable activity".
    
41. Ordinarily, the expression "supply of goods", having regard to the definition of the term "supply" at Section 3, would imply those goods and services "acquired or produced by a registered person".
    
42. Section 3(1) of the Decree, gives the term supply the same general meaning as that found within Section 2 of the Sale of Goods Act (Cap 230).
    

"supply", when used as a verb, includes-

(a) in relation to goods - the supply by way of sale, exchange, lease, hire or hire purchase; and

(b) in relation to services - provide, render, grant or confer and when used as a noun has a corresponding meaning

43. Section 3(2) though provides further clarification. It speaks of the "goods and services acquired or produced by a registered person in the course or furtherance of making taxable supplies...".
    
44. The term "goods" at Section 2 is defined to mean:
    

all kinds of personal and real property, but does not include choses in action or money

45. I concur with the Respondent, that the acquisition of the property by the business, was doneso as an acquisition of a good by a registered person in the course or furtherance of taxable activity. So much seems clear from Section 3(2) of the Decree.
    
46. I note that in the course of events that have unfolded, the Respondent initially charged the business Output Tax as a result of the sales price of the property. It then allowed an Input Tax credit for the VAT paid on the purchase and then a further offset for plant and equipment.
    
47. I also note that within the Agreement of Sale, where Clause 1 refers to the purchase price, it does so in the following manner:
    

The purchase price of the Property is FJ$1,000,000 (One Million Fiji Dollars)("Purchase Price") inclusive Value Added Tax (if any)

48. Again the language of the authors of that contract, seem to have earlier forewarned the parties as to how the legislation would be interpreted in such circumstances.
    
49. I am satisfied that they were right in doing so.
    
50. On that basis, Appeal No 8 of 2007 is also dismissed.
    

The Tribunal orders accordingly.

Mr Andrew J See

Resident Magistrate

^[1]

^[2] See Act No 6 of 1974

^[3] See Parliamentary Debates of Fiji, Second Reading Speech, Income Tax Bill 1974, 18^th April 1974; p137.

^[4] See Steinberg and Others v Federal Commissioner of Taxation[1975] HCA 63; (1975) 7 ALR 491 at 495

^[5] (1981) 5 NZTC 61,006 (CA).

^[6] (1970)120 CLR 487

^[7] At [27]

^[8] See Exhibit A4, where the relevant issue is canvassed by the Ra Rural Local Authority.