Edited version of private ruling

Authorisation Number: 1011475242280

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Ruling

Subject: GST and subdivision of property

Question

Are you conducting an enterprise of subdividing the property for Goods and Services Tax (GST) purposes?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The subject died in 2008 leaving a rural residential property to the beneficiaries.

The property is approximately XX hectares and is on a single title.

The late owner purchased the property in 1950 and resided there until their death.

The property had been used for their livelihood up until 1970's when they retired and used the property as their principle residence.

The executors of the estate (you) are realising the assets for the benefit of the beneficiaries.

You are of the view that the best outcome is to subdivide the property prior to sale.

You will have no personal involvement with the selection, engagement and instruction of engineers and consultants, preparation of development applications, dealings with council or choice and liaison with real estate agents.

The carriage of the development will be undertaken by the developer.

No other land will be acquired as part of this subdivision.

The property is zoned rural residential.

The property has not previously been committed to any development proposal or subdivision.

The proposed subdivision will result in 10 to 13 lots depending on council requirements.

You will carry out the minimum council requirements to gain approval for the subdivision.

You will not construct any buildings on the subdivided lots as per point 7 of part A of the Development Application.

The proposed development will be able to connect to existing electricity and telecommunications.

Each proposed allotment comprises adequate area for effective and efficient disposal of effluent waste.

There will be no bridgeworks or any major road access as part of the requirements for the subdivision but a 260 metre long internal access road with drainage will be required.

You have not generated any income from the property or used it for any income earning activities such as leasing, or other enterprise since becoming executors.

You have not claimed any income tax deductions for any expenses incurred on the property.

You have not been involved in property development, subdivision; trading or amalgamation activities in the past and you do not intend to engage in any such activities in the future.

You do not intend to claim any of the expenses of the subdivision as a business expense.

You intend to engage a real estate agent to sell the lots of subdivided land.

You anticipate that the selling price for the lots in total will be in excess of $4.5 million.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 - Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 - Section 23-5

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Trustee for the Estate.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The subdivision of the property is not considered to be conducting an enterprise. As you are not registered or required to be registered, the subsequent sale of the subdivided lots will not be subject to GST.

Detailed reasoning

The sale of the lots of subdivided land will be a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).  Section 9-5 of the GST Act states:

You make a taxable supply if:

you make the supply for ^*consideration; and

the supply is made in the course or furtherance of an ^*enterprise that you ^*carry on; and

the supply is ^*connected with Australia; and

you are ^*registered, or ^*required to be registered.

However, the supply is not a ^*taxable supply to the extent that it is ^*GST-free or

^*input taxed.

 

(*denotes a term defined in the GST Act)

Based on the information that you have provided, the sale of these lots will not be GST-free or input taxed. As the supply will be for consideration and the supply is connected with Australia as the property is located in Australia, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

It remains to be determined whether the sale of the lots of subdivided land will be made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act and whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act.

Enterprise

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, it goes on to say that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

In respect of isolated transactions and sales of real property, paragraphs 262 to 266 of MT 2006/1 provide:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

§ there is a change of purpose for which the land is held;

§ additional land is acquired to be added to the original parcel of land;

§ the parcel of land is brought into account as a business asset;

§ there is a coherent plan for the subdivision of the land;

§ there is a business organisation - for example a manager, office and letterhead;

§ borrowed funds financed the acquisition or subdivision;

§ interest on money borrowed to defray subdivisional costs was claimed as a business expense;

§ there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

§ buildings have been erected on the land.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

You were appointed executors of the estate by the will. To realise the full potential value of the property for all the beneficiaries, you have decided to subdivide the property into rural residential lots and engage a real estate agent to sell the lots. When the decision to sell the land was made, you instructed engineers to prepare the documentation for the subdivision which has been submitted to council. You are unable to undertake this activity until you receive approval from the local council.

Only the work required to meet council requirements, to secure its approval for the subdivision, will be undertaken. No bridgeworks or major road access will be undertaken as part of the subdivision. However a short 260 metre access road with driveways will be constructed to allow access to all lots. Furthermore, no buildings are to be constructed by you on the lots of subdivided land which are to be sold. You intend to engage real estate agents to complete the sale of the lots of subdivided land.

You advised that you have not been involved in property development, subdivision; trading or amalgamation activities in the past and you do not intend to engage in any such activities in the future apart from this subdivision. You have not generated any income from the property, or used it in any income earning activity or used it in any leasing, or other, enterprise, during the period of your ownership. You have not claimed any income tax deductions for expenses incurred on the property.

Based on the information provided, your subdivision activity will be a one-off activity, and is not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities.

Therefore, considering all of the facts and circumstances in your case, the subdivision of the property and the subsequent sale of the subdivided lots will not have the characteristics of an enterprise. This is consistent with the guidelines in paragraphs 262 to 266. The supply is not made in the course of or furtherance of an enterprise being carried on by you under paragraph 9-5(b) of the GST Act.

Registration

Section 23-5 of the GST Act states who is required to be registered:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

Since we have established that you will not be carrying on an enterprise, you do not satisfy all of the requirements of section 23-5 of the GST Act. You will not be required to be registered for GST with regard to the subdivision of the subject property.

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