Edited version of private ruling

Authorisation Number: 1011480099824

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Ruling

Subject: goods and services tax and subdivision of land

Question 1

Will you be required to register for GST as a result of your activity of subdividing and selling land?

Answer

No. You are not required to register for GST as your activity of subdividing and selling land is not regarded as carrying on an enterprise for GST purposes.

Relevant facts and circumstances

Your ruling is based on the following facts.

· You are a married couple who are not registered for GST.

· As joint tenants you acquired a block of several acres of land with a house in Australia many years ago.

· Over your period of ownership the land was used mainly for domestic purposes and some minor and some incidental horse agistment.

· A few years ago you agreed with your several neighbours to join your landholdings and do what was required to obtain the necessary approvals to enable subdivision of the combined land into a number of blocks (the 'project').

· The project is structured as a joint venture between the different land owners.

· You have attached a copy of the joint venture agreement ('agreement').

· Under the agreement the project is defined to include the development of the property, the subdivision of the property and the allocation of the individual lots to the participants.

· Once the entirety of the land of all land holders is subdivided into small lots, it is largely individually allocated back to the original owners for their ultimate disposal or retention.

· The agreement makes it clear that the participants have entered into this agreement and associated themselves in the project as joint ventures only and not as partners.

· In your case, your existing land holding once divided would be equal to 4.75 blocks.

· You and another landowner will share in one block as tenants in common.

· Thus you own four blocks yourselves, and share ownership of a fifth block as tenants in common with a neighbour.

· When the block of land shared where you share ownership with your neighbour is sold, the purchaser would need to sign two contracts of sale - one with you, and a second contract with the other neighbour.

· You and your neighbour will share the proceeds of the sale of the shared in proportion to the extent of the quantum of your ownership.

· You are not skilled in land developments.

· A project manager was engaged who has arranged for the drawing up of the plans and has negotiated the proposed development through the process of the local government approval system.

· Together with the various other land owners, you have maintained control of the final decision making and expenditure.

· The subdivision has proceeded through the local government approval process.

· You will the share the cost of the physical infrastructure work on the land, including drainage, power, water and roads.

· All work done in the form of input of utilities is the minimum required by the local council.

· The roads to be constructed into the subdivided blocks are a requirement of the local council.

· You did not have the funds required to enable you to undertake the project.

· You financed your activity by borrowing from a bank.

· You were required by the bank to enter into a conditional pre-sale contract for one of the lots.

· It is your intention to sell three blocks out of the five.

· You will retain the other two blocks.

· One of the two blocks which you retain will include the block upon which your house now sits.

· The proceeds of the sale of the first block will go towards paying back the bank loan.

· The proceeds of the second and third block will be invested to provide an income stream, which will be utilised to enable you to live independently and within your current environment for as long as possible.

Reasons for decision

Under section 23-5 of the New Tax System Goods and Services Tax Act 1999 (GST Act) you are required to be registered for GST if:

· you are carrying on an enterprise; and

· your GST turnover meets the registration turnover threshold

The term 'enterprise' is defined in section 9-20 of the GST Act so as to include an activity or series of activities done:

· in the form of a business

· in the form of an adventure or concern done in the nature of trade, and

· in the form of a lease, licence or other grant of an interest in property made on a regular or continuous basis.

The definition of the term 'enterprise' for GST purposes is discussed in the following two public rulings available on our website www.ato.gov.au

· Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1)

· Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6)

Paragraphs 6 and 10 to 15 of GSTD 2006/6 state:

What is an enterprise?

6. An enterprise is defined as an activity or series of activities done in a certain manner or by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or continuous basis, activities done by charitable or religious institutions, superannuation funds, and activities done by the Commonwealth, a State, a Territory, or local government.

An activity or series of activities

10. Essentially, this is any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

In the form of a business

11. An enterprise includes an activity, or series of activities, done in the form of a

business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

12. The definition of 'business' in section 195-1 is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'.

In the form of an adventure or concern in the nature of trade

13. An adventure or concern in the nature of trade includes a commercial activity that

does not amount to a business but which has the characteristics of a business deal.

However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or

concern in the nature of trade' is wider than 'an adventure or concern in the nature of

trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

When is an enterprise being carried on?

15. The term 'carrying on' is defined in section 195-1 and ensures that activities done

in the course of commencement or termination of an enterprise are included in determining whether the activities of the entity amount to an enterprise.

Paragraphs 159 to 160 of MT 2006/1 state:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise…

As discussed in paragraphs 177 to 179 of MT 2006/1, to determine whether an activity or a series of activities amounts to a business, the activity needs to be considered against the indicators of a business established in case law.

The following indicators of carrying on a business have been so established:

· whether there is a significant commercial activity

· there is a purpose and intention to engage in commercial activity

· an intention to make a profit, and whether the venture is profitable

· the activity is recurrent or regular in nature

· the activity is carried on in a similar manner to that of other businesses in the same trade

· the activity is carried on in a businesslike manner with records being kept

· the activities are of a reasonable size or scale

· there is a business plan

· there are commercial sales of product, and

· the entity has relevant knowledge and skill.

MT 2006/1 continues:

Trade v. investment assets

258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

260. Assets can change their character but cannot have a dual character at the same time.

…….

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…

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.

……..

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.

We need to determine whether the subdivision and the subsequent sale of the subdivided blocks of land are activities with a commercial flavour that go beyond the mere realisation of an investment / capital asset. Of most relevance, in this case, is the character of the property at the time of supply.

We need to examine the scale and level of development activities that you have undertaken. Paragraph 180 of MT 2006/1 provides that the larger the scale of the activities, the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

The scale of your subdivision comprises five lots. This level of land subdivision is an activity carried on in a small way.

However, you have entered into an arrangement with your neighbours to undertake the subdivision of your land as a part of a larger joint venture project of subdivision of land on several adjacent properties. Further, you have also entered into a formal written agreement with your neighbours to undertake this project. As a consequence, you also share one of the subdivided blocks in this larger project with a neighbour. In addition, a project manager was engaged who has arranged for the drawing up of the plans and has negotiated the proposed development through the process of the local government approval system on behalf of the joint venture.

It is also noted that you have borrowed funds from a bank to finance your activity of land subdivision, using one of your subdivided blocks as collateral for your loan

These factors indicate the activities are of a reasonable size or scale, there is a purpose and intention to engage in commercial activity, that there is a business plan, and that the activity is carried on in a similar manner to that of other businesses in the same trade.

However, it is noted that after the entirety of the land of all land holders is subdivided into small lots, it is largely individually allocated back to the original owners for their ultimate disposal or retention. Together with the various other land owners, you have maintained control of the final decision making and expenditure. These indicate that the activities of the joint venture are limited in scope and duration. Even the proceeds of sale of the subdivided block Lot 15 held by you as tenants in common with your neighbour will be distributed between you according to the proportion of your ownership of the block.

In this context it is again noted that your land has been subdivided in five blocks. It is also noted that it is your intention to only sell three of the subdivided blocks, and to retain two blocks for your personal use.

On the basis of these facts it can therefore be concluded that your own activity of land subdivision remains of a small scale, and an activity of a personal nature.

In addition, you have not developed your land beyond what is necessary for the subdivided lots to comply with council requirements for approval of the subdivision. It is accepted on that basis that your activity of subdividing your land is not commercial in character.

Further, it is also noted that you have lived on your land for many years, that over your extended period of ownership the land was mainly used by you for domestic purposes, and that you will remain in residence on one of your subdivided blocks in your existing family home. In addition you will retain ownership of one of your other subdivided blocks. All the subdivided land that you intend to sell has been excised from the curtilage of your own private home.

The proceeds of sale of one subdivided block will cover your costs, and the proceeds of the sale of the other two blocks will be used to fund your retirement.

These factors indicate that your subdivision and sale of land are the mere realisation of a private asset.

On balance, we therefore consider that the subdivision of your land does not amount to an enterprise of property development.

You are not currently registered for GST. As you are not carrying on an enterprise you are not required to be registered.

GST is payable on taxable supplies. To ascertain whether there is a GST liability on the sale of the three blocks of land, it must be determined whether the sale is a taxable supply. As you are not registered or required to be registered for GST, you will not be making a taxable supply when you sell the three blocks of land. As such, no GST is payable on the sale.

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