Edited version of private ruling

Authorisation Number: 1011584904706

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Ruling

Subject: GST and subdivision of property and margin scheme

Questions

Will your proposed subdivision of the inherited land into several blocks and their sales be a mere realisation of a capital asset or will your involvement as a passive land owner in the joint venture be an enterprise for GST purposes?

If it is considered that you are carrying on an enterprise in question 1, when will you need to obtain a valuation in order to calculate the GST under the margin scheme for your proposed sales of the blocks of land?

Advice:

Based on the information received, your proposed subdivision of the inherited land into several blocks and their sales will not be a mere realisation of a capital asset. With your involvement as a passive land owner in the joint venture, you will be considered to be carrying on an enterprise for GST purposes.

Based on the information received, where the sales of the blocks of land by you are taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the valuation date of the approved valuation under paragraph 75-11(3)(d) of the GST Act will be the day you register or are required to be registered for GST.

Relevant facts:

You are an individual and in the recent year inherited a block of land located in Australia. You currently use the property as your family home.

You are considering subdividing the land by entering into a joint venture arrangement with a developer. In the arrangement with the developer, you will retain ownership of the land. The developer will undertake the development of the land (which is made available to him) with a proposed subdivision of the land into several blocks with one block to be retained by you as your residence. The block you will retain as your residence is the one where your current house is located on.

The developer will solely be responsible for managing the development. The developer will also engage a real estate agent to sell and market the land and you will not be involved in that process.

You will enter into contracts for the sale of the sub-divided lots. It is estimated that each block will be sold above the GST registration threshold. You will receive the proceeds of the sale of the Lots and pay the developer a percentage of such proceeds.

Currently you are not registered for the goods and services tax (GST).

The land you inherited was registered under the name of the deceased entity and was purchased by the latter prior to the capital gains tax regime was introduced. The deceased entity was at no stage registered or required to be registered for GST.

You referred to subsection 75-11(3) of the GST Act and advised that you do not want to choose paragraph 75-11(3)(ca) of the GST Act to work out the margin scheme of your supply of the blocks of land.

Reasons for decisions

Question 1

Goods and Services Tax Determination GSTD 2006/6 and Miscellaneous Taxation Ruling MT 2006/1 (available at www.ato.gov.au) consider what 'an enterprise' is for the purposes of the GST Act.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include 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.

It is considered that a business includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business but which have the characteristics of a business deal. Such transactions are of a revenue nature.

However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, itself, result in the activity being commercial in nature. However, assets can change their character but cannot have a dual character at the same time.

The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

In relation to the subdivision of land, MT 2006/1 provides at paragraph 265 a list of factors that the Courts have considered in determining whether activities amount to a business or an adventure or concern in the nature of trade. It is not necessary to satisfy all of the factors but 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:

· there is a change of purposes 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.

In determining whether an activity or series of activities amounts to an enterprise, it is necessary to examine the facts and circumstances of each particular case and whilst the occupation of the individuals involved may have some relevance it is not a dominant factor. The factors outlined above may be considered, 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.

From the information received, you are planning to subdivide the inherited property into several blocks and to retain one block as your residence. To do this, you will have a joint venture arrangement with a developer who will undertake the development of the land and will be responsible in managing the development. A real estate agent will be engaged to sell and market the vacant lands.

In this case, though you will be a passive land owner, your intention (subdividing the land into several blocks with the assistance of a developer and selling them with the assistance of a real estate agent) have the characteristic of a business deal. The joint venture agreement with the developer is clear evidence of a commercial approach and a clear intention of profit making. Accordingly, you will be considered to be carrying on an enterprise when you decide to carry on with your proposed intention.

Further, your proposed intention will change the actual character of the property. Currently the whole property is a capital asset since it is your place of residence. With the commercial characteristics of the proposed intention, the character of the property will be changed from capital to trading asset. The sale of the vacant blocks of land will therefore not be a mere realisation of a capital asset.

Question 2

GST is payable on a taxable supply. Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply for consideration;

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

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

However, the supply is not a taxable to the extent that it is GST-free or input taxed.

For a supply to be a taxable supply all the requirements listed in section 9-5 of the GST Act must be satisfied. The GST payable for a taxable supply is 1/11 of the price under sections 9-70 and 9-75 of the GST Act.

Supply of real property

There is a special provision under the GST Act in regard to the calculation of the GST payable on taxable supply of real property (margin scheme).

Subsection 75-5(1) of the GST Act provides that you may use the margin scheme if the supplier and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) of the GST Act provides that the agreement must be made on or before making the supply, or within such further period as the Commissioner allows.

Subsection 75-10(1) of the GST Act provides that if a taxable supply of real property is made under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

Subsection 75-10(2) of the GST Act provides that, subject to subsection 75-10(3) of the GST Act and section 75-11 of the GST Act, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.

Based on the information you have provided, subsection 75-10(3) of the GST Act does not apply.

Section 75-11 of the GST Act discusses the margin for supplies of real property in particular circumstances. The relevant subsection that applies to your circumstances is subsection 75-11(3) of the GST Act, as none of the other subsections apply.

Subsection 75-11(3) of the GST Act applies to supplies of real property that were acquired from deceased estate and the deceased acquired the real property before 1 July 2000.

Paragraph 75-11(3)(ca) of the GST Act

If you supply real property that you inherit, and the deceased acquired it before 1 July 2000, then paragraph 75-11(3)(ca) of the GST Act allows you to choose to use the consideration for the deceased's acquisition of the real property when calculating the margin for the supply.

However, Paragraph 75-11(3)(ca) of the GST Act can only apply if:

· you know the amount of the consideration for the deceased's acquisition of the property; and

· you choose to use this amount when calculating the margin for the supply.

Under paragraph 75-11(3)(ca) of the GST Act, the margin for the supply is the amount by which the consideration for the supply you make exceeds the consideration for the deceased's acquisition of the property.

If you do not know the consideration for the deceased's acquisition of the real property or you don't choose to calculate the margin for the supply under paragraph 75-11(3)(ca) of the GST Act, then the margin is calculated under paragraph 75-11(3)(d) or 75-11(3)(e) of the GST Act.

From the information received, you do not want to choose paragraph 75-11(3)(ca) of the GST Act to work out the margin scheme of your supply where the sale of the blocks of land in the future is a taxable supply under section 9-5 of the GST Act.

The next step is to consider paragraph 75-11(3)(d) or 75-11(3)(e) of the GST Act.

Paragraph 75-11(3)(d) of the GST Act

Paragraph 75-11(3)(d) of the GST Act applies if, immediately before the time that you inherited the real property, the deceased was neither registered nor required to be registered.

The margin for the supply under paragraph 75-11(3)(d) of the GST Act is the amount by which the consideration for the supply exceeds an approved valuation of the real property as at the latest of:

(i) 1 July 2000;

(ii) the day on which you inherited the real property; or

(iii) the first day on which you were registered or required to be registered for GST.

Paragraph 75-11(3)(d) of the GST Act will be relevant where your sale of the blocks of land in the future is a taxable supply under section 9-5 of the GST Act.

Currently you are not registered or required to be registered for GST. Accordingly, to calculate the margin for the future supply of blocks of land, the approved valuation date will be the first day that you register or are required to be registered for GST since this will be the latest of the requirements for an approved valuation under paragraph 75-11(3)(d) of the GST Act

Paragraph 75-11(3)(e) of the GST Act

Paragraph 75-11(3)(e) of the GST Act applies if the margin for the supply is not calculated under paragraph 75-11(3)(ca) of the GST Act and immediately before the time that you inherited the real property, the deceased was registered or required to be registered for GST purposes.

Paragraph 75-11(3)(e) of the GST Act is not applicable as you advised the deceased was not registered or required to be registered for GST purposes.

Summary

Accordingly, where you will sell the blocks of land in the future and satisfy all the requirements in section 9-5 of the GST Act, the approved valuation date will be the first day that you register or are required to be registered for GST.

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