Edited version of private ruling

Authorisation Number: 1011605155781

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: GST and supply of subdivided lots

Question

Is the sale of the proposed subdivision subject to goods and services tax (GST)?

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.

You are the owners of the proposed subdivided land (tenants in common).

You are not currently registered for GST.

The proposed land subdivision (Property) is situated in Australia.

The Property was initially inherited from your parents and was continued to be used for primary production activities through to your retirement. Since then the land has been agisted to other farmers and presently to hold stock.

Previous transactions

Since your inheritance, you have from time to time, sold off various parcels of land as mere realisation of capital assets. In addition, a considerable quantity of your land holding has been compulsorily acquired by government departments for different purposes.

You also reacquired a part of land which was compulsorily acquired when a government project was completed.

You were approached by the Local Council's Local Planning Department in relation to a shortage of land for urban expansion. As a result, you provided a number of lots.

After the sales of land as stated above and the compulsory acquisitions, a part of the remaining inherited land will be included in the proposed subdivision.

An adjoining land that was a part of the land you inherited from another relative will also be included in the proposed subdivision.

The proposed subdivision

The proposed subdivision was instigated by the planning schemes formulated by the Council's Local Planning Department.

A draft Rural Living Study was commissioned by the Council in response to the lack of an adequate strategic framework for rural living in the country. The draft study made a number of recommendations to the Council to address the future demand for rural living. An analysis was made to identify the development status and theoretical subdivision potential.

The Property was zoned low density residential and as a result the Council proposed the land subdivision in relation to future rural living development.

The proposed subdivision is in preparation stage and is intended to be carried out over a number of stages:

Once each stage is completed, the land sale from that stage will fund the next subdivision stage.

Due to the location and nature of the subdivision, you will incur costs. However, it is your intention to incur minimal expenditure to comply with the council regulations and those costs will be funded by your own fund.

All of the consultants are independent to you and have no financial involvement in the proposed subdivision.

You will not conduct any additional works that are not specifically required by the Council.

You do not have any plan to build houses on the subdivided lot to sell them as packages.

The land sales will be handled by real estate agents.

Relevant legislative provisions

A New Tax System (Goods and Services tax) Act 1999

Sections 7-1(1), 9-5, 9-10.

Reasons for decision

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act sets out 4 criteria required for a supply to be a taxable supply. Under this section, you make a taxable supply if:

1. you make the supply for consideration

2. the supply is made in the course or furtherance of an enterprise that you are carrying on

3. the supply is connected with Australia, and

4. you are registered or required to be registered.

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

A supply is not a taxable supply unless all of the criteria above are met. In your circumstances, the supplies (sales) of the subdivided lots will be made for monetary consideration. The supply of the land will be connected with Australia as the lots are situated in Australia. You are currently not registered for GST, however you are required to be registered for GST if you are carrying on an enterprise and your turnover exceeds the registration threshold of $75,000. Therefore, it is necessary to establish whether you are carrying on an enterprise of land development in relation the proposed subdivision.

Enterprise is defined in section 9-20 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.

Miscellaneous Ruling MT 2006 /1 provides the view of the Tax Office on whether or not an activity constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Goods and Services Tax Determination GSTD 2006/8 provides that the view of the Tax Office expressed in the MT 2006/1 can be equally applied to the meaning of enterprise under the GST Act.

Generally, a business includes a trade that is engaged on a regular or continuous basis.

The sale of the subdivided land involved business-like activities such as preparing the subdivision plans, applying for council permits and disposal. However, the activities are not repetitive and regular. Therefore, it is considered that you are not carrying on a business.

Although the sale of the subdivided land is not considered to be a business, paragraph 234 of MT 2006/1 provides that an isolated or one-off activity may fall into the category of 'an adventure or concern in the nature of trade'. This category includes a commercial activity of a trading nature that does not amount to a business but which has the characteristics of a business deal.

Paragraphs 235 and 237 of MT 2006/1 explain that:

235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any Property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

However, paragraph 244 of MT 2006/1 emphasises that:

…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, of itself, result in the activity being commercial in nature.

The approach of the Tax Office on the question of 'whether an entity is carrying on an enterprise where there is one-off or isolated real Property transaction' is expressed in paragraph 263 of MT 2006/1

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.

The cases of Statham & Anor v. Federal Commissioner of Taxation (1988) 20 ATR 228; (1988) 89 ATC 4070 (Statham) and Casimaty v. FC of T (1997) 37 ATR 358; 97 ATC 5135 (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme.

From those cases a list of factors can be of assistance in determining whether activities are business or adventure or concern in the nature of trade (a profit-making undertaking or scheme). If several 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:

§ 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.

Paragraph 266 provides further that:

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.

In your circumstances

The Property was initially inherited. You did not acquire the Property to resale for profit.

The Property was continued to be used for primary production activities through to your retirement. Since then the land has been agisted to other farmers and presently to hold stock.

You own the Property as tenants in common and currently run an agistment business as partnership.

You have not acquired any additional land to add to the Property.

The expenses you claimed in your tax returns were only related to rent (agistment).

It is your intention to incur minimal expenditure to comply with the Council regulations. Those costs are funded by your own fund.

The land sales from stage one will fund the next stage. The amount of fund utilised will be minimal for the whole development.

The proposed subdivision will take place in a number of stages and the commencement of a consecutive stage will only commence after the previous stage has been completed and the lots sold out. There will be no fixed time frame for completion of all stages.

Your involvement in the proposed subdivision is minimal as you engage consultants to undertake all necessary works as required by the Council for the subdivision, including the sale of the subdivided lots.

You will not build houses on the lots to sell them as packages.

It is considered that the supply of the subdivided land is a mere realisation of a capital asset and is not an enterprise as defined in section 9-20 of the GST Act. Although the size of the development is large, your activities involved in the subdivision are minimal and you intend to incur minimal expenditure to comply with the Council requirements.

As all of the criteria in section 9-5 of the GST Act are not met, your supply of the subdivided lots is not subject to GST.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).