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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011614173759

Ruling

Subject: GST enterprise and sales of subdivided lots of land and new villas

Questions:

1. Is the sale of the subdivided lot(s) of land by you a taxable supply?

2. Is the sale of the newly developed villa(s) by you a taxable supply?

Relevant facts and circumstances

You (an individual) are not registered for the goods and services tax (GST).

Your parent purchased a block of land with several acres more than 20 years ago. The land was not purchased to subdivide but to supplement an adjoining block which you owned at that time jointly with a relative. Crops were grown and a few cattle agisted on both blocks for lengthy periods after purchase. This was more of a hobby, and not a farming business.

You (and your relative) sold your adjoining block many years ago to finance house extensions.

You parent left you their block of land upon their death over 8 years ago.

At the time that you inherited the block, it was vacant land. There was no business (farming or leasing) on the land by your parent when you inherited it from them.

About a year after their death, a licensed surveyor was approached by the owner of a nearby block to investigate subdivision possibilities. The Council at that time indicated that they would strongly prefer only one major road exit onto a main road. Consequently, the surveyor convened a meeting of the owners of the adjoining blocks to see if there was any interest in presenting a single plan to Council which would embrace all blocks. Three of the blocks are currently owner occupied and the remaining blocks were vacant, of which your block is one.

With that surveyor acting as convener and negotiator with Council, a subdivisional plan for the blocks has been approved by Council involving roadworks, sewerage, water reticulation, and electricity and telephone connections to service the blocks.

The number of lots from your block is less than 30 lots.

The Council submitted a tender price to draw up all engineering plans and to carry out the actual works to completion. The tender price was about $XXX,XXX per owner, depending on the exact numbers of blocks their land yielded.

The owners accepted Council's tender and construction of all stages has now been completed.

The subdivision land is traversed by a water pipeline easement which had a big influence on road alignments. This alignment has meant that the surveyor has had to design the plans around 'give and take' among adjoining owners. Furthermore, a percentage is for contributions to parklands which Council requires have been consolidated to form a larger single area to the south east of the subdivision.

In order to ensure the development works were completed in the event of death or bankruptcy of any of the participating parties, a 'joint venture' agreement was drawn up by a solicitor and signed by all parties. Such an agreement was required by the individual financiers of the parties and by the Council.

You and your relative have recently retired from professional positions. You have other investment interests including rental properties. However, you have not in the past nor will be in the future directly involved in the work associated with the subdivision. The surveyor has agreed to remain as coordinator for the group and the mediator and negotiator with Council, as well as undertake all the necessary surveying work and preparation of drawings for submission to the titles office for registration.

Each individual owner has made his/her own arrangements in relation to finance, legal and accounting matters and selling arrangements. You have not formed any special legal entity such as a company to undertake this subdivision; and you have retained ownership in your own name. As per the letter from the Council, they agreed to accept and invoice individual owners independently for progress payments.

The development works for all stages are now complete. Only several allotments are unsold. It is anticipated that all allotments will be sold within the next few years.

Due to current demand for higher density housing at the location, you plan to use two adjacent allotments to have four villas erected, two of which will be for sale as soon as practical. All planning, construction and finishing work will be undertaken by qualified professionals and trade contractors. Your involvement in the development of the villas will be limited to selecting a building design, colour schemes and some inclusions.

You state that these activities represent a 'once off' transaction on the 10 acres block that you inherited and not the beginning of an on-going land subdivision business.

You further provided the following information:

You advised that your participation in this subdivision has been passive. The appropriate professionals were engaged to subdivide, negotiate with Council and advertise the land on an estate wide basis. Although decisions were required to be made as a group, you made decisions independently in relation to pricing the negotiating sales contracts of your properties.

You advised that you did not prepare a business plan in relation to the subdivision and sale of the subdivided lots.

The contract prices of the subdivided lots of land vary.

The developed allotments were advertised by a sign board at the entrance to the estate, online advertisement, advertisement in the local realtor magazine, and a few pages brochure distributed by real estate agents. All advertising was created and distributed on an estate wide basis. No advertising or promotion was carried out separately for your portion of the estate.

You borrowed funds to finance the development and constructions. Sales proceeds were used to repay debts.

In relation to the villas, you plan to sell two of the villas as soon as practical to clear the loan used to finance the building costs. When the first two villas are sold it is anticipated that they will be new and unoccupied. The other two will be used as residential accommodation. One villa will be retained and leased with the mid-term intention of occupying it as your main residence. The fourth villa will most likely be leased out with income used as part of your retirement plans, and then sold.

The estimated selling price of the two villas for sale is above $75,000.

You have provided copies of the subdivision plans and documentations, and contract of sales for the lots already sold.

Reasons for decisions

Issue 1: Sales of subdivided vacant land

GST is payable on a taxable supply. You make a taxable supply where the transaction satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Under section 9-5 of the GST Act, you make a taxable supply if:

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

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the properties are located in Australia respectively.

Therefore, we need to consider:

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in these rulings have been applied in this case.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

The term business ordinarily would encompass 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 isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

In your circumstance, you advised that the activities represent a 'once off' transaction on the land that you had inherited, and not the beginning of an on-going land development business. Based on these facts, it is considered that your activities are not carried out in the form of a business.

As your activity of land development leading to subdivision and sales of the land is an isolated transaction, it is necessary to consider whether the subdivision and sales of the subdivided land is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

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

Paragraph 13 of GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade.

Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

From the facts provided, you did not purchase the block of land, but had inherited the land from your parent who had purchased more than 20 years ago. You inherited this land about 8 years ago upon their death. Your parent did not purchase the land to subdivide but to supplement an adjoining block which you owned at that time jointly with a relative. Crops were grown and cattle agisted on both blocks for lengthy periods after purchase. This was more of a hobby, and not a farming business. However, you have sold your adjoining block many years ago to finance house extensions. You advised that you (and your parent) had not acquired the land for the purposes of subdivision and resale for profit.

The facts indicate that you did not initiate the subdivision. You, along with other owners of nearby blocks, were approached by a surveyor (for one of the owners of a nearby block) to see if there was interest in presenting a single subdivision plan to Council because Council strongly preferred only one major road exit onto the main road (which you have shown on a diagram). You and the owners agreed to the single subdivision plan of the blocks. The surveyor acted as the convenor and negotiator with Council for the single subdivision plan for the blocks to be approved by Council involving roadworks and drainage, sewerage, water reticulation, electricity and telephone connections. The Council submitted a tender to actually carry out these subdivision activities to completion in stages, which was accepted by you and the other owners. You advised that you did not prepare a business plan in relation to the subdivision and sale of the subdivided lots.

You (and each owner) are acting as an individual and were liable for your own financing and expenses for your share of the subdivision, and did not create an overall business structure or organisation for the whole development. Council invoices each owner independently for progress payments. The land and allotments are in your own name, and although you borrowed funds to finance the subdivision, there is no indication that you have account for it as a business asset or expenses. The level of activities undertaken for the subdivision, which was carried out by the Council, was minimal development work to meet council requirements and to improve the presentation of all the allotments. For the vacant lots of land in question, there are no buildings erected on the land. All advertising was created and distributed on an estate wide basis, but no advertising was carried out separately by you for your allotments. The level of marketing appears to be reasonable and expected for the sales.

On the basis of these facts and taking into consideration all the factors, it is considered that your subdivision and sales of the subdivided lots of land is the mere realisation of a capital asset, and that you are not carrying on an enterprise. Therefore, the sales of the subdivided lots of land do not satisfy the requirements of paragraph 9-5(b) of the GST Act. Accordingly, as all the requirements of section 9-5 of the GST Act are not satisfied, these sales are not taxable.

Since the sales of the subdivided lots of land do not satisfy the requirements of paragraph 9-5(b) of the GST Act, there is no need to consider if you are required to be registered under paragraph

9-5(d) of the GST Act in relation to these sales; however this requirement will be covered in Issue 2 below.

Summary - Issue 1

The subdivision and sales of the subdivided lots of land are not made in the course or furtherance of an enterprise because it is the mere realisation of a capital asset, and therefore the sales do not satisfy all the requirements of a taxable supply under section 9-5 of the GST Act.

Issue 2: Sales of the newly developed villas

Section 9-5 of the GST Act (stated above) is also of relevance. The facts indicate that you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the properties are located in Australia, respectively. We need to consider whether your sales of newly developed villas are in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

In this circumstance, you plan to use two adjacent allotments to have four villas erected for resale. You will select building designs, colour schemes and inclusions, with all planning, construction and finishing work to be undertaken by qualified professionals and trade contractors. The selling price of the two new villas for sale is above $75,000 each. You plan to sell two of the villas as soon as practical to clear the loan used to finance building costs, and the other two villas will be leased out (with one being a main residence in the mid-term). The two new villas for sale would be new and unoccupied.

We consider that your development and sales of the two new villas are in the course of an enterprise and more than the mere realisation of capital assets because:

On the basis of these factors taken in combination, these activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the new villas have the characteristics of activities that would constitute an adventure or concern in the nature of trade. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act, and the sales of the newly developed villas will satisfy the requirement of paragraph 9-5(b) of the GST Act.

We note for your information that in relation to the two newly developed villas for which you will retain and lease, are activities in the course or furtherance of a leasing enterprise and will also satisfy the requirement of paragraph 9-5(b) of the GST Act.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the subdivision and sale activities that took place.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of developing and selling the new villas constitute the carrying on of an enterprise. At the time of the sales, the nature of your assets (the two lots) has changed from capital to revenue (trading) assets. The sales of the new villas do not constitute the transfers of capital assets and section 188-25 of the GST Act does not apply. You are deriving income from disposals of revenue (trading) assets even if the disposals are part of a one-off transaction.

Therefore, the sales of the two newly developed villas are not excluded from the calculation of your projected GST turnover. Hence, the value of these sales must be included in the calculation of your current and projected GST turnovers.

We note that the sales of the subdivided lots of land (as discussed in Issue 1) are excluded from the calculation of your GST turnover. Also, consideration received from renting residential premises will be excluded from the calculation of your GST turnover. However, any consideration received from the sales and the renting of commercial residential premises and commercial properties must be included in the calculation of your GST turnover.

Accordingly, prior to the first sale of the new developed villas, you should be registered for GST because your projected GST turnover would be above the GST registration threshold of $75000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

We note that you may choose to backdate your GST registration to the date when you commenced your enterprise.

GST-free and input tax supply

The sales of the newly developed villas are not GST-free under any provisions of the GST Act or any other legislation.

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au.

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

New residential premises are defined in subsection 40-75(1) to mean premises that:

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

From the facts provided, the newly developed villas are residential premises to be used predominantly for residential accommodation. You plan to sell two of the villas as soon as practical, and these villas would be new and unoccupied when sold. These new villas are neither used before 1998, nor rented for five years. On the basis of these facts, the new villas are new residential premises as defined under subsection 40-75(1) of the GST Act, and the sales of these two new villas will not satisfy the requirements to be an input taxed supply under section 40-65 of the GST Act.

We note for your information that since you will retain and lease the other two newly developed villas, for which are residential premises used for residential accommodation, the leasing of these two villas will be input taxed, and therefore not a taxable supply. You advised that you will later retain one villa as a main residence, and may sell the other one. The sale of this leased villa will be a new residential premise if it is not rented for a period of at least 5 years, and will be a taxable supply. If it is rented for 5 years or more, the sale of this villa will be an input taxed supply. You will need to determine the GST status at the time of sale.

Summary - Issue 2

The development and sales of the two newly developed villas satisfy all the requirements of section 9-5 of the GST Act, and are taxable supplies.

Additional Information

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications on page 17 of that guide.

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