Edited version of private ruling

Authorisation Number: 1011616393575

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Ruling

Subject: GST and sale of subdivided land

Question

Are you required to remit goods and services tax (GST) on the supply of the subdivided lots?

Answer: No.

Relevant facts and circumstances

X and Y (you) have been the owners of the property in Australia prior to 1 July 2000 and are not registered for GST. Prior to the purchase of the property, you were residing there as tenants.

You also owned a vacant block of land in another part of Australia which you sold prior to 1 July 2000 due to financial problems.

X is self employed and is not registered for GST.

The property has only been used as a residential property. The family home is situated along the eastern portion of the property with the rest of the property being unused other than for storage of X's business equipment in a shed not attached to the family home.

The property has never been used for commercial purposes.

You sold part of the property to entity A.

You have now separated due to marriage problems and as part of the marriage settlement you intend to demolish the existing house and subdivide the land of the remaining property into several lots.

The house in the property is old and needs to be demolished as it is spread out over a number of the new blocks to be developed. It is also in the way of the installation of underground electricity and sewerage systems.

You have applied for approval for subdivision of your portion and the subdivision plan is with their Council for approval.

No major road construction or major road access will be undertaken as all the lots will face the road already in existence.

An agent will be appointed to sell the lots.

You will immediately sell some lots to cover the cost of the subdivision. At this stage you are unable to estimate how much it will cost to develop the land as it is subject to market rate at the time you start subdividing the land.

Each of you (according to the plan) will hold an equal number of lots.

X will sell some lots to cover the cost of the purchase of a property interstate. However, at this stage you are unable to estimate the selling price of those lots and the purchase price of the property interstate.

You will sell a lot immediately to pay for the cost of the building of a new house on the other lot in which Y will reside. However, you are unable to estimate the cost of the building and the selling price of a lot. It all depends on the market value at that time of selling the lot and building the new house in the remaining lots.

The property/lots have not been brought into the account as business asset.

You did not buy any additional parcel of land to be added to the original parcel of land.

There is no business organisation - for example a manager, office and letterhead.

You did not borrow funds to finance the subdivision and hence did not claim the subdivision costs as a business expense.

There is no level of development of the land beyond that necessary to secure council approval for the subdivision.

No building is to be erected on the land prior to sale.

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

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-20.

Reasons for decision

Summary

No, you are not required to remit goods and services tax (GST) on the supply of the subdivided lots of land.

Detailed reasoning

The land is going to be subdivided. The lots that are going to be sold will be a taxable supply if the supply satisfies all of 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:

(a) you make the supply for ^*consideration; and

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

(c) the supply is ^*connected with Australia; and

(d) 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 supply of the lots will be for consideration and are connected with Australia as the property is located in Australia. Therefore, 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 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 and whether your sale of these lots of land will be GST-free or input taxed.

For a supply to be a taxable supply all the elements of section 9-5 of the GST Act must be satisfied.

Furthermore, the supply of subdivided land is neither GST-free nor input taxed.

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 (enclosed) 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.

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, we need to consider whether your subdivision activity is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 244 of MT 2006/1 provides further guidance on adventures and concerns in the nature of trade. It states:

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

There are several other points raised by MT 2006/1 which are of relevance to your circumstances:

· Assets can be categorised as either trading assets or investment/capital 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 (paragraph 258).

· Examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere realisation of investment/capital assets does not amount to trade (paragraph 259).

· The mere realisation of a capital/investment asset is not a business or an adventure or concern in the nature of trade (paragraph 263).

Isolated transactions and sales of real property

Paragraph 262 of MT 2006/1 states:

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

Paragraphs 264 and 265 of Mt 2006/1 state:

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 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 of MT 2006/1 states:

266 In determining whether the activities relating to isolated transactions are an enterprise or are the mere realization of a capital asset, it is necessary to examine the facts and circumstances of eah particular case. This may require a consideration of the factors outlined above, however there my 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 now need to determine whether your subdivision and sale of the lots are activities with a commercial flavour that go beyond the mere realisation of an investment/capital asset. We need to consider the character of these lots of land at the time of supply (please refer to examples 28 to 31 and in particular to example 30).

You advised the following:

the property was originally purchased by you prior to 1 July 2000. You sold part of the property due to financial problems. The rest of the property is going to be subdivided into many lots due to your marriage breakdown.

the house in the land is old and needs to be demolished as it spread over a number of the new lots to be developed. It is also in the way of the installation of underground electricity and sewerage system.

some of the lots of subdivided land are going to be sold immediately to cover the costs of the subdivision. Out of the remaining lots of land, some will be sold to cover the costs of your new homes. Some lots will remain unsold.

you did not purchase additional land to be added to the original property.

you have not brought the property/lots into account as a business asset.

you do not operate a business organisation - for example a manager, an office or letterhead for you to subdivide the land and sell them.

you will appoint an agent to sell the property/lots.

you did not borrow funds to finance the subdivision and hence did not claim the subdivision costs as a business expense.

there is no level of development of the land beyond that necessary to secure council approval for the subdivision.

no building is to be erected on the land prior to sale.

no construction or major road access was undertaken as part of the subdivision as there is road access to all of the lots that are going to be subdivided.

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

you did not acquire the land for a profit making scheme or arrangement. Please refer to example 33 of MT 2006/1.

Therefore, considering all the facts and circumstances of your case, your sale of the subdivided property will not have the characteristics of a business deal and will not result in the activity being commercial in flavor. The sale will be the mere realisation of an investment/capital asset. Hence, the condition at paragraph 9-5(b) of the GST Act will not be satisfied.

As you do not satisfy all the requirements of section 9-5 of the GST Act, your sale of the sub-divided land will not be a taxable supply. Accordingly, you are not required to remit GST on the sale of your subdivided lots of land.

Please note that it is not necessary to consider whether you will satisfy the condition at paragraph 9-5(d) of the GST Act in this case.

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