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Edited version of private ruling

Authorisation Number: 1011637005636

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Ruling

Subject: Subdivision and sale of land

Question

Will the sales of the proposed subdivided blocks be taxable supplies?

Answer

Yes, the sales of the proposed subdivided blocks will be taxable supplies.

Relevant facts and circumstances

You (Mr and Mrs X) own a property in Australia (the property).

You have acquired to property before 1 July 2000 and have used it as your private residence since then.

You wish to subdivide the property into a specified number of blocks and sell as separate parcels of land to fund your retirement.

The property has not yet been surveyed. You drew the subdivision layout under the recommendations from a surveyor. The proposal was given to a firm of surveyors and town planners for comment and they prepared the planning report for your property and submitted the application to the council.

The council has not yet approved your application. The application is current and no work has commenced. No zoning changes are required.

The adjoining property, Lot Y, will be subdivided concurrently with your subdivision. The owner has already obtained development approval on Lot Y and has submitted a reconfiguration application for variations to suit the sharing of costs of a proposed road to be constructed on your property and Lot Y (centre road).

You and the owner of Lot Y commissioned a firm to prepare a stormwater management plan for your properties. The report provides that you and your neighbour propose to reconfigure two lots into a specified number of lots with associated facilities including internal roads and park and access driveways.

The proposal plan for your property shows that your property will be divided into a specified number of lots. The proposal plan for Lot Y shows that Lot Y will be subdivided into a specified number of lots.

The stage plan provides that your property is to be subdivided in a number of stages.

The plan of subdivision shows that the centre road will provide access to all your subdivided blocks and those of your neighbour.

The plan of subdivision also shows that another road is to be built between two proposed subdivided blocks on your property, which will connect the centre road to a road that is to be built on the adjacent property, Lot Z.

Lot Z is not being subdivided at this time but the council requires that access is provided for any future subdivision as part of their future planning. The road layouts are based on the council's planning for the area.

The subdivision will not be part of an estate or master plan.

You and the owner of Lot Y are undertaking the subdivision work jointly. Your neighbour has experience is subdivision projects. They will manage the subdivision project for both sites and liaise with the council. You do not have a written agreement with your neighbour.

You have been actively involved in the planning stages and will be consulted by the project manager on a regular basis through the life of the project.

When your development application is approved, you and your neighbour will call tenders for the centre road (such as construction, associated stormwater and electrical works) as a joint tender to be divided equally and have separate tenders from the same contractor for works to your subdivision and your neighbour's subdivision.

All existing services such as electricity, telecommunication and town water supply will be extended to the newly created allotments. Your proposal intends to pay a contribution in lieu of park dedication. Amongst other things, you will provide street lighting, plant street trees and landscape the proposed allotments.

You also advised that a road dedication is required by the council.

You will not construct any buildings on the subdivided blocks.

You have provided an undated feasibility report.

Once you receive the development approval, you will approach financial institutions for funding and will also start marketing to help with finance applications.

It is planned that the sales of the proposed subdivided blocks will be done by a real estate agent. No marketing has commenced yet. A marketing program will be chosen after consultation with a chosen real estate agent with some presales.

You will not be marketing the proposed subdivided blocks jointly with your neighbour.

All the structures on the property, including your house, will be demolished.

You are carrying on another enterprise in a partnership. You are registered for GST as a partnership, Australian business number (ABN) xx xxx xxx xxx.

You have never used the property in carrying on your other enterprise.

You have never recorded the property as a partnership asset in your books of account.

You have never claimed any income tax deductions in respect of the property.

You have never been in the business of property development.

Your contentions:

You contend that your activities are a mere realisation of a capital asset and consider Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 (Casimaty) relevant for consideration.

Reasons for decision

Summary

The sales of the proposed subdivided blocks will be taxable supplies as your activities amount to more than a mere realisation of a capital asset.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. This section states:

In your case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the sales of the proposed subdivided blocks will be for consideration and the sales will be connected with Australia as the subdivided blocks are situated in Australia.

Therefore, what needs to be determined is whether the sales of the subdivided blocks will be in the course or furtherance of an enterprise that you carry on, whether you are registered or required to be registered for GST and whether the sales are input taxed or GST-free.

Whether the sales of the proposed subdivided blocks are in the course or furtherance of an enterprise that you carry on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done:

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN. Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

Paragraph 244 of MT 2006/1 states:

You intend to subdivide the property which you have been using as your private residence since its acquisition into a specified number of blocks for the purposes of sale. You advised that you have not previously carried out any land development activities.

We consider that you are not carrying on a property development business as you are not engaged in developing properties on a regular or continuous basis. However, it remains to be considered whether your property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transaction and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether the activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

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.

However, it is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

You contend that your activities are a mere realisation of a capital asset and consider Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 (Casimaty) relevant for consideration.

In Casimaty the taxpayer acquired a farming property on which he erected a homestead and conducted a primary production business. Because of growing debt and ill health, the taxpayer had to subdivide and sell off a large part of the property. In all, there was a total of eight separate subdivisions. The proceeds from the subdivisions and sales were held not to be assessable as there was no change of purpose for which the land was held. The taxpayer acquired and continued to hold the property for use as a residence and the conduct of the business of primary production. A related consideration was the fact that the land was developed and subdivided on a piecemeal basis in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the subdivision of the whole property, even in stages, to maximise the return from the aggregate for the individual lots. Accordingly, the subdivisions were considered to have occurred as part of the mere realisation of a capital asset.

In Statham the appellants were the trustees of the deceased who had acquired a farm to raise his family there and engage in farming. There was never any intention of selling for a profit. The deceased's health deteriorated and he had various employment transfers and it was decided to subdivide and sell the land. It was court held that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise for a number of reasons including:

We consider that the facts of your case can be distinguished from those in Statham and Casimaty as outlined below.

In your case, there is a change of purpose for which the whole property is held as you will demolish all the structures on the property and sell all the subdivided blocks. There is a coherent plan for the subdivision of the land. You have drawn the subdivision layout under the recommendations from a surveyor. You engaged a firm of consultants to prepare a planning report and submit to the council. You have been actively involved in the planning stages and will be consulted by the project manager on a regular basis through the life of the project.

You have joined with your neighbour to undertake a property development encompassing both properties. As a result, you are able to maximise the number or size of the lots that could be developed on your property by the placement of the centre road that will run through both properties. Your neighbour has experience in subdivision projects and will manage the subdivision, liaise with the council and oversee the development project. You and your neighbour commissioned a firm to prepare a stormwater management plan for both properties, will call tenders for the centre road and share the costs of that road. You and your neighbour will also call for tenders from the same contractor for subdivision of both sites. By entering into the agreement with your neighbour to subdivide both properties concurrently, you are able to maximise the profit from the sales.

Furthermore, the subdivision will take place in stages. You will borrow funds to finance the subdivision. You are carrying on the activities with a reasonable expectation of making a profit or gain.

Whilst the property has been your principal place of residence, after taking into account the circumstances of your case, we consider that your activities change the character of your property from a capital asset into a trading asset and go beyond a mere realisation of a capital asset. This is because your activities have the characteristics and appearance of a commercial deal.

Accordingly, we consider that your activities amount to an adventure or concern in the nature of trade and hence you are carrying on a land development enterprise.

Therefore, the subdivision and sales of the subdivided blocks are in the course or furtherance of an enterprise that you carry on. Consequently, the requirement of paragraph 9-5(b) of the GST Act will be met.

Whether you are registered or required to be registered for GST

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act. This section states:

As explained above, you are carrying on a land development enterprise. You are carrying on this enterprise in a partnership.

You are also carrying on another enterprise in a partnership. This partnership has an ABN and is registered for GST.

An entity carrying on an enterprise is ordinarily entitled to one ABN and GST registration even if the activities or series of activities conducted by the entity amount to several separate enterprises.

As your partnership is registered for GST, the requirement of section 9-5(d) of the GST Act is met. Accordingly, it is not necessary to consider whether you are required to be registered for GST.

Whether the sales of the proposed subdivided blocks are input taxed or GST-free supplies

The sales of the proposed subdivided blocks are not input taxed or GST-free supplies under any provisions of the GST Act or any other Act.

Conclusion

As the supplies of the proposed subdivided blocks meet all the requirements of section 9-5 of the GST Act, the sales are taxable supplies. Your partnership is liable to pay an amount equal to 1/11 of the consideration that it receives for the supply of each block as GST.

Margin Scheme

Where a sale of a real property is a taxable supply, the sale may be made under the margin scheme pursuant to Division 75 of the GST Act.

For further information on margin scheme, please refer to the following publications:

Entitlement to input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out when an entity makes a creditable acquisition. It states:

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, however, you do not acquire the thing for a creditable purpose to the extent that:

In your case as the sales of the proposed subdivided blocks are taxable supplies, the acquisitions that you make in relation to the subdivision and sales of the proposed blocks are creditable acquisitions as required by paragraph 11-5(a) of the GST Act. Your partnership will be entitled to input tax credits for the acquisitions relating to the subdivision and sales of the proposed blocks provided the acquisitions meet all the other requirements of section 11-5 of the GST Act.


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