Edited version of private ruling

Authorisation Number: 1011707567554

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Ruling

Subject: Sale of vacant land

Facts:

Two individuals purchased a vacant block of land as joint tenants before the introduction of the goods and services tax (GST).

One of them is carrying on an enterprise as a sole trader and he is registered for the GST.

The second individual is not registered for the GST.

They obtained a loan to finance the purchase of the land by way of a bank over-draft.

Prior to the purchase, the sole trader leased the land for storing stocks and continued to use the land for the same purpose subsequent to the purchase.

The lease payments for the property were minimal.

Following the acquisition of the land, the sole trader did not claim lease expense in relation to the use of the land in his business.

The sole trader claimed whole of the interest on the over-draft as a tax deduction.

The second individual works part time as a wage employee in the enterprise the sole trader is carrying on.

The second individual does not receive a share of the profits from the sole trader's enterprise.

The sole trader no longer requires the land for his enterprise.

Recently, they sold the land.

The sole trader operates his business from another property which the two individuals own.

Issue:

Was the sale of your land a taxable supply?

Decision:

No, the sale of your land was not a taxable supply.

Reasons for the decision:

GST is payable on taxable supplies. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) you make a taxable supply if:

§ you make the supply for consideration; and

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

§ the supply is connected with Australia, and

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

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

In this case, the sale of the property is neither GST-free nor input taxed as none of the provisions of Division 38 and Division 40 of the GST Act apply to this situation.

You sold the property for consideration and the land is situated in Australia. You are not registered for GST. What remains to be determined is whether the supply was made in the course or furtherance of an enterprise you carry on and if you are required to be registered

Section 9-20 of the GST Act defines the term enterprise to include activities done in the form of a business or in the form of an adventure or concern in the nature of trade.

The Commissioner's view on the meaning of the term enterprise is explained in detail in Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1). This ruling provides assistance to entities in determining their 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 to apply to the meaning of the terms 'entity' and '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 constitutes an enterprise is a question of fact and degree, having regard to all the circumstances of the case. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. These are the transactions of a commercial nature which are entered into for profit making, but are not part of the activities of an ongoing business. 

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

The sale of the land in your case was an isolated transaction. In order to determine whether the sale occurred in the course or furtherance of carrying on an enterprise, we must determine if it constitutes an adventure or concern in the nature of trade. It is necessary to consider whether the sale of the land occurred under a profit-making scheme or whether it was a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making scheme. Paragraph 265 of MT 2006/1 provides that 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 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 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 applying the above factors to this case we found that:

§ the land was held as a capital asset, although it was used by a related entity for the purpose of its enterprise.

§ you did not acquire additional land to be added to the original land;

§ you did not have a coherent plan for the subdivision of the land;

§ you borrowed funds to finance the purchase of the land and the sole trader claimed interest paid on the loan against the income from his enterprise for income tax purposes;

§ there was no development or buildings erected on the land;

§ you did not lease the land to the sole trader for monetary consideration;

Having given consideration to the above factors, it is our view that the sale of the land was not in the course of carrying on a business, or an adventure or concern in the nature of trade for the purposes of section 9-20 of the GST Act.

For the sale of the land to be a taxable supply, it is necessary for you to make that supply in the course or furtherance of an enterprise that you are carrying on. This is one of the requirements of section 9-5 of the GST Act and this requirement has not been satisfied.

Further, under section 23-5 of the GST Act an entity is required to be registered for GST, if:

§ the entity carries on an enterprise and

§ the entity's GST turnover meets the registration turnover threshold.

As you are not carrying on an enterprise together, you are not required to be registered for GST as a partnership.

For an entity to have made a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied. In your case, as you did not satisfy all the requirements of section 9-5 of the GST Act, the sale of your property did not constitute a taxable supply. Therefore, GST is not payable on the sale.

Please note that the sale may have consequences for income tax and capital gains tax and that you are required to address such issues appropriately.

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