Edited version of private ruling

Authorisation Number: 1011749184073

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 sale of subdivided land

Question 1

Is GST payable on the sales of the X vacant blocks of land?

Answer

No.

Question 2

Is GST payable on the sale of a subdivided block if you construct a house on the block prior to its sale?

Answer

Yes.

Relevant facts and circumstances

Prior to 1 July 2000 you and your spouse acquired a vacant block of land on a single title (the property).

The property was acquired in the name of your spouse.

You and your spouse's sole intention at the time of purchase was to fully utilise the vacant land by building a secluded family dwelling in the middle of the property.

Prior to 1 July 2000, a builder and an architect were engaged to design plans for the proposed dwelling. During this process, it became evident that the cost of locating the dwelling in the middle of the block would be too expensive due to the additional works required to connect to the sewerage and other utilities.

To mitigate the prohibitive costs arising from the required extensions to sewerage and other utilities, it was then decided to reposition the proposed dwelling closer to the boundary of the property to make use of the existing and available connections to the sewerage, gas and water.

Prior to 1 July 2000, a contract volume builder was engaged and the new dwelling was built on one boundary of the block and the family moved into the newly completed house.

Prior to 1 July 2000, due to specified reasons, the property was transferred from your spouse to you.

The repositioning of the house resulted in an excess of land being now available at the rear of the property, which was used as a large backyard.

After 1 July 2000, a surveyor was contracted to determine the best way to sell the excess land.

A Y lot subdivision was recommended by the surveyor. Based on this advice and having no prior experience or knowledge in the field, you engaged the surveyor to make application to the relevant council (the council) for a subdivision planning permit on your behalf.

The planning permit was granted by the council in a specified year.

The planning permit was later amended to make the subdivision allowable in two stages. This was necessary to manage the high cost associated with the subdivision if completed all at the one time. The first stage, and the primary objective, was to separate the house from the balance of the land. Stage two was to complete the remaining X lot subdivision to dispose of the excess land in a way which maximised the worth of your private asset.

In a specified year, the first stage of the subdivision was completed which separated the house and excess land onto separate titles.

Due to the substantial amount of capital required to complete stage two of the subdivision, further works have been deferred until now. For the subdivision to proceed, the council requires various specified works to be carried out.

It is now proposed that the above work will be undertaken with respect to the vacant land.

You will shortly proceed in line with the current planning permit to subdivide the balance of the land into X separate lots. It is anticipated that this will commence in a specified year and be completed in a specified year.

You will appoint:

§ a civil engineering contractor to plan and administer the work

§ a surveyor to attend to the necessary separation of title requirements, and

§ a real estate company to market and sell the subdivided blocks.

Finance for the subdivision will be funded by way of a private bank loan facility available to you, which is secured by your residence, the vacant land and other personal assets.

The subdivision will cost around $Z which includes the open space levy and fencing to your property.

Once the subdivision has been completed, it is anticipated that the X blocks will be sold as soon as offers are made and accepted.

Since the construction of the house, the whole property for the entire time has been used as your principle place of residence.

The property has never been used for rental or other income producing purposes. You have never claimed any income tax deductions in respect of the property.

It is also possible that you may retain one vacant block for the purpose of building a home for sale. Construction of the home would commence in a specified year after all the other vacant blocks are sold. You would engage a contract builder to build the home and a real estate agent to market and sell the home.

You have no background in property subdivision or development. You have never subdivided or developed properties before.

You are not registered nor required to be registered for GST.

Reasons for decision

Question 1

Is GST payable on the sales of the X vacant blocks of land?

Summary

GST is not payable on the sales of the X subdivided vacant blocks of land as your activities are considered to be 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:

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 section 195-1 of the GST Act)

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 vacant bocks 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 proposed subdivided vacant blocks will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act)

§ whether you will be required to be registered for GST (paragraph 9-5(d) of the GST Act), and

§ whether the sales will be input taxed or GST-free.

Whether the sales of the proposed subdivided vacant blocks will be 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:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; …

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an Australian business number (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.

You intend to subdivide the excess land into X vacant blocks for the purposes of sale. You advised that you have no background in property subdivision or development and have never subdivided or developed properties before.

Based on the information provided, 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 subdivision activities will amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

Paragraph 244 of MT 2006/1 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.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transactions 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. This paragraph states:

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 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.

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.

Furthermore, MT 2006/1 provides that 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, 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.

In your case, the land was acquired prior to 1 July 2000 in your wife's name. You and your wife built a residence on the land prior to 1 July 2000. As a result of your marriage breakdown, the property was transferred to you prior to 1 July 2000.

You advised that since the construction of the house the whole property for the entire time has been used as your principle place of residence. The property has never been used for rental or other income producing purposes. You have never claimed any income tax deductions in respect of the property.

After taking into account the circumstances of your case, we consider that the subdivision and sale of the excess land will not be an enterprise but a mere realisation of a capital asset. Therefore, the sales of the proposed subdivided vacant blocks will not be in the course or furtherance of an enterprise that you carry on and hence the requirement of paragraph 9-5(b) of the GST Act will not be met. As a result, the sales will not be taxable supplies as the sales will not meet all the requirements of section 9-5 of the GST Act. You will not be liable to pay GST on the sales of the X subdivided vacant blocks.

Consequently, it is not necessary to consider whether the other requirements of section 9-5 will be met.

Question 2

Is GST payable on the sale of a subdivided block if you construct a house on the block prior to its sale?

Summary

GST is payable on the sale of a subdivided block if you construct a house on the block prior to its sale. This is because your activities go beyond the minimal activities needed to sell the subdivided block.

Detailed reasoning

Where you construct a house on one of the proposed subdivided blocks for the purpose of sale, the supply will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale will be for consideration and will be connected with Australia as the property is situated in Australia.

What remains to be determined is:

§ whether the sale of the subdivided block with a newly constructed house will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act)

§ whether you will be required to be registered for GST (paragraph 9-5(d) of the GST Act), and

§ whether the sale will be input taxed or GST-free.

Whether the sale of the proposed subdivided block with a newly constructed house will be in the course or furtherance of an enterprise that you carry on

MT 2006/1 provides examples of subdivisions of land that are considered to be enterprises. Example 31 in MT 2006/1 states:

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for :

§ their house to be demolished ;

§ the land to be subdivided ;

§ a builder to be engaged ;

§ two houses to be built ;

§ water meters, telephone and electricity to be supplied to the new houses ; and

§ a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

Similarly in your case, where you construct a home on one of the subdivided blocks for the purposes of sale, you will be carrying on a building and development activity that amounts to an adventure or concern in the nature of trade.

Your activities will change the character of the subdivided block from a capital asset into a trading asset as they will go beyond the minimal activities needed to sell the subdivided block. In this situation, your activities will no longer be a mere realisation of a capital asset. Your activities will amount to an enterprise for the purposes of the GST Act.

Therefore, the sale of the subdivided block containing the new house will be in the course of your building and development enterprise. Consequently the requirement of paragraph 9-5(b) of the GST Act will be met.

Whether you are 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:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

Whether you will be carrying on an enterprise

As explained above, construction of a house on one of the subdivided blocks for the purposes of sale will be an adventure or concern in the nature of trade and therefore an enterprise. Accordingly, you will satisfy paragraph 23-5(a) of the GST Act.

Whether your GST turnover will meet the registration turnover threshold

Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets the registration turnover threshold if:

(a) your current GST turnover is $75,000 or more, and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or

(b) your projected GST turnover is $75,000 or more.

Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

However, certain supplies, including supplies that are input taxed, are excluded from the calculation of both the current and projected GST turnovers.

Whether the sale of the subdivided block containing the newly built house will be an input taxed supply

You advised that you intend to construct a home on one of the proposed subdivided blocks for sale.

The home that you intend to construct on one of the proposed subdivided blocks is 'residential premises' for the purposes of the GST Act.

Section 40-65 of the GST Act deals with the sale of residential premises and states:

(1) A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the *residential premises are:

(a) *commercial residential premises; or

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

The term 'new residential premises' has the meaning given by section 40-75 of the GST Act. This section states, in part:

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b) have been created through *substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

(2) However, the premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became *residential premises; or

(b) if paragraph (1)(b) applies - the premises were last *substantially renovated; or

(c) if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

…

In your case, the proposed subdivided block containing the new house will be new residential premises under paragraph 40-75(1)(a) of the GST Act. This is because the block of land and the new house, as a package, would not have previously been sold as residential premises, or been the subject of a long-term lease. Therefore, the sale of the subdivided block containing the new house will not be an input taxed supply under the GST Act or a provision of another Act.

For further information on sale of new residential premises please refer to Goods and Services Tax Ruling GSTR 2003/3.

Whether the sale of the subdivided block containing the new house will be a transfer of a capital asset

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

§ by way of transfer of ownership of a capital asset, or

§ solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The GST Act does not define the term capital assets. The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

GSTR 2001/7 provides that, generally, the term capital assets refers to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of an enterprise. That is, if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital nature even if such a disposal is an occasional or one-off transaction.

In your case, the sale of the subdivided block containing the new house will be inherent in carrying on your building and development enterprise. As stated earlier, building a house on the subdivided block will change the character of the subdivided block from a capital asset into a trading/revenue asset. Therefore, the sale of the subdivided block containing the new house will not be a transfer of a capital asset as the subdivided block containing the new house will be your trading asset. Furthermore, the sale will not be made solely as a consequence of ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of your enterprise. Accordingly, the sale of the subdivided block containing the new house will not be disregarded under section 188-25 of the GST Act when calculating your projected GST turnover.

Therefore, the GST exclusive sale price of the subdivided block containing the new house is included when working out both your current and projected GST turnovers.

In your case, it is reasonable to conclude that the subdivided block containing the new house will be sold for an amount that is greater than $75,000. Accordingly, where at a time during a particular month you expect to sell that block either during that month or the following 11 months, your projected GST turnover will meet the registration turnover threshold of $75,000. At that point in time, the requirement of paragraph 23-5(b) of the GST Act will be satisfied.

As both requirements of section 23-5 of the GST Act will be satisfied you will be required to be registered for GST. Consequently, the requirement of paragraph 9-5(d) of the GST Act will be met.

Whether the sale of the subdivided block containing the new house is GST-free

The sale of the subdivided block containing the new house will not be a GST-free supply under a provision of the GST Act or a provision of another Act.

Summary

In summary, the sale of the subdivided block containing the new house will meet the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act. Furthermore, the sale of the subdivided block containing the new house will neither be input taxed nor GST-free under any provision of the GST Act or a provision of another Act. Therefore, the sale will be a taxable supply. You will be liable to pay 1/11^th of the sale price as GST.

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:

You make a creditable acquisition if:

(a) you acquired anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

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:

§ the acquisition relates to making supplies that would be input taxed, or

§ the acquisition is of a private or domestic nature.

In your case as the sale of the subdivided block containing the new house will be a taxable supply, the acquisitions that you make in relation to the construction of the new house and subdivision and sale of the proposed vacant block containing the new house will be creditable acquisitions as required by paragraph 11-5(a) of the GST Act. You will therefore be entitled to the input tax credits for the acquisitions relating to the construction of the new house and subdivision and sale of the proposed vacant block containing the new house provided the acquisitions meet all the other requirements of section 11-5 of the GST Act.

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 if certain requirements are met.

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

§ GST and the margin scheme (NAT 15145)

§ Goods and Services Tax Ruling GSTR 2000/21 Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000

§ Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

All publications mentioned in this ruling are available on our website at www.ato.gov.au.

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).