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Edited version of your private ruling

Authorisation Number: 1012061378770

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Ruling

Subject: GST and the subdivision sale of land

Question 1

Is the sale of subdivided land a taxable supply?

Answer

The sale of the subdivided land is a taxable supply.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A (you) are an equal joint owner of vacant land. You inherited the land from your late mother. The land was acquired by her post 20 September 1985.

An application for subdivision of the land was lodged with the City Council prior to the death of your mother. The application was instigated by your mother and her children. A planning permit allowing a staged subdivision was issued shortly after her death.

You now intend to arrange the subdivision of the land and to sell all in stages in accordance with the terms of the planning permit. You will not directly engage in the subdivision and sales activity. You will engage a private company under the control of yourself and your siblings to attend to all subdivision and sales activity (referred to here as the "associated development company").

The company was a pre-existing company. In addition to the property development, it currently also manages a commercial rental property.

You will engage the associated development company under a formal contract. The formal contract has been drafted and ready to be executed by the parties. The key terms of this contract are:

a. The associated development company will be appointed to carry out the sub-division. It will engage all necessary contractors, and pay all subdivision related costs.

b. The associated development company will be empowered by way of power of attorney to negotiate and conclude sales of the land on behalf of the taxpayers.

c. You will continue to be liable for and pay usual landholding outgoings such as council rates and land taxes.

d. The associated company will bear all commercial and legal liability risks associated with the subdivision.

e. You will receive an agreed amount of proceeds for the sale. That amount is reflective of the current pre- subdivision market value of the land.

f. The balance of the sale proceeds will be received by the associated development company as its fee for undertaking the subdivision and sales activities; and

g. The associated development company will not act as an agent for you in relation to matters associated with the subdivision of the land. It will be conducting a separate and independent enterprise of providing land subdivision and sales services to the taxpayers for a fee.

The land was zoned residential at the time of the application for subdivision. No re-zoning will be necessary to carry out the subdivision and sales of the land.

You have previously subdivided and sold part of a block of land that your main residence was located on.

Your vocation does not involve dealings in real property of any kind. You will have no direct personal involvement in the subdivision and sale activity.

The land was valued by a professional valuer. That valuation was on an "as-is" basis prior to the commencement of any subdivision works.

The total anticipated subdivision and sale costs are to be incurred by the associated development company. The associated development company will engage engineers, surveyors, construction contractors, and other professionals as required from time to time.

The majority of the associated company's funding will be sourced from proceeds from the sale of lots. Some additional short term funding may be required to be sourced externally.

In the first instance the consideration received in respect of the subdivision will be applied against the costs of the subdivision and cash will be used to reduce and ultimately eliminate the debts of the company. Any profits will be taxed and accumulated within the company. It is uncertain at this stage what will ultimately happen with the retained profits; they may be reinvested into further land or other income producing investments or be paid out as dividends to the company's shareholders.

Some subdivision works have commenced and some pre-sales stage 1 lots have been concluded.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 195

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(c)

Income Tax Assessment Act 1997 Section 995

A New Tax System (Australian Business Number) Act 1999 Section 41

Reasons for decision

Section 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act states:

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

In this instance you are making a supply for consideration and the supply is connected with Australia. We need to now determine if the supply is made in the course of carrying on an enterprise that you carry on and if you are required to be registered for GST.

Section 9-20 of the GST Act defines the term enterprise in broad terms. Relevantly the GST Act provides that:

The term carry on in relation to an enterprise is described in section 195 of the GST Act as follows:

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby.

Paragraph 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity, or series of activities done by an individual or partnership without reasonable expectation of profit.

Enterprise

Miscellaneous Tax Ruling MT 2006/1 (MT 2006/1), provides that enterprise is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act), to have the same meaning given by section 9-20 of the GST Act.

MT 2006/1 at paragraph 150 provides guidance in relation to enterprise.

Paragraph 150 states:

The main principles from MT 2006/1 which are relevant to the present circumstances include:

In the Form of a Business

The GST Act definition of business in section 195-1 of the GST Act is identical to that in section 995 of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states:

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

Whether a business is being carried on is generally the result of a process of weighing all the relevant factors.

If all the relevant factors of a business are not satisfied we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade.

White J in Toyoma Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160 said at [69]:

MT 2006/1 at paragraph 170 states:

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

MT 2006/1 provides guidance on the meaning of this expression.

An adventure or concern in the nature of trade refers to transactions that have a commercial nature which are entered into for a profit making purpose.

Paragraph 237 of MT 2006/1 states:

Paragraph 6 in Taxation Ruling 92/3 (TR 92/3) provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph in 13 TR 92/3 provides that

Miscellaneous Tax ruling MT 2006/1 also discusses isolated transactions and sales of real property and at paragraph 265, it presents a list of factors which, if present, may be an indication that a business or an adventure or concern in the nature of trade is being carried on. Those factors are:

Paragraph 266 in MT 2006/1 provides further guidance in determining whether activities relating to an isolated transaction are an enterprise or the mere realisation of a capital asset and states:

In this instance, the following facts have been considered:  

The way in which the subdivision is planned shows some of the indica of a business and of an adventure or concern in the nature of trade.

The land had been acquired by you from a deceased estate. It has been your intention to dispose of the property since the acquisition. Whilst there is only one previous history of land development, the arrangement employed is relatively sophisticated, involving the interposition of a company as recipient of the sale receipts.

The expenditure incurred goes beyond the minimum required to realise the asset and in fact may involve significant short-term borrowings.

Based on these facts it would seem that the project is an undertaking on a sufficient scale to take it beyond the realms of a mere realisation of an asset and characterise it as a commercial undertaking.

It is therefore considered that the subdivision and sale of the land will be an enterprise for the purposes of the GST Act.

Each of the requirements of section 9-5 of the GST Act are met as you will be making a supply for consideration, the supply is connected with Australia, the supply is made in the course of carrying on an enterprise and you are required to register for GST.


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