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Ruling

Subject: GST and carrying on of an enterprise

Questions

1. Are you carrying on an enterprise?

2. Is goods and services tax (GST) payable on the lots that you have sold?

Advice/Answers

1. Yes, you are carrying on an enterprise

2. Yes, GST is payable on the lots that you have sold.

Relevant facts and circumstances

You are two individuals. You purchased a property.

One individual is registered for GST as a sole trader. The other individual is currently not registered for GST.

The property originally contained a house and the intention at the time of purchasing the property was to rent the existing house, and subdivide the rest of the land and build another residential house, also for the purpose of renting.

Due to a particular reason, a decision was made to demolish the house. The value of the property dropped substantially.

In the meantime, you commenced arrangements to sub-divide the property.

The subdivision resulted in creating four new blocks.

You have built residential premises in three of the blocks.

You have sold the block that does not have any buildings to a third party.

You did not prepare a business plan for this project.

You did open separate bank accounts, being loan accounts to fund the project.

You also used your personal money to fund the project.

You had some knowledge regarding purchasing properties and renovations, but did not have the appropriate knowledge with sub-divisions and building new houses.

You did not keep business records.

Relevant legislative provisions

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

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

Reasons for decision

Are you carrying on an enterprise of property development?

An enterprise is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as follows:

An enterprise is 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; or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

· by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the ITAA 1997 and to which deductible gifts can be made; or

· (da) by a trustee of a complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or

· by a charitable institution or by a trustee of a charitable fund; or

· by a religious institution; or

· by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

· by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

However, enterprise does not include an activity, or series of activities, done:

· by a person as an employee or in connection with earning *withholding payments covered by subsection (4) (unless the activity or series is done in supplying services as the holder of an office that the person has accepted in the course of or in connection with an activity or series of activities of a kind mentioned in subsection (1)); or

· as a private recreational pursuit or hobby; or

· by an individual (other than a trustee of a charitable fund, or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or

· as a member of a local governing body established by or under a *State law or *Territory law (except a local governing body to which paragraph 12-45(1)(e) in Schedule 1 to the Taxation Administration Act 1953 applies).

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Whilst the property development activities that you have undertaken may be a one off occurrence those activities can nevertheless be considered to be done in the form of an enterprise. In this regard, paragraph 9-20(1)(b) of the GST Act which is about an activity done in the form of an adventure is relevant. Miscellaneous tax ruling, The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) explains the Commissioners' views on property development activities and states the following:

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.

Consistent with the Commissioners' views in MT 2006/1, when considering the activities that you have undertaken on the property, we are of the view that they amount to an adventure that comes within the definition of 'enterprise'. You have engaged various parties to subdivide the property and the property has gone through a development that is beyond the minimal activities that are necessary for a mere subdivision. You have built or are in the process of building houses on three blocks of land. The activities that you have undertaken amount to an enterprise. On that basis, we consider you to be carrying on an enterprise of property development.

Note: You are currently renting out two properties. According to paragraph 9-20(1)(c) of the GST Act, a regular activity done in the form of a lease is considered to be an enterprise.

Is GST payable on the lots that you have sold?

GST is payable on taxable supplies that you make. A taxable supply is defined in section 9-5 of the GST Act as follows:

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.

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

The following is a discussion of whether the above requirements of section 9-5 of the GST Act are satisfied.

Paragraph 9-5(a)

You have sold (i.e. supplied) the relevant lots for a price (ie: consideration). Even though the sale prices of these properties were allegedly below market value, you have received an amount of money for selling those lots which is more than $75,000. Accordingly, the first requirement of section 9-5 of the GST Act is satisfied.

Paragraph 9-5(b)

Under question 1 above, we have explained that we are of the view that you are carrying on an enterprise. Therefore, the sale of lots is considered to be done in the course of your enterprise of property development.

Paragraphs 9-5(c)

The above requirements are satisfied because the land is located in Australia.

Paragraph 9-5(d)

Whilst you (i.e. the two individuals) are not registered for GST, one party is currently registered for GST. You owned the property jointly and have borrowed monies together to fund the development project. Whether or not you are a partnership is dependant on your individual circumstances and your tax agent may be able to assist you with determining how you register for GST. The sale proceeds from the lots exceed the GST registration turnover threshold. Accordingly, if you are a partnership (either common law or tax law) the partnership is required to be registered for GST. If you are not a partnership, the party that is currently not registered will be required to be registered if their annual turnover meets the registration turnover threshold which is $75,000.

GST-free/input taxed

Subdivision 40-C of the GST Act provides that the sale of residential premises is only considered to be an input taxed supply if the residential premises are not new residential premises. The sale of the house and land at Lot X is not an input taxed supply because it is a new residential premises.

The sale of the vacant land at Lot Y also does not constitute an input taxed supply, nor is it GST-free under any provision of the GST Act.

Accordingly, as the requirements of section 9-5 of the GST Act are satisfied, the sale of the relevant lots is subject to GST.

Who is liable for GST?

If you are not a partnership and the party that is currently not registered is not required to be registered, the party that is currently registered is considered to be making the taxable supply and as such is liable for GST.

Additional information

Input tax credits

The entity that is registered is entitled to claim input tax credits on expenses that they have incurred on developing the lots that have been sold. However, you are not entitled to claim any input tax credits on the lots that are being developed to make input taxed supplied.

Margin Scheme

The sale of your properties may have been eligible to apply the margin scheme.

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