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Ruling

Subject: Goods and services tax (GST) and sale of lots created by subdivision

Question

Will GST be payable on the sale of the new lots created from the subdivision?

Answer

No.

Relevant facts and circumstances

Individual 1 and individual 2 (the owners) own a property located in Australia (the property), which they purchased on a certain date.

The owners are not registered for GST as a partnership.

The owners have been leasing out the property since a certain date and they currently lease out the property.

There was no oral or written agreement between the owners that determined the mutual rights and obligations of the owners in relation to the activity of leasing out the property.

The owners jointly acquired the property under a single contract.

The owners hold the property as joint tenants.

The co-owners funded their acquisition of the property out of joint borrowings.

The joint leasing activity of the owners is for the mutual benefit of all co-owners.

The owners jointly appointed a manager to manage the leasing activity.

The income from the property is paid into a joint bank account of the owners.

Expenses relating to the property are paid from a joint bank account of the owners.

The owners jointly pay all liabilities relating to the property.

A single lease agreement is executed by the owners in relation to the property for any given period.

The lessee does not pay separate rent amounts to each owner.

The property had a house on it when the owners purchased the property.

The owners have not used the property for any purpose other than leasing it out for use as residential accommodation.

The owners originally intended to subdivide the property into a number of lots, build a house on each new lot and lease out the new residential premises. However, due to financial reasons the owners have determined that it is no longer viable to pursue this strategy.

The owners will subdivide the property into a number of lots and demolish the house.

Then the owners will sell the lots created from the subdivision.

The owners did not purchase additional land to add to the original parcel of land.

The owners did not record the land as a business asset in accounting records of any business that they carry on.

The owners will not hire a manager to oversee the subdivision.

The owners will not have an office to mange the property subdivision or have a sales office.

The owners will use the original loan they acquired for purchasing the property to finance the subdivision - they will redraw additional repayments they made on the loan.

The owners have not decided yet whether they will claim income tax deductions for interest incurred on the loan funds they will use to finance the subdivision - it will depend on whether the sale of the new lots is treated by the Australian Taxation Office as being on the capital account or instead revenue account.

The owners will not build any buildings on the land.

The owners will not develop the land beyond the level that is necessary to secure Council approval for the subdivision.

The owners are not carrying on an enterprise as a partnership elsewhere.

If the owners can choose to voluntarily register for GST as a partnership, they would not choose to voluntarily register for GST as a partnership.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(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 9-40

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(4)

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-35(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 188-25(a)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

GST will not be payable on the sale of the new lots created from the subdivision because the supplier (the partnership between the two owners) will not be registered or required to be registered for GST.

Detailed reasoning

GST is payable by an entity where it makes a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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.

(*Denotes a term defined in section 195-1 of the GST Act)

We need to first consider whether the owners of the property in question are in a partnership and whether the partnership will sell the new lots created from the subdivision.

A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). In accordance with subsection 995-1(1) of the ITAA 1997, partnership includes an association of persons (other than a company or limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly.

Paragraph 40 of Goods and Services Tax Ruling GSTR 2004/6 considers whether co-ownership of rental property is a partnership. It states:

40. Two or more entities may enter into a single agreement to purchase property for leasing purposes. The entering into of the agreement for the acquisition of the property is the initial step by those entities in jointly commencing, and, therefore, carrying on an enterprise. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, we accept that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased.

The owners entered into a single agreement to purchase the current property for leasing purposes. Therefore, the owners have a joint right or entitlement to income. Hence, the owners are in a partnership.

We shall now determine whether this partnership carries on a single property leasing enterprise in relation to the property or whether instead each partner is carrying on a separate leasing enterprise in relation to the property. If the partnership carries on a single property leasing enterprise in relation to the property, then the partnership will be considered to be selling the new lots created from the subdivision.

Paragraphs 62 and 68 of GSTR 2004/6 provide factors that assist in determining whether a partnership of co-owners of a rental property carry on a single leasing enterprise in relation to a property.

Paragraph 62 of GSTR 2004/6 states:

62. The following factors may point to an enterprise being carried on by a tax law partnership, and not by each co-owner in their own right:

· an oral or written agreement (for example, a syndicate agreement or agreement between family members) determines the mutual rights and obligations of the parties. The agreement may set out rules by which a co-owner might be admitted to a syndicate, or may indicate an intention to act for the mutual benefit of all family members. This agreement may be made before the acquisition of property (see Tikva and FC of T v. Walsh (PJ and BJ)(Walsh )), or it may be made later;

· the income producing property is jointly acquired by the co-owners under a single contract (see McDonald, Walsh and Tikva );

· property is held by the co-owners as joint tenants;

· the co-owners fund their acquisition of the income producing property out of joint borrowings or funds (see AAT Case 11,324, Walsh , and Cripps v. Federal Commissioner of Taxation );

· the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners (see Yeung and MacDonald );

· the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise;

· income from the income producing property is paid into a joint bank account of the co-owners;

· expenses relating to the income producing property are paid from a joint bank account of the co-owners; and

· the co-owners jointly pay all liabilities in relation to the income producing property.

Paragraph 68 of GSTR 2004/6 states:

Single lease agreement

68. The fact that a single lease agreement is executed by all the co-owners, and that the lessee pays a single rental amount are further factors that need to be considered and weighed in the context of all the evidence in determining which entity carries on the enterprise. The presence of a single lease agreement and a single lease amount is not decisive of an enterprise being carried on by a tax law partnership.

All but one of the factors set out in paragraphs 62 and 68 of GSTR 2004/6 are present in this case. Therefore, we consider that the partnership of the owners carries on a single leasing enterprise in relation to the property. Hence, the sales of the new lots created from the subdivision will be supplies made by the partnership.

We shall now consider whether GST will be payable on the partnership's sale of the new lots created from the subdivision.

Consideration

The partnership will supply the new lots created from the subdivision for consideration when it sells these lots. Hence, the requirement of paragraph 9-5(a) of the GST Act will be satisfied.

Supply made in the course or furtherance of enterprise

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Paragraph 1 of Goods and Services Tax Determination provides that the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

Paragraph 263 of MT 2006/1 states:

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraph 264 of MT 2006/1 discusses a court case where a property subdivision was undertaken but the sale of the lots created by the subdivision was regarded as the mere realisation of a capital asset. It states:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides a list of factors we consider in determining whether a property subdivision activity is a business or an adventure or concern in the nature of trade. It 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.

Paragraph 254 of MT 2006/1 discusses motive. It states:

254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Considering the factors in paragraph 265 of MT 2006/1 in this case and the fact that the owners did not have an intention at the time they purchased the property to sell it, we do not consider that the activities in question amount to a property subdivision enterprise or property trading enterprise.

However, as the partnership used the property in its property leasing enterprise, its sale of the new lots created from the subdivision will be supplies it makes in the course or furtherance of its leasing enterprise. Hence, the requirement of paragraph 9-5(b) of the GST Act will be satisfied.

Connected with Australia

The partnership's sale of the new lots created from the subdivision will be supplies connected with Australia as the lots will be located in Australia. Hence, the requirement of paragraph 9-5(c) of the GST Act will be satisfied.

Registered or required to be registered for GST

The partnership is not registered for GST.

We shall now consider whether the partnership is required to be registered for GST.

In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if:

· the entity is carrying on an enterprise, and

· the entity's GST turnover meets the registration turnover threshold of $75,000.

The partnership satisfies the requirement of paragraph 23-5(a) of the GST Act as it is carrying on a leasing enterprise.

We shall now determine whether the partnership's GST turnover will meet the registration turnover threshold.

Subsection 188-10(1) of the GST Act states:

You have a GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold

Subsection 188-15(1) of the GST Act states:

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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you*carry on.

Subsection 188-20(1) of the GST Act states:

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, other than:

(a) supplies that are *input taxed; or

(b) supplies that are not for consideration (and are not *taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an *enterprise that you *carry on.

Paragraph 188-25(a) of the GST Act excludes sales of capital assets from the calculation of projected GST turnover.

The leasing income in this case is excluded from the calculation of current and projected GST turnover as it is consideration for an input taxed supply of residential premises by way of lease under paragraph 40-35(1)(a) of the GST Act.

Input taxed supplies under subsection 9-30(4) of the GST Act

Subsection 9-30(4) of the GST Act states:

A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies.

Paragraph 97 of Goods and Services Tax Ruling GSTR 2003/3 states:

97. Where the owner of rented residential premises later subdivides the land into two blocks, one with a residential building and the other a vacant block, subsection 9-30(4) does not apply to the supply of the vacant block. The subdivision of the land is a use of the land that is not in connection with input taxed supplies. Vacant land is not residential premises as defined in section 195-1 of the Act. The supply of the vacant block needs to be considered under section 9-5.

The partnership's subdivision of the land is a use of the land that is not in connection with input taxed supplies. Therefore, the partnership's sales of the new lots created from the subdivision will not be input taxed supplies under subsection 9-30(4) of the GST Act.

Paragraph 259 of MT 2006/1 provides guidance on the meaning of capital assets. It provides that examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment/capital assets does not amount to trade.

The partnership has held the property as a rental property and the subdivision activity will not be an adventure or concern in the nature of trade or part of a business. Hence, the partnership's sales of the new lots created from the subdivision will be the mere realisation of a capital asset.

Therefore, the partnership's sales of the new lots created from the subdivision will be excluded from the calculation of projected GST turnover by virtue of paragraph 188-25(a) of the GST Act.

The partnership's projected GST turnover will be zero because:

· the rental income is excluded from the calculation of projected GST turnover

· the partnership's sales of the new lots created from the subdivision will be excluded from the calculation of projected GST turnover, and

· the partnership does not carry on an enterprise elsewhere.

Hence, the partnership's GST turnover will not meet the registration turnover threshold. Therefore, the requirement of paragraph 23-5(b) of the GST Act will not be satisfied.

As not all of the requirements of section 23-5 of the GST Act will be satisfied, the partnership will not be required to be registered for GST.

As the partnership is not registered for GST and will not be required to be registered for GST, the requirement of paragraph 9-5(d) of the GST Act will not be satisfied.

As not all of the requirements of section 9-5 of the GST Act will be satisfied, the partnership will not make taxable supplies when it sells the new lots that are created from the subdivision. Hence, GST will not be payable on these sales.

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