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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012326543146

Ruling

Subject: GST and registration requirements, taxable supplies and the margin scheme

Issue 1

GST registration

Question 1

Are you required to be registered for GST?

Answer

No, you are not required to be registered for GST

Issue 2

Taxable supplies

Question 1

If you are required to be registered for GST, will the sale of your property constitute a taxable supply?

Answer

Not applicable as you are not required to be registered for GST.

Question 2

In the case where the supply of your property is deemed to be a taxable supply, at what date will the land value be determined for establishing the consideration for your acquisition for use under the margin scheme?

Answer

Not applicable as you are not required to be registered for GST and are not making taxable supplies.

Relevant facts and circumstances

You are not registered for GST.

You own vacant land (the Property).

You purchased the Property approximately X years ago as a hobby farm.

A short time after you purchased the Property you decided to build a house on the Property with the intention of it becoming your principle place of residence. The relevant permits were obtained and construction commenced. After the house slab was laid, you reversed your decision to live at the Property and reverted to using it as a hobby farm.

The Property is vacant except for some minor outbuildings.

The Property was predominately used as a hobby farm. It was never hired out or used for primary production. You have consistently maintained a garden and a brood of hens on the Property. From time to time the Property has also carried a couple of horses and/or cattle and/or sheep and/or goats. You would often conduct family barbeques at the Property. The Property has also been used for recreational purposes (camping).

You have never had a business plan in relation to the use of the Property.

You have been retired for some years.

You do not have an existing mortgage over the Property.

You were approached by a real estate agent on behalf of another entity (the Developer) with an offer to purchase the Property.

You originally rejected the offer. Subsequently, the real estate agent enquired whether you would be interested in considering a proposal for the development of the Property in the form of a staged subdivision expected to create vacant residential and commercial lots.

You are not in the business of land acquisition and resale or development.

Due to your lack of experience in such matters you engaged a related party to act as your representative (referred to as the Owner's Representative or OR) in regard to the negotiations.

The OR is qualified with a number of years experience in the construction industry.

You are not associated or related to the Developer in any way.

The Developer subsequently engaged the OR as a contractor to assist in the development of the subdivision.

You advised that the role of the OR is a separate role to that of a contractor engaged by the Developer.

You have provided a Draft Development Agreement (DA) which you are considering entering into with the Developer after consultation with the OR and your legal and financial representatives.

Contained within the DA are two separate loan agreements which you are also considering entering into with the Developer.

The Developer will provide their own finance for the project/development costs and will not be permitted to use the Property as security for any borrowings by the Developer or related entities.

The DA provides, amongst other things:

The DA does not vest any proprietary, beneficial or other interest in the Property by the Developer.

The Developer will pay all shire council rates and State Government land tax obligations for the period of the Development.

Upon a written request from your Representative, the Developer will convene a meeting to inform your Representative of the progress of the Development. Such meeting requests are limited to one meeting per month.

Your Representative is entitled to make decisions in relation to the Development at any meetings properly convened.

Your Representative must approve the retail price list per stage of the Development and in the case of any disagreement in pricing, a licensed valuer will be engaged to set lot pricing at a cost to both parties.

Either party will have a right of first refusal to purchase any lot within the Development up to a specified percentage of the development lot yield.

The Developer has first right of purchase on any medium and high density unit sites within the development.

You have first right of refusal to any sites not classified as medium or high density.

Upon signing the DA, the Developer will loan you a specified amount, subject to a separate loan agreement contained in the DA, which is to be repaid in full from the proceeds of the sales of the lots.

A further loan from the Developer will be advanced on an unspecified date, subject to another separate loan agreement contained in the DA, which is also to be repaid in full from the proceeds of the sales of the lots.

The loan agreements contained in the DA both state the following: 'The Borrower is a corporation validly existing under the laws of its place of incorporation'. You advised that this statement is incorrect and will be amended pending finalisation of the DA. You advised that the landowner/borrower is not a corporation.

Where there is a default under the DA by the Developer, the loaned funds are forfeited and are not repayable by you.

The loans are secured by a caveat and charge against the Property in favour of the Developer to the value of the amount of the loan outstanding at any time.

Under the loan agreements, you (the Borrower) shall not be required to pay any interest with respect to the loan principal.

You must ensure the Developer has access to the Property at all times.

You must execute all documents and do all things required in connection with the Project.

The Developer must effect and maintain public liability insurance in connection with the Property from the date of the DA.

You must execute the Power of Attorney and appoint your Representative, as your attorney to execute any sale contract on developed lots, execute any document required under a sale contract and do all things you are required to do under any sale contract.

In the event that the attorney pursuant to the Power of Attorney refuses to sign off on any on sale contract, a sworn valuation will be ordered to support the contract price. In the case where the valuation supports the sale price, the attorney will be obliged to sign off on the contract of sale or you will be deemed in default of the DA.

The Owner is the beneficial owner of the Property.

The Developer has no beneficial interest in the Property for the term of the DA.

The DA details the anticipated payment schedule and states that you will hold all titled lots per stage until settlements take place and will be allocated funds pro-rata of agreed stage payment from the settlement of each lot. The balance of funds will then be made payable to the Developer.

In regard to the DA providing for monthly meetings, the OR is in regular contact with the Developer in their capacity as a contractor on the Development and as such is aware of the progress of the Development. As such, no formal meetings have occurred.

The Developer does not provide you with any formal progress reports on the Development.

All decisions relating to the Development are made in isolation by the Developer in accordance with the DA, e.g. subdivision layout, selection of contractors, funding, sales and marketing etc. The OR can intervene on your behalf if they believe any of the obligations of the Developer under the DA are not being met.

The OR has no commercial input into the running of the project. The OR provides you with guidance on all commercial matters in relation to the Development. The OR is the first point of contact by your legal and financial representatives in relation to the Development.

Relevant legislative provisions

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

Section 9-20

Section 23-5

Section 23-10

Section 195-1

Reasons for decision

Issue 1

Question 1

Are you required to be registered for GST?

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST where you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000 and $150,000 for non-profit bodies).

The term 'carrying on' an enterprise is defined in section 195-1 of the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act defines the term 'enterprise' to include an activity, or series of activities, done:

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides the Commissioner's views on carrying on an enterprise in relation to determining entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 states that the discussion in MT 2006/1 is considered to apply equally to the term enterprise as used in the GST Act, and can be relied upon for GST purposes.

Paragraph 170 of MT 2006/1 states that an enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' indicates a wider meaning than the word 'business' on its own.

A distinction is made in paragraph 234 of MT 2006/1 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':

Paragraphs 243 through 246 of MT 2006/1 explains that 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. Reference is made to the 'badges of trade' and paragraphs 247 through 255 of MT 2006/1 outline a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

The property in question was originally purchased as a hobby farm to be later developed as your principle place of residence. You decided not to proceed with building your place of residence on the Property and have since held the Property for your personal enjoyment. We acknowledge that the Property was held as a capital asset, however the relevant issue in this case is whether the nature of the asset has changed as a consequence of the proposed development and subdivision of the Property.

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (Casimaty)] involving subdivision and development of properties that were originally held as capital/investment assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From these 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 as opposed to the mere realisation of a capital asset.

Paragraph 178 of MT 2006/1 sets out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions.

Indicators of carrying on a business.

Factors used to examine an isolated transaction:

In addition, other factors that may be relevant include the length of time the Property has been held and the purpose to which it was put in that time and the personal involvement in the development activity.

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 acknowledge that you have owned the Property for a significant period of time and the land was held as a capital asset for your personal enjoyment. We also acknowledge that you did not initiate the contact with the Developer. The Developer approached a real estate agent who in turn approached you with a proposal to purchase your property. After declining to sell the property, a proposal to develop the Property was subsequently presented to you.

However, in applying the principles in MT 2006/1, it is necessary to examine your activities and conduct in relation to the development, to determine whether the nature of the asset has changed and as a consequence whether your supplies of the vacant lots are made in the course or furtherance of an enterprise.

You submit that your involvement in the Development is minimal and all decisions relating to the Development, such as the layout of the subdivision, selection of contractors, sales and marketing are made by the Developer in isolation in accordance with the terms and conditions of the DA. You also submit that your Representative has no commercial input into the project. In accordance with the DA, you will appoint your Representative, as your attorney for the purposes of executing sale contracts on developed lots, executing any other document required under a sale contract and any other act required by you to be done under any sale contract.

You have also advised that you have not been engaged in any previous property development activities.

The DA provides for the Developer to advance you interest free loans to be repaid from proceeds of lot sales of the Development. The loan is to be secured by a caveat and charge against the Property to the value of the loan principal outstanding at any time. The purpose of the loan is neither to finance your acquisition of the Property nor to fund the subdivision.

In addition, under the terms and conditions of the DA, it is the Developer that will bear the commercial risk in undertaking the project.

After considering the facts of your case and the factors discussed above, on balance we consider that your activities pertaining to the development of your property support the view that you are merely realising a capital asset when you sell the vacant lots and are not carrying on an enterprise.

As discussed initially, one of the requirements for GST registration is that you are carrying on an enterprise. As we consider that you are not carrying on an enterprise you are neither required (as per section 23-5 of the GST Act) nor entitled (section 23-10 of the GST Act) to register for GST.

Issue 2

Question 1

Not applicable

Question 2

Not Applicable


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