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Ruling

Subject: Goods and services tax (GST) and subdivided land

Question

Are you making taxable supplies when you sell vacant lots from the subdivision of your property?

Answer

No.

Relevant facts and circumstances

You are not registered for GST.

You purchased the property some time ago.

The property was purchased as a farm with residence.

You have resided on the property.

You carried on a business at the property previously.

You were previously registered for GST for the business.

You are of retirement age.

As a result of deteriorating health and lack of profits from the horse stud business you have decided to subdivide the property and sell some of the subdivided lots.

You have not subdivided property previously and have not sold any land for some time.

You have an existing mortgage on the property.

You have no formal business plan or timeline for completing the subdivision works and selling the subdivided lots.

You propose to conduct a subdivision of a number of lots, which will be sold as residential lots.

The purpose of the subdivision is to pay down the existing debt and fund your expenses in retirement. It is also expected to reduce the maintenance of the property which has become difficult due to your ages and decreasing health.

You intend to retain and continue to live on the subdivided lot that contains your current residence.

You may also retain some of the lots for sale at a later date.

You are likely to sell the lots in stages to pay down debt and then according to your medical and retirement needs.

You could not seek development approval for a residential subdivision until the land was rezoned residential.

The local government has required as part of the conditions of allowing the subdivision:

· an access road to be constructed, and

· other obligations relating to the adjoining property.

The owners of the adjoining property were not interested in having their land rezoned or sub-divided. You entered into a conditional contract to purchase the adjoining property in order to meet the other obligations of the local government.

You expect to incur a loss from the sale of the proposed lots from the adjoining property.

You have no business organisation for the subdivision. You do not have a secretary, office, or letterhead.

You will use consultants and contractors to perform the subdivision activities. The subdivided lots will be advertised through local real estate agents.

You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the local government conditions.

You have not claimed any expenses in relation to the subdivision as deductions for income tax purposes.

You will need to borrow funds to finance the subdivision activities.

You have never leased the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 7,

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

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

Reasons for decision

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

Under section 9-5 of the GST Act you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

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

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

For the sale of vacant lots from the subdivision of your property to be taxable they must meet all of the requirements in section 9-5 of the GST Act.

In your case, you will make the supply of vacant lots for consideration and the supply will be connected with Australia as the property is located in Australia, satisfying the requirements of subsection 9-5(a) and 9-5(c) of the GST Act. Additionally, the supply of vacant lots will not be GST-free or input taxed.

However, we must determine if the supply will meet the other requirements of section 9-5 of the GST Act and thus consider whether:

· the supply of vacant lots is made in the course or furtherance of an enterprise that you carry on

· you are registered, or required to be registered for GST.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST act and includes, amongst other things, 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.

The meaning of the term 'enterprise' is discussed in detail in 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 (MT 2006/1).

When considering the meaning of 'in the form of an adventure or concern in the nature of trade' paragraph 234 of MT 2006/1 states that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Based on the information you have provided, you are not in the business of buying and selling land or other real estate on a regular or continuous basis. However, an enterprise can be a single undertaking such as the division and sale of property.

Isolated transactions and sales of real property

In your case, the issue to be decided is whether the activities are an enterprise. That is, they are of a revenue nature considered to be an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 264 of MT2006/1 discusses the cases Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. Federal Commissioner of Taxation (Casimaty). In these cases, farm land was subdivided and sold with minimal development work 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.

A list of factors can be ascertained from the Statham and Casimaty cases that provide assistance when determining whether activities are a 'business' or an 'adventure or concern in the nature of the trade'. If several of the factors are present it may be an indication that a business or adventure in the nature of trade is being carried on. These factors are outlined in paragraph 265 of MT2006/1:

· 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.

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.

Your circumstances

In considering your facts to the indicators listed in paragraph 265 of MT2006/1, you have entered into a conditional contract to acquire additional land adjacent to your property, and you will need to borrow funds to finance the subdivision. These two facts are indicators of an enterprise.

However, in relation to these facts you have advised the purchase of the additional land was required by the local government as part of the conditions to allow the subdivision of your land, in that you were required to fulfil certain obligations on the adjoining property before council approval would be granted. You have advised that you expect to incur a loss from the purchase of this property and the subsequent sale of the proposed lots from this property. Further to this, you have not claimed any expenses in relation to the subdivision as deductions for income tax purposes.

In considering your circumstances, the other factors in paragraph 265 of MT 2006/1 are not present. You have owned the land for some time, and you have resided on the property and operated a business on the property previously. Due to age and deteriorating health it has become difficult for you to maintain the property, and you wish to subdivide the property to pay your existing debt and fund your retirement and medical expenses.

You have further advised that there is no business organisation for the subdivision, formal business plan or timeline for completing the subdivision works and selling the subdivided lots. You will engage consultants and contractors to perform the subdivision activities, only completing the minimal development works necessary to satisfy local government conditions. The subdivided lots will be advertised through local real estate agents.

You intend to continue to live on the subdivided lot that contains your current residence, and retain some of the vacant lots for sale at a later date.

Our decision

After considering the above factors we consider that your circumstances are similar to those contained in example 35 in paragraphs 297 to 302 of MT 2006/1. That example explains when a subdivision of real property amounts to the mere realisation of a capital asset. The relevant factors in the example are no change of purpose or object with which the land is held, no coherent plan for the subdivision, and the amount of work undertaken was that necessary to secure approval by the council for the subdivision.

We have determined that the subdivision and sale of vacant lots from your property will be a mere realisation of a capital asset. Therefore, your circumstances do not satisfy paragraph 9-5(b) of the GST Act, as your activities do not satisfy the definition of an enterprise.

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