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Ruling

Subject: GST and sale of real property

Question 1

If the arrangement between the parties constitutes a 'partnership' for tax purposes, does the project involving the subdivision of the Land into separate lots and the subsequent sale of those lots under the terms of the Project Agreement constitute the carrying on of an enterprise within the meaning of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

The Applicants acquired the Land in many years ago and have lived on the property ever since. The Applicants are retired but some time ago became concerned about the cost and work involved in maintaining the Land. The Applicants investigated various options which would allow them to reduce the area of the property which they had to maintain, while allowing them to remain in their residence.

The Applicants decided not to sell to a developer. The Applicants entered into a Joint Venture Agreement with X and Y) (Project Agreement).

The Project Agreement provided that:

· the parties intended to form an unincorporated joint venture to subdivide the Land to create new lots;

· the Applicants would contribute a portion of the Land to the joint venture sufficient to allow subdivision into a number of lots;

· X would provide the necessary finance;

· Y would manage the project;

· on completion of sales of the lots the parties would be entitled to a proportion of be proceeds as per an agreed schedule; and

· the parties are not partners and they are severally, but not jointly liable for obligations under the Project Agreement.

The Project Agreement provided that the share of the sale proceeds to which each participant would be entitled was to be set out in a schedule to the document.

The work required to finalise the project has been substantially completed but the Applicants had deferred registration of the plan of subdivision (which will result in the creation of the separate lots) as a result of reduced property values in the area and the requirement to start paying additional council rates once the new titles are registered. However the Applicants anticipate they will shortly proceed with registration of the plan and then move to sell the lots.

The parties have not registered the joint venture as an entity for GST purposes and have not applied for an ABN.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The project involving the subdivision of the Land and the subsequent sale of those lots under the terms of the Project Agreement does not constitute the carrying on of an enterprise within the meaning of section 9-20 of the GST Act.

Detailed reasoning

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 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.

In examining the parties' activities against the Statham and Casimaty factors, the following is apparent:

· There is no significant change of purpose for which the Land is held; the Land was used for residential purposes and will continue to be used for residential purposes, only as smaller lots.

· The Property is not recorded as a business asset.

· There is no formal business plan. The Applicants have no previous experience in subdividing land.

· There is no business organisation for the subdivision. There is no office, no secretary and no letterhead.

· The parties have not borrowed from external entities to fund the project.

· The Applicants do not intend to undertake any construction work on the land beyond that necessary to meet the terms of the development approval.

Considering the factors in paragraph 265 of MT 2006/1 in this case and the fact that the Applicants 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 and will not constitute an enterprise within the meaning of section 9-20 of the GST Act.

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