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Ruling

Subject: GST and sale of land

Question 1

Is the sale of the land subject to good and services tax (GST)?

Answer

No.

Relevant facts and circumstances

You are not registered for GST.

You purchased two parcels of land in two stages.

The first lot was purchased by you in early 2000 and included a GST amount calculated under the margin scheme.

The second lot was purchased by you in late 2000. There was no GST included in the price of this land.

At the time of settlement of the second lot of land you re-aligned the boundaries to amalgamate the two parcels of land.

You have purchased the land with the intention to hold it on capital account and sell it in the future.

You have not carried out any property development or subdivided the land other than the amalgamation and you have no intention of carrying out any property development activities.

You have derived some agistment income.

Your agistment income from the property is not going to be $75,000 or more per annum.

You have received an offer to sell your property.

There is no contract in place for the sale of the property at this stage.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 23-15(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20.

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

As defined in section 9-5 of the GST Act, a supply is taxable if it is:

· made for consideration

· made in the course of furtherance of an enterprise carried on by the entity making the supply

· connected with Australia, and

· made by an entity registered or required to be registered.

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

As you will be supplying land located in Australia for consideration, there is no provision in the GST Act that would make the supply of the land GST free or input taxed. However, the other conditions for making a taxable supply include that you are carrying on an enterprise and are either registered or required to be registered for GST.

You have supplied the property for grazing purposes since its acquisition. This constitutes a leasing enterprise in accordance with the above definition. Therefore you may be considered to be carrying on an enterprise of licensing the land for grazing purposes. Hence, you meet the third condition of section 9-5 of the GST Act.

You are not registered for GST; therefore it needs to be determined whether you are required to be registered.

As provided in section 23-5 of the GST Act, you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

You are considered to be carrying on an enterprise of licensing the land for grazing purposes. Therefore, you meet the first condition to be required to be registered for GST. However, the second requirement must also be satisfied for you to be required to be registered for GST. As such, we will consider if your annual GST turnover meets the registration turnover threshold of $75,000.

In respect of the second requirement, section 188-10 of the GST Act provides that your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

In your situation, the registration turnover threshold is met when your current GST turnover and your projected GST turnover is equal to or greater than $75,000. The current GST turnover is the sum of the value of all supplies made in a particular month plus the previous 11 months. The projected GST turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

Before the sale (settlement) of your interest in the land, your current GST turnover will consist only of your agistment income from the land which is less than $75,000. However, at the time of settlement of your interest in the land, the proceeds from the sale of the land may result in you exceeding the registration turnover threshold of $75,000.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will be required to be registered for GST.

Paragraph 188-25(a) of the GST Act provides that in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 provides that a capital asset is generally the profit-yielding subject of an enterprise. This is different from a revenue or trading asset, which is described in paragraph 34 of the ruling as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business.'

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act to include (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;

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

The definition of 'enterprise' clearly includes a business. The definition of 'business' in section 195-1 of the GST Act is the same as that in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. Some of those indicators are:

· a significant commercial activity

· a purpose and intention of the taxpayer to engage in commercial activity

· an intention to make a profit from the activity

· the activity is or will be profitable

· the recurrent or regular nature of the activity

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade

· activity is systematic, organised and carried on in a business like manner and records are kept

· the activities are of a reasonable size and scale

· a business plan exists

· commercial sales of product, and

· the entity has relevant knowledge or skill. 

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

There is no single test that determines whether a business is being carried on.

To be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business.

Paragraph 234 of MT 2006/1 states:

234. 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 provided, your sale of the land will be a one-off activity, and is not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities. Although it is likely the sale of the land will be profitable, you have held the property for a number of years, you have not carried out any property development activities and you have no plans to develop land in the future. Therefore, based on the facts provided, we are satisfied that you are not in the business of land development or property trading activities.

However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions that do not amount to a business but which have the characteristics of a business deal.

Although you are not in the business of property development, your activities may be considered an enterprise even though it is a 'one-off' property transaction. Therefore, we need to decide whether your activities are an adventure or concern in the nature of trade or a mere realisation of a capital asset.

In accordance with paragraph 258 of MT 2006/1, assets can be categorised as either trading assets or investment/capital assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. In accordance with paragraph 259 of MT 2006/1, examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere realisation of investment/capital assets does not amount to trade.

Paragraph 249 of MT 2006/1 provides that trading assets are generally dealt with or on-sold within a short time after acquisition.

In accordance with paragraph 260 of MT 2006/1, assets can change their character from investment/capital assets to trading assets, or vice versa.

Paragraph 251 of MT 2006/1 provides that the higher the frequency of similar transactions the greater the likelihood of trade.

Paragraphs 265 and 266 of Miscellaneous Taxation Ruling MT 2006/1 state:

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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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 order to determine whether the activities in your case are an enterprise of land development or are a mere realisation of a capital asset, it is necessary to ascertain whether there are sufficient indicators that the activities are a business or an adventure or concern in the nature of trade.

In accordance with MT 2006/1 we have considered the following factors:-

· there is no change of purpose for which the land is held;

· you have acquired another lot and added it to the original parcel of land;

· you do not have a coherent plan for any subdivision of the land;

· there is no business organisation - for example a manager, office and letterhead;

· you have not carried out any development of the land; and

· you have not erected any buildings on the land.

After consideration of the above factors in MT 2006/1, it is concluded that there are insufficient indicators that the activities are a business or an adventure or concern in the nature of trade.

Therefore, based on the information provided, it is considered that the character of the property is in the nature of a capital asset.

Although the sale proceeds from the land will be included in your current GST turnover, the proceeds of the sale will not be included in your projected GST turnover as the proceeds are from the sale of a capital asset.

As your projected GST turnover is below the registration turnover threshold, you are not required to be registered for GST. Consequently, all of the requirements of a taxable supply are not satisfied and the sale of your land will not be subject to GST.

As the supply of the land is not considered to be a taxable supply it is no longer necessary to consider whether the margin scheme applies.

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