Edited version of your private ruling

Authorisation Number: 1012375913734

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Ruling

Subject: GST enterprise and sale of property

Question 1

Are you carrying on an enterprise of property development?

Question 2

Is the supply of these properties subject to GST?

Question 3

Are you eligible to use the margin scheme when you sell these newly developed properties?

Question 4

Should a valuation of the properties be undertaken to use the Margin scheme?

Answers

1. Yes, you are carrying on an enterprise for GST purposes.

2. Yes, the supply of the properties will be subject to GST.

3. Yes, the margin scheme will apply to the sale, where the requirements of section 75-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. (See Reasons for Decision)

4. Yes, the subdivided land will require a reasonable method to value the land.

Relevant facts and circumstances

· xx (you) have been a member of a GST group from xx

· Your group representative is xx

· You have been conducting property investment activities for more than xx years.

· Until recently your properties were bought solely for rental income.

· Two established residential properties both located in the state of xx, know as xx (xx) and xx, xx (xx) were recently purchased for redevelopment and sale at a profit.

· The xx property was purchased in xx. The intention was to subdivide the land into a number of parcels. The land that contains the existing house is to be retained and the newly created vacant land is to be sold at a profit.

· The xx property was purchased in xx. The intention was to demolish the existing property, subdivide a number of parcels of land, build a new residential unit (units) on each of the newly created land parcels and sell them to the general public at a profit.

· You intend to contract a licensed real estate agent to carry out the sale of these properties. The marketing campaign will be undertaken by the agent.

· In subsequent telephone conversations, you have advised the Australian Taxation Office that this is only a proposal at this stage and the decision on the proposal will only be made once you receive a response to your private ruling request.

· You also advised that funding for the proposal will be available through an arrangement with your bank to finance these developments.

· You have no prior experience in property development.

· You will engage experts from a licensed real estate agent and a professional builder, to carry out these proposals.

· You plan to engage in similar projects in the future.

· You do not have a formal business plan for the development.

· You have sort advice from a real estate agent regarding development opportunities in the respective areas.

· You purchased xx properties from purchasers at 'arms length'

· These properties were acquired by you as existing residential houses, used as a residence and they were built more than xx years ago.

· You do not have agreements in place with any prospective buyers for the properties to apply the margin scheme.

· You do not have a current contract for the sale of these properties

· You wish to apply the margin scheme to the sale of these properties if the sale of the properties is subject to GST.

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 9-20.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-35(1).

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(2).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-75(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1A).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(2).

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

Question 1 & 2

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) requires you to pay GST on taxable supplies.

Section 9-5 of the GST Act states that an entity makes a taxable supply if:

1. the supply is made for consideration; and

2. in the course or furtherance of an enterprise the entity carries on; and

3. the supply is connected with Australia; and

4. the entity is registered or required to be registered for GST.

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

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

Based on the facts, the sale of vacant land at xx and units at xx will satisfy the requirements of first, third and fourth elements of section 9-5 of the GST Act. Therefore, we must determine if the sale will satisfy the remaining elements of section 9-5 of the GST Act. That is, whether you will be making the supply in the course or furtherance of an enterprise and whether the supply will be GST-free or input taxed under any of the provisions in the GST Act.

In the course or furtherance of carrying on an enterprise

'Enterprise' is broadly defined in section 9-20 of the GST Act. The term, 'enterprise' is defined in section 9-20 in 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.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides guidance on the meaning of the term 'entity carrying on an 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 to apply to the meaning of the terms 'entity' and 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes 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. A business encompasses trade engaged in on a regular basis. 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. However, it does not extend to the mere realisation of investment or private assets such as the family home and private cars.

This means that an asset sold at a profit, does not, of itself, result in the activity being commercial in nature. Therefore, we need to determine whether the sale of land at xx and units at xx will be an activity (solely or partly) in the course or furtherance of an enterprise.

An adventure or concern in the nature of trade can include an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

At paragraph 260 of MT 2006/1 it is stated that assets can change their character but cannot have a dual character at the same time.

Paragraph 263 of MT 2006/1 states that 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.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme). 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:

1. there is a change of purpose for which the land is held;

2. additional land is acquired to be added to the original parcel of land;

3. the parcel of land is brought into account as a business asset;

4. there is a coherent plan for the subdivision of the land;

5. there is a business organisation (for example, a manager, office and letterhead);

6. borrowed funds financed the acquisition or subdivision;

7. interest on money borrowed to defray subdivisional costs was claimed as a business expense;

8. there is a level of development of the land beyond that necessary to secure council approval for subdivision; and

9. buildings have been erected on the land.

In determining whether activities relating to an isolated transaction 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 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 applying the above factors to your case, we consider the facts of this case will demonstrate factors one, three, four, six and eight.

There has been a change of purpose for which the land was held. Initially, you bought the property to be used for investments of residential premises. However, having rented these properties for a very short period you found they were no longer suitable for that purpose. You intend to develop and sell the properties for a profit.

Xx properties have previously been taken into account as a business asset for income tax purposes.

Although you are in the preliminary stages of this venture you will be utilising the skills of an estate agent and builder for costing and property advice. Therefore, we consider you have a coherent plan for the demolition and subdivision of these properties.

You have access to funding through your bank to carry out the relevant development work on the properties.

You are aware of the approvals necessary from the council for the subdivision of land and the construction of the units and will engage professional builders. The facts indicate, your development proposal does have a level of development of the land beyond what is necessary to secure council approval for the subdivision of land to facilitate the sale of the property.

However, factors two and five were not demonstrated in this case. Based on the information provided, you did not acquire any additional land to be added to the original parcel of land. You did not employ a business organisation and you do not have a manager or office to carry out the subdivision and the construction work.

Further factors taken into account include, that you have not been engaged in any property development, and it is your intention to develop properties in the future. You advised that your intention was to take advantage of the current property price and make a profit by constructing the units for sale and selling additional land for a profit

Subsection 9-20(2) of the GST Act states that an enterprise does not include an activity, or series of activities done by an individual, or a partnership without a reasonable expectation of profit or gain.

On balance, the facts indicate that you are carrying on a property development enterprise. Therefore the supply of your properties will be made in the course of carrying on an enterprise for the purposes of the GST Act.

New residential premises

The term 'new residential premises', is defined under subsection 40-75(1) of the GST Act. It states residential premises are new residential premises if they:

· have not previously been sold as residential premises (other than commercial premises) and have not previously been the subject of a long term lease; or

· have been created through substantial renovations of a building; or

· have been built or contain a building that has been built to replace demolished premises on the same land.

However, under subsection 40-75(2) of the GST Act residential premises are not new residential premises if the premises have only been used for making input taxed supplies of residential rental under paragraph 40-35(1)(a) of the GST Act for the period of at least 5 years since the current premises have been built.

Goods and Services Tax Ruling GSTR 2003/3 provide guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au

Vacant land

An example of the ATO position is outlined in Chapter 15 of the Goods and Services Tax Industry Property and Construction partnership register, (Property register). It explains where a trust owns land that was held as part of the business structure, the sale is connected to the entities enterprise and will be made in the furtherance of that enterprise. The relevant item in the property register can be located by performing a search using the term 'property construction' at www.ato.gov.au to locate item 15. 4.18. For your connivance I have reproduced it below.

ATO Position

A transaction is a supply 'in the course or furtherance' of an enterprise that is carried on where the supplies can be considered to be connected to the entity's enterprise.

The term in the course or furtherance is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

As the business, trading company or trust owns the land, and it was held as part of the business structure, the sale is in the course or furtherance of its enterprise and will be a taxable supply.

In this case, your core enterprise is that of a residential property investment and you held the property as part of that enterprise. Moreover the vacant land was held as part of your business structure.

Furthermore, vacant land is discussed in paragraph 25 of GTR 2000/20 and states in part, that 'vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be or intended to be occupied as a resident or for residential purposes'. Therefore, vacant land in itself can not be classified input taxed in the GST legislation. There are no other sections in the GST Act to classify vacant land as either GST-free or input taxed.

Consequently, the potential sale of the newly created parcel of land at xx and new residential preemies when created at xx, (if the units are rented for less than five years), will be a taxable supply. As all the requirements of section 9-5 of the GST Act are satisfied GST will be payable on the sale of your properties.

Question 3 & 4

Margin scheme eligibility

Under section 75-5 of the GST Act, all the requirements to apply the margin scheme are met if:

§ you sold a freehold interest in land, a stratum unit or selling or granting a long-term lease, and

§ you did not acquire the property that you sold:

- from a supplier who worked out the GST payable on the property without using the margin scheme

- by inheritance from a person who would not have been able to apply the margin scheme

- as a member of a GST group from another member of the group who would not have been able to apply the margin scheme

- as a participant in a GST joint venture from the joint venture operator who would not have been able to apply the margin scheme and

- you have a written agreement with the purchaser, on or before the sale of the property.

Furthermore, paragraph 15 of Goods and Services Tax Ruling GSTR 2000/21 Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000 (GSTR 2000/21) states:

15. You can only apply the margin scheme if the supply is a taxable supply. If the supply is new residential premises then the first supply will be a taxable supply to which the margin scheme can apply but subsequent sales of the property as residential premises will be input taxed under Subdivision 40-C. Subsequent sales of vacant residential land will be a taxable supply if sold by a supplier who is registered or required to be registered for GST.

To be eligible to use the margin scheme, the property you acquired can not be supplied to you as a taxable supply.

In this case, you acquired xx properties in xx as an input taxed supply, (being residential premises,) from purchasers at arms length, outside of your GST Group.

You may be eligible to apply the margin scheme relating to the first supply of the new residential units. (Subsequent sales of the property will be input taxed.) The vacant land will be a taxable supply and where the requirements of section 75-5 of the GST Act are satisfied you may be eligible to use the margin scheme.

Additional information can be found in the guide titled, 'GST and the margin scheme' (NAT 15145) which explains the application and calculation of the margin scheme. It is available on our web site www.ato.gov.au by conducting a search using the NAT number in the search box.

Subdivided land - valuation to use the margin scheme

Section 75-15 of the GST Act discusses subdivided land, it states:

For the purposes of sections 75-10 to 75-14, if the freehold interest, *stratum unit or *long-term lease you supply relates only to part of land or premises that you acquired, the *consideration for your acquisition of that part is the corresponding proportion of the consideration for the land or premises that you acquired.

Furthermore, paragraph 16 in GSTR 2000/21 explains the general margin scheme formula; it explains in the case of subdivided land the consideration received for the acquisition of the relevant land will need to be apportioned. It states:

16. Where the interest, unit, or long-term lease is acquired on or after 1 July 2000, and the circumstances in item 2A of the table in subsection 75-10(3) do not apply, then the margin is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or long term lease. The consideration for the acquisition of the interest, unit or long-term lease is the original purchase price or in the case of subdivided land or a stratum unit the corresponding proportion of the original purchase price paid to acquire the relevant land. It does not include costs later incurred in developing the interest, unit or long term lease.

From the facts relating to xx, where the parcels of land will be divided into a number of approximately equal sized lots, you can apportion the purchase price for each unit sold by dividing the purchaser price by three using formula sell price less purchaser price equals margin. Example two in the fact sheet Margin scheme made easy. (NAT 73740) I have attached a copy of the fact sheet.

The ATO view in this case is in the publication titled 'GST and the margin scheme' (NAT 15145). It explains amongst other things, how to work out the purchase price for the subdivided land, refer to example seven. This publication is available from our web site www.ato.gov.au by conducting a search using the title. For your convenience I have included a copy.

From the facts relating to the xx property, you acquired a large parcel of land which can be sub-divided to create a new parcel of land. There is an existing house located on a part of the land, which you intend to retain.

Paragraph 58-59 of Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 (GSTR 2006/8) provides guidance to ascertain the proportion of the purchase price that relates to the subdivided land. You will need a 'reasonable method', to determine if the land has equal value with or without the house.

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