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Ruling

Subject: GST and subdivision of farm land

Questions

1. Are you required to be registered for GST and pay GST on the sale of your subdivided blocks of farm land?

2. If yes, what is the date of valuation of your land for margin scheme purposes?

Decisions

1. Yes, you are required to be registered for GST and pay GST on the sale of your subdivided blocks of farm land.

2. The date of valuation of your land for margin scheme purposes will be the date of effect of your registration or the day on which you applied for the registration, if it is earlier.

Relevant facts and circumstances

· You, Mr and Mrs X, purchased farm land in prior to 1 July 2000 and built your residence on the property.

· For several years, you operated a market garden on the property in order to derive a supplementary income. For the last X years, you operated a hobby farm on the property and did not earn any income from the property.

· You have been employees and plan to retire soon. After retirement, you wish to downsize your property and continue to live in your current residence. In recent years, your health issues have made it difficult to maintain the property as required.

· There are a number of similar properties being developed in this way in close vicinity to your property. Because of the transition to smaller block sizes, you have been impacted with higher council rates.

· You engaged a consultant to represent your interests in achieving your objective of downsizing your property. He was instructed to liaise with consulting engineers to establish a plan that enables you to realise the best outcome from developing your property and also enable you to continue to live in the property.

· The consultant lodged an application for subdivision with the local council, which issued a 'notice of determination' to issue a subdivision permit in accordance with your plan.

· The plan is for a number of blocks plus the existing home block. The plan details three stages, which will be completed at the same time.

· In order to subdivide the land, you will engage the consultant to seek suitable contractors, monitor and supervise the works, make payments and gain certification from the council. The development will be fully funded from your self managed superannuation fund. You plan to commence construction work next year.

· Following the receipt of the 'certificate of compliance' from the council, you will obtain individual titles for the blocks. You will engage a real estate agent and legal associates to sell and finalise the payments and for conveyancing of the blocks.

· You have never been registered for GST.

· You have supplied a copy of the 'application for a subdivision permit' to the local council and the 'intention to issue a permit' from the council.

· You have mentioned that the land was not brought into account as a business asset. You did not acquire additional land to be added to the original land. You did not borrow funds to finance the acquisition or subdivision of the land. You did not claim any interest on borrowed funds as a business expense. You consider that there will not be any development beyond that is necessary to secure council approval for the subdivision. You will not construct any buildings on the land before sale.

Contentions

· You consider that this development transaction should be considered as 'capital' in nature. You have not been involved with any other developments and nor it is your intention to do so. You are endeavouring to realise the best value in order to ensure that you can self fund your retirement.

Relevant legislative provisions

Goods and Services Tax Act 1999 (GST Act) - section 9-5.

Goods and Services Tax Act 1999 (GST Act) - section 9-20.

Goods and Services Tax Act 1999 (GST Act) - section 75-5.

Goods and Services Tax Act 1999 (GST Act) - section 75-10.

Reasons for the decisions

Decision 1

Unless otherwise specified, all references below are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

Section 9-5 of the GST Act provides that:

You make a taxable supply if:

a) you make the supply for consideration; and

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

c) the supply is connected with Australia; and

d) you are registered or required to be registered.

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

When you sell your subdivided blocks of land, you will make the supply for consideration and satisfy paragraph 9-5(a) of the GST Act.

Your supply of subdivided blocks will be connected with Australia, as the land is located in Australia. You will satisfy paragraph 9-5(c) of the GST Act.

Sale of subdivided bare land is not a GST-free or an input taxed supply under any provision of the GST Act.

It is necessary to determine whether your supply of subdivided blocks will be made in the course or furtherance of an enterprise carried on by you and therefore, you will be required to be registered for GST.

Property development

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) refers to the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) considers whether MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraph 1 of GSTD 2006/6 provides that MT 2006/1 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the GST Act. The principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraphs 262 - 302 of MT 2006/1 refer to isolated transactions and sale of real property. The following paragraphs are relevant in determining whether the sale of your subdivided blocks will be made in the course or furtherance of an enterprise carried on by you.

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

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……..

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ ( Statham ) and Casimaty v. FC of T ¹⁰⁶ ( 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.

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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

268. The case of Marson (H M Inspector of Taxes) v. Morton and Others ¹⁰⁸ describes the process of reaching a conclusion in cases involving isolated transactions. After listing the factors that have been taken into account by courts in other cases, including the badges of trade, Sir Nicolas Browne-Wilkinson V-C stated:

I emphasise again that the matters I have mentioned are not a comprehensive list and no single item is in any way decisive. I believe that in order to reach a proper factual assessment in each case it is necessary to stand back, having looked at those matters, and look at the whole picture and ask the question - and for this purpose it is no bad thing to go back to the words of the statute - was this an adventure in the nature of trade?

Similarly, Foster J in AB v. FC of T observed:

It is clear in my view, that before the label 'adventure in the nature of trade' can be applied it is necessary to isolate with clarity the particular matters which are the subject of its application...Accepting as I do, that the phrase means 'an isolated business venture' questions must be asked as to what was the venture and what gave it its commercial character.

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience. If an entity is experiencing practical difficulty reaching a decision they can seek guidance from the Tax Office……

Example 30

277. Steven buys a 100 hectare property. He believes that the property may be suitable to be developed as a resort. After investigation he decides that it would be more profitable to subdivide and sell the property. He decides to subdivide the property into one hectare lots and sell these.

278. He engages a town planner and a surveyor to survey the 100 hectare property and to establish how many hectare lots it can be subdivided into. Steven then approaches the local shire council and is advised that he may subdivide his property into 65 one hectare lots.

279. However, Steven must satisfy various shire council conditions if he wishes to obtain development approval. They are :

· the making of new sealed roads with kerbing and channelling within the subdivision;

· the provision of water, electricity and telephone services to the new lots ;

· the provision of culverts and other storm water drainage works ; and

· the transfer of certain areas of land to the shire council for parks, environmental and other public purposes.

280. Steven consults his accountant and legal advisers. Together they prepare a comprehensive business plan for the project. They approach a commercial lender to arrange a substantial loan, secured by the property, to cover all development costs and related expenses.

281. After gaining development approval from the council, Steven then engages a project manager who arranges for all the survey and subdivisional works to be carried out. Contractors are engaged to put in the roads, complete all the necessary drainage works and install the water, electricity and telephone services.

282. Steven also investigates a marketing strategy that will provide the best return for his project. Sales agents are retained to carry out the marketing program which involves a comprehensive advertising campaign using a promotional estate name , ' Bush Turkey Hill'.

283. Steven is entitled to an ABN on the basis that the subdivision is an enterprise and it is more than a mere realisation of a capital asset. Significant factors that are relevant which lead to this conclusion are as follows :

· there is a change of purpose for which the whole property is held ;

· there is a comprehensive plan for the development of the property ;

· the subdivision is developed in a businesslike manner for example there is a project manager, significant development costs, a comprehensive marketing campaign including an estate name for the land ; and

· a substantial loan has been taken out to finance the development.

Land subdivision in the area administered by your local council

Your local council has provided the following information on their general procedures of approving land subdivision.

If a land owner wants to subdivide their land, the person has to engage a land surveyor and submit a land subdivision plan to the council. If the plan meets their regulations, the council would issue a subdivision permit. The permit will list all the developments to be carried out in order to provide infrastructure facilities to each block to be subdivided out of the land. If necessary, the land owner could sell the land with the subdivision permit, without carrying out any development work.

If the land owner desires to subdivide the land and sell individual blocks, the land owner has to engage consulting engineers, contractors etc and carry out all the development work listed in the subdivision permit. If the development work satisfies the council requirements, the council will issue a certificate of compliance.

With the certificate of compliance, the land owner could apply to the titles office to issue separate titles for each subdivided block. Once the individual titles are available, the land owner could sell the blocks as bare land or further develop the blocks and sell the blocks with buildings.

Selling land with the subdivision permit

In your case, there will be a change of purpose for which the land was held. Originally it was held for farming purposes and now it will be used for subdivision purposes.

As mentioned above in the Statham and Casimaty cases, if you sell your farm land with the subdivision permit from the council and with minimal work to enhance the presentation of the blocks, we could treat the sale of your land as a mere realisation of a capital asset. You would not have carried on an enterprise of property development. In such a case, you would not be required to be registered for GST. Accordingly, the sale of land would not be subject to GST.

Selling the subdivided blocks

You have decided to go ahead with the subdivision of your land as per the permit. You plan to commence construction work next year and finally obtain a certificate of compliance from the council. Thereafter, you will obtain individual titles to the blocks and sell the blocks, except the block containing your residence, to the public. You expect that each block will be sold for a price in excess of $Y.

We consider that the work that will be carried out by you on the land after obtaining the subdivision permit, bears the hallmark of a property developer. You would carry on a property development enterprise on your land. The sale of the subdivided blocks to the public would be made in the course or furtherance of this enterprise and you would satisfy paragraph 9-5(b) of the GST Act. It is necessary to determine whether you will be required to be registered for GST.

Requirement to register for GST

Section 23-5 of the GST Act provides that you are required to be registered under this Act if:

a) you are carrying on an enterprise; and

b) your GST turnover meets the registration turnover threshold.

Subsection 23-15(1) of the GST Act provides that your registration turnover threshold unless you are a non-profit body is $50,000 or such higher amount as the regulations specify. At the present time, the regulations specify that, if you are not a non-profit body, your registration turnover threshold is $75,000.

If you sell these blocks in the course of your property development enterprise, the blocks will be treated as your trading stock. As each block is valued over $75,000, we consider that you will meet the registration turnover threshold and satisfy paragraph 9-5(d) of the GST Act.

Accordingly, if you carry out the subdivision requirements of the council, obtain individual titles to the blocks and sell them to the public, you will satisfy all the requirements of section 9-5 of the GST Act. The sale of each block will be a taxable supply under section 9-5 of the GST Act and you will incur a GST liability.

Decision 2

Paragraph 75-5(1)(a) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land, if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made on or before the making of the supply or within such further period as the Commissioner allows.

Paragraph 75-5(3)(a) of the GST Act provides that a supply is ineligible for the margin scheme if it is a taxable supply on which the GST was worked out without applying the margin scheme.

In your case, you acquired the land prior to 1 July 2000. Therefore, paragraph 75-5(3)(a) does not apply to the acquisition of your land.

Subsection 75-10(1) of the GST Act provides that if a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

Subsection 75-10(2) of the GST Act provides that subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest in question.

Subsection 75-10(3) of the GST Act provides that subject to section 75-11, if:

a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and

b) an approved valuation of the freehold interest as at the day specified in the corresponding item in the third column of the table has been made;

the margin for the supply is the amount by which the consideration for the supply exceeds the valuation of the interest.

In your case, you acquired your land before 1 July 2000. You were never registered for GST. You will become required to be registered and finally will be registered for GST after 1 July 2000. In this situation, Item 2 of the table of subsection 75-10(3) of the GST Act will apply to you. Accordingly, the date of valuation of your land will be the date of effect of your GST registration or the day on which you applied for GST registration, if it is earlier.

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