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Ruling

Subject: GST and the sales of subdivided lots of land

Issue

Are the sales of the subdivided lots of land (on former 'Property -A') by a partnership (you) taxable supplies under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, you are not making taxable supplies in relation the sales of the subdivided lots of land as you are neither registered nor required to be registered for GST.

Relevant facts and circumstances

Mr and Mrs X as a partnership (you) have registered for an Australian business number (ABN).

You advised that you are not registered for goods and services tax (GST) as a partnership or as individuals.

You, as joint tenants, own two adjoining titles of land in Australia. The two adjoining properties are:

· Property-A; and

· Property-B.

Collectively, Property A and Property B (referred together as 'land') were purchased and used by you to conduct a primary production business on the land for over XX years.

In XXXX, you considered selling the entire land without any division/infrastructure work for $XX million. Only some soil testing was undertaken on the land at that time. The properties were put on the market and were available for purchase for about a few months. Issues arose and you decided to take the properties off the market after a few months.

Around XXXX, you considered subdividing the land as the best way to realise the land. However, complications arose from a planning perspective, and you did not proceed with the subdivision at this time.

In XXXX, you reconsidered the idea of subdividing the land. You engaged surveyors and engineers for the purpose of the potential subdivision, and the development approval was sought to develop the land. The surveyors and engineers are arm's length unrelated parties. The approval is being sought in multiple stages due to the uncertainty about how much allotment can actually be sold.

You have not previously been involved in the subdivision of land or the buying and selling of land for profit. You have only ever been in primary production activities.

There is no business organisation associated with the subdivision of the land, and there is no manager employed or business premises used to conduct these activities.

Property-A

You acquired Property-A in the 1970s. Property A is still partly used in the primary production operations.

A Plan of Division was registered at the Australian Lands Titles Office in relation to Property-A on XXXX. A full subdivision of Property A could result in up to XX titles being brought into existence for sale. However, releases are uncertain.

In accordance with the terms of development approval, you have undertaken infrastructure work on part of Property-A, including block fill, sewerage, stormwater, water supply, electricity supply, gas supply, telephone lines, road footpaths and kerbs. This is basic infrastructure work only and the minimum required under the development approval terms to enable unimproved blocks of land to be sold.

The infrastructure works were carried out by an arm's length unrelated party,

The first release of X new titles has been completed. Some of the titles have already been sold.

You have invested $XXXX for the approval and subdivision as follows:

· Surveying and engineering costs: $XXXX

· Government and utility charges: $XXXX

These amounts include GST for which you have not claimed any input tax credits.

Funding for the development of the land has been provided by your family members on an informal arrangement, with them expecting to be eventually repaid by you. Your family members have not charged you any interests or intend to charge you. Your family members have not taken any security over the land for the advances. No tax deductions have been claimed in relation to any borrowings and financing arrangements for the subdivision/development of the land.

The new subdivided lots (allotments) will be sold as vacant blocks of land with supporting infrastructure in accordance with the requirements of the subdivision approval. There has been no development on the land beyond that necessary to secure approval for subdivision. Further no buildings or structures are proposed to be erected on the land.

You have appointed a real estate agent in relation to the sales of the allotments. You have family members who are sales agents for this real estate agent, however they do not hold any equity interests in this firm.

Property-B

You are not requesting this private ruling in relation to Property-B.

Additional information provided:

You confirmed that you have not registered for GST as your annual GST turnover in relation to your primary production business is less than $75,000, and therefore have not charged GST on your sales.

The second release of X titles has now occurred. The infrastructure work for all the second release has been completed.

Any further progression of land/property sales is stalled because of difficult market conditions.

There is no formality for your subdivision and sales of the land. You do not have a business plan for the subdivision. The progression from start to finish is ad hoc depending on cash flow and market conditions. There is no organisation set-up for the subdivision and sales of the subdivided lots of land.

The family has no ongoing need of the land and there is a need for the family to manage the succession plan from you (the partners) to your children.

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 Paragraph 9-5(d)

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(a)

Reasons for decision

GST is payable on a taxable supply. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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.

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) to 9-5(c) of the GST Act as you make the supplies of the new subdivided lots of land for consideration; the properties were originally acquired and used in the course of carrying on your primary production business; and the sales of the subdivided lots of land are connected with Australia as the lots are located in Australia.

What remains to be determined is whether you are registered or required to be registered for GST for the purposes of paragraph 9-5(d) of the GST Act.

You (the partnership) advised that you are not registered for GST for your market gardening activities as your annual GST turnover is less than $75,000. We need to consider if you are required to be registered for GST due to the sales of the new subdivided lots of land.

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The registration turnover threshold is $75,000 for businesses (and $100,000 for non-profit entities)

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

(a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

(b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

(b) supplies that are not for consideration.

(c) supplies that are not made in connection with an enterprise that you carry on.

(d) supplies that are not connected with Australia.

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

Capital asset or revenue (trading) asset

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 (which is available at www.ato.gov.au) provides that a capital asset is generally the 'profit-yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. This is different from a revenue or trading asset, which is described in paragraph 34 of GSTR 2001/7 as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business'.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that the activities represent a 'once off' transaction on the land that you had purchased many years ago, and not the beginning of an on-going land development business. Based on these facts, it is considered that your subdivision activities are not carried out in the form of a business.

Paragraph 13 of Goods and Services Tax Determination GSTD 2006/6 explains that 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

As your activity of land development leading to subdivision and sales of the land is an isolated transaction, it is necessary to consider whether the subdivision and sales of the subdivided land is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

Paragraphs 262 to 302 of Miscellaneous Taxation Ruling MT 2006/1 specifically consider isolated transactions and sales of real property. 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 opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

· 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 borrowed to defray subdivisional costs was claimed as a business expense,

· there is a level of development of the land beyond that necessary for council approval for the subdivision, and

· buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade.

Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

From the facts provided, there are several events which occurred for which we consider that your activities in subdividing and selling the new subdivided lots of land is the mere realisation of a capital asset. Significant factors which lead to this conclusion are as follows:

· You purchased Property-A over XX years ago, and have used this property (together with Property B) in conducting your market gardening business activities since acquisition.

· You are subdividing and disposing the subdivided lots of land due to personal reasons and because you can no longer maintain the property (or properties).

· You did not purchase Property-A for the purposes of subdivision and resale for profit. You conducted a primary production business on the property, and intended to continue to conduct the primary production activities on the remaining vacant land on Property-A (until any further subdivision).

· You have not claimed any input tax credit in relation to the approval and subdivision of the land. No tax deductions have been claimed in relation to any borrowings and financing arrangements for the development of the land.

· You (and your family members) have not previously been involved in the subdivision of land or the buying and selling of land for profit. You have only ever been involved in the primary production activities.

· The level of activities undertaken for the subdivision was basic infrastructure work only and the minimum required under the development approval terms to enable unimproved blocks of land to be sold. There has been no development on the land beyond that necessary to secure approval for subdivision.

· No buildings or structures are proposed to be erected on the land.

· You do not have a business plan, there is no organisation set-up for the subdivision and sales of the new subdivided lots of land, and no manager is employed or business premises used to conduct these activities. The level of marketing appears to be reasonable and expected for the sales.

On the basis of these facts and taking into consideration all the factors, it is considered that your subdivision and sales of the new subdivided lots of land is the mere realisation of a capital asset. The sales of the new subdivided lots of land are part of the disposal of a capital asset.

Hence, the sales of the subdivided lots of land are excluded from the calculation of your current and projected GST turnovers.

In the absence of any other commercial activities, you will not meet the registration turnover threshold, and you are not required to be registered for GST under section 23-5 of the GST Act. Accordingly, you do not satisfy the requirement under paragraph 9-5(d) of the GST Act when you are not required for GST, and not required to be registered for GST.

In summary, your sales of the new subdivided lots of land do not satisfy all the requirements of a taxable supply under section 9-5 of the GST Act, and are not taxable.

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