Edited version of your private ruling

Authorisation Number: 1012425542914

Ruling

Subject: GST and sale of real property

Question:

Is GST payable on the sale of the individual lots?

Answer:

No.

Relevant facts and circumstances

In your application for GST private ruling, you stated that the facts are the same as those outlined in certain income tax rulings. These facts were based on your application for private ruling. The facts as outlined in the income tax rulings are as follows:

· The company owns farmland and either receives rent from external parties or allows various farming land to be used by related entities on the basis that all expenses are paid by the lessee.

· The total land owned by the company is approximately XXX hectares.

· The company is in negotiations to develop and sell farming land which was purchased in 19XX.

· The total land held in the development area is approximately YYY hectares and adjoins the beach and central business district areas and is surrounded by residential development on three sides.

· The land has been farmed by consecutive generations of the X family for over X years.

Due to other land development in the area, farming has become increasingly difficult and is impractical to continue. Some of the problems include movement of farm machinery and livestock through the suburban streets, interference by local residents, livestock mauled by township animals, crop spraying drift issues, risk of accidents and traffic restrictions.

The X hectares, is the only land that is wholly within the township zone.

The company had attempted to sell the property as a whole but could not achieve the desired sale value.

The company is now obliged to develop and sell approximately Z hectares of the land that is zoned residential. This area of land has always been used for agricultural purposes.

The remaining YYX hectares of land in the area is zoned rural, recreation and tourist accommodation and could be rezoned to residential or other higher land use values to increase its sale value. All other land surrounding it is already zoned residential and mostly built upon.

This land is on the opposite side of the busy main road from the YYX hectares, and is now unsafe for farming vehicles and machinery to enter and exit.

The main director will continue their farming operations on other land owned by the company and associated entities.

The company and its directors have not previously been involved with land development activities.

The company had sought and obtained planning approval from the local council in 19YY on the Z hectares. Some construction work was undertaken by contractors; such as: upgrading of existing roads, and associated kerbing, paving, effluent disposal, storm water and street lighting by the local council. Potable water service, telephone and electricity have been in existence for many decades to council's existing road reserves.

The company never carried out any works in its own right.

As at Month 19XY all of the requirements for the land division had not been completed by the company. Subsequently, the local council declared the original planning approval was still valid and issued a Completion of Work Notice.

The company is required to complete the developments as approved by Month 20YZ. This will involve the construction of internal roads and the associated infrastructure.

It is proposed that this development work will be undertaken by independent contractor/s and overseen by an independent contracted project manager.

The marketing and sale of the blocks will be undertaken by an independent real estate agent.

It is anticipated that the company and its directors will only be involved in management meetings with the project manager and real estate agent to monitor the progress and costs of the subdivision and not in the direct operational aspects of the development or sale of the blocks.

You are not registered for GST.

The land which is the subject of this GST private ruling request is located at X Town. This land is listed in your balance sheet as at 30 June 20XX as one of your fixed assets.

In a telephone conversation your tax agent confirmed that the facts as outlined in the income tax rulings have not changed. The only difference is that you have now commenced marketing the saleable lots (that is, lots that do not require any works). The proceeds of these sales will be used to finance the works required to comply with Council requirements.

In a telephone conversation your tax agent confirmed that you own a number of properties which are either leased to third parties for residential or commercial purposes or used by your related entities in their farming business. For the use of the land, the related entities pay for the outgoings relating to the land. The total rent and outgoings is less than $75,000 per annum.

The income tax rulings referred to above cover the period 20X1 to 20X2, respectively. You have received another income tax ruling which covers the years 20Y1 to 20Y2. All these income tax rulings ruled that the proceeds from the sale of the subdivided lots are not assessable income under ordinary concepts (under section 6-5 or 15-15 of ITAA 1997). The proceeds represent a mere realization of a capital asset and will fall for consideration under the Capital Gains Tax provisions.

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(a).

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

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

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 188-5.

A New Tax System (Goods and Services Tax) Act 1999 section 188-5.

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.

A New Tax System (Goods and Services Tax) Act 1999 section 188-25.

Income Tax Assessment Act 1997 6-5

Reasons for decision

Summary

GST is not payable on the sale of the individual lots.

Detailed reasoning

GST is payable on the sale of the individual lots if you are making a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it states:

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 for GST.

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

(* denotes a term defined in section 195-1 of the GST Act.)

Based on the information that you have provided, the sale of the individual lots is for consideration and is connected with Australia as the property is located in Australia. Therefore, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

It remains to be determined whether the sale of the individual lots is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act, whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act, and whether the sale is GST-free or input taxed.

Whether the sale of the individual lots is in the course of an enterprise that you carry on

An '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.

As outlined in the income tax rulings, we do not consider that the sale of the individual lots is in the course or furtherance of a business of buying and selling land nor is it in the course or furtherance of a property development enterprise.

On the information provided, you own a number of properties that are either leased to third parties for residential or commercial purposes or used by your related entities in their farming business. You are carrying on a leasing enterprise.

For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances.

Goods and Services Tax Ruling GSTR 2004/8 contains the ATO view on decreasing adjustments on supplies. It also considers the meaning of 'in the course or furtherance' in relation to an enterprise. Paragraphs 29 and 30 of GSTR 2004/8 state:

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

· at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

· at the time of sale it was applied in carrying on your enterprise to at least some extent; and

· it is sold as a transaction of your enterprise.

The individual lots formed part of the land that was used by related entities in carrying on a farming business. You leased the land to your related entities for a number of years for no consideration.

As you carry on a leasing enterprise on the land, the disposal of the individual lots has a connection with your enterprise. Accordingly, the supply of the individual lots is considered to be made in the course or furtherance of the leasing enterprise that you carry on. As such, the supply of the individual lots satisfies paragraph 9-5(b) of the GST Act.

Whether you are required to be registered for GST

You advised that you are not registered for GST. Therefore, we need to consider whether you are required to be registered for GST.

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

(a) you are carrying on an enterprise, and

(b) your GST turnover meets the registration turnover threshold of $75,000.

On the information provided, your only enterprise is the leasing of the properties. We therefore need to determine whether the income from leasing and the proceeds from the sale of the individual lots are included in working out your GST turnover.

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

· 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

· 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 working out both your current and projected GST turnover, you disregard certain supplies including:

· supplies that are input taxed and

· supplies that are not made in connection with an enterprise that you carry on.

However, section 188-25 of the GST Act excludes certain supplies made when working out your projected annual turnover.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

· by way of transfer of ownership of a capital assets of yours, or

· solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of capital assets is discussed in Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 32 of GSTR 2001/7 state:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up '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'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

In your case, you derive income from leasing the properties. As such, the properties are considered the profit yielding subjects of your leasing enterprise. That is, the properties are capital assets of your leasing enterprise. As such the individual lots are capital assets of your leasing enterprise. In addition, your leasing enterprise on those individual lots will cease as a consequence of the disposal of these lots used in the enterprise. Hence, the sale of the individual lots is disregarded in the calculation of your projected GST turnover.

As such, although the proceeds from the sale of the individual lots are included in the calculation of your current GST turnover, this amount will be excluded in the calculation of your projected GST turnover.

On the information provided, when you sell the individual lots, your current GST turnover will be at or above $75,000. However, your projected GST turnover will be below $75,000. Hence, your GST turnover will not meet the registration turnover threshold and you will not be required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act is not satisfied.

As all the requirements of section 9-5 of the GST Act are not met, the sale of the individual lots is not a taxable supply. There is no need to consider further whether the supply is GST-free or input taxed. Consequently, GST is not payable on the sale of the individual lots.

All GST rulings referred to above are available at the ATO website www.ato.gov.au

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