Edited version of your private ruling

Authorisation Number: 1012440361808

Ruling

Subject: Goods and Services Tax (GST) and Property Subdivision

Question 1

Is GST payable on the sale of the lot?

Answer

No.

Question 2

Are individual 1 and individual 2 required to register for GST regarding the sale of the lot?

Answer

No.

Relevant facts and circumstances

Individual 1 purchased a principal place of residence (the property) a number of years ago.

The property is located in Australia.

The property was transferred into the joint names of individual 1 and individual 2 on a certain date.

Individual 1 and individual 2 subdivided the property into two lots and the vacant lot created from the subdivision - the lot was sold.

Individual 1 and individual 2 decided to do the subdivision and sell the resulting vacant lot after an inheritance was received.

The property has always been the principal place of residence and has not been used to produce income.

Individual 1 and individual 2 decided to subdivide the property and sell the vacant lot created by the subdivision as a one-off transaction and remain on the remainder of the property as their principal place of residence.

Individual 1 and individual 2 are not property developers by trade.

No buildings were built on the vacant lot created by the subdivision. Individual 1 and individual 2 sold this lot as vacant land.

Costs of the subdivision included council fees and payments to various contractors to comply with council regulations.

Individual 1 and individual 2 only did the minimum amount of work required for council approval.

Additional land was not acquired to be added to the original parcel of land.

The parcel of land was not brought to account as a business asset.

There was no business organisation - for example, a manager, office and letterhead.

Money was not borrowed to finance the subdivision.

Current income derived from other sources.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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 section 9-40

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

Reasons for decision

Question 1

Summary

GST is not payable on the sale of the lot because the property subdivision activity was not an enterprise.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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.

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)

We shall now consider whether the property subdivision activity was an enterprise.

Section 9-20 of the GST Act provides that 'enterprise' includes:

· an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) and

· an adventure or concern in the nature of trade (paragraph 9-20(1)(b))

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on determining whether an entity is carrying on an enterprise for ABN purposes.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'enterprise' for the purposes of the GST Act and can be relied on for GST purposes.

Paragraph 234 of MT 2006/1 distinguishes between the term business and the term adventure or concern in the nature of trade. It state:

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.

Paragraph 178 of MT 2006/1 sets out the indicators of a business. It states:

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some 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 businesslike 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.

Paragraph 259 of MT 2006/1 assists in determining whether an activity is an adventure or concern in the nature of trade. It states:

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

Paragraphs 262 and 263 of MT 2006/1 discuss one-off real property transactions. They state:

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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraph 265 of MT 2006/1 sets out factors to assist in determining whether a property subdivision activity is a business or adventure or concern in the nature of trade. It states:

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.

Paragraph 270 of MT 2006/1 discusses the situation where land is purchased with the intention of resale at a profit. It states:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

We do not consider that the activity of subdividing the land in individual 1 and individual 2's case is a business because:

· the subdivision was not a significant commercial activity (the land was subdivided into only two lots; individual 1 and individual 2 did not build on the lot and they only did the minimal activities required by council)

· the subdivision was not of a recurrent or regular nature

· individual 1 and individual 2 did not purchase the land to resell at a profit (whereas a property subdivision business operator would normally purchase land to subdivide and sell at a profit), and

· individual 1 and individual 2 used the property as their residence only.

Furthermore, in accordance with paragraph 234 of MT 2006/1, a business is trade engaged in on a regular or continuous basis, and the property subdivision activity in this case was not trade engaged in on a regular or continuous basis.

We shall now consider the factors in paragraph 265 of MT 2006/1.

There has not been a change of purpose for which the land in this case was held - individual 1 and individual 2 have retained the remaining land for use as their residence, which was always the purpose in holding the land.

Additional land was not acquired to be added to the original parcel of land.

The parcel of land was not brought to account as a business asset.

There was a coherent plan for the subdivision of the land.

There was no business organisation - for example, a manager, office and letterhead.

Money was not borrowed to finance the subdivision.

There was not a level of development of the land beyond that necessary to secure council approval for the subdivision

Buildings were not erected on the lot that was sold.

Less than several of the factors in paragraph 265 are present in this case, and individual 1 and individual 2 did not build on the land. Therefore, an analysis of the factors in paragraph 265 does not, in itself, point to the conclusion that the property subdivision activity was an enterprise.

We do not consider that the property subdivision activity in this case was an enterprise, because:

· an analysis of the factors in paragraph 178 of MT 2006/1 does not point to a business having been carried on

· the activity did not involve trade engaged in on a regular or continuous basis

· an analysis of the factors in paragraph 265 of MT 2006/1 does not, in itself, point to the activity being an enterprise

· individual 1 and individual 2 did not build on the vacant lot resulting from the subdivision

· the activity was very small scale

· individual 1 and individual 2 did not purchase the property to resell at a profit, and

· individual 1 and individual 2 used the property as their residence only.

As the property subdivision activity was not an enterprise and individual 1 and individual 2 used the property as their residence only, the sale of the lot was not a supply made in the course or furtherance of an enterprise that they carried on.

The sale of the lot was the mere realisation of a private investment asset.

As the requirement of paragraph 9-5(b) of the GST Act is not satisfied, the sale of the lot is not a taxable supply. Hence, GST is not payable on the sale of the lot.

Question 2

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise, and

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

The property subdivision activity was not an enterprise and the sale of the lot was not a supply made in the course or furtherance of an enterprise. Hence, the requirement of paragraph 23-5(a) of the GST Act is not satisfied in regard to the property subdivision. Therefore, the property subdivision activity and sale of the lot did not result in individual 1 and individual 2 being required to be registered for GST.

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