Edited version of your private ruling

Authorisation Number: 1012449978256

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Ruling

Subject: Goods and services tax (GST) and property subdivision

Question

Is the subdivision of the property and subsequent sale of the subdivided lots an enterprise for which GST is payable?

Answer

Yes.

Relevant facts and circumstances

· You (a number of individuals) are registered as individuals for GST with the exception of one of you whose registration ceased on a certain date.

· The partnership you have formed has an Australian Business Number (ABN) but is not registered for GST.

· You purchased a property comprising a number of hectares many years ago as an asset for your families.

· At the time of purchase, the land was zoned for residential development by the council planning scheme.

· The property and surrounds was later zoned residential something on a certain date.

· On a certain date the property and surrounds was then re-zoned residential something.

· The property was used for market gardens a number of years ago but this was not a commercial activity undertaken by you.

· The property was also used for agistment of cattle until a certain date but again this was not considered to be a commercial activity on your part but merely a way to keep the grass down.

· The property does not generate any income presently and the past uses have not been considered commercial activities.

· You are subdividing the property. You will sell the lots created by the subdivision.

· The council has approved the plan of subdivision.

· The plan of subdivision has been sealed by the Responsible Entity and registered.

· The plan of subdivision allows for a large number of residential lots to be sold in a number of stages over a period of a number of years (subject to market demand).

· The first so may stages of the subdivision have been registered and a further so many stages are to be registered in the future.

· No security was taken against the subject land in order to effect the subdivision.

· You have funds available from your other activities and are certain you will not need to borrow funds to undertake the subdivision.

· The so many stages have been financed from existing resources and the intention is for future stages to be funded from the sale of previous stages.

· The whole of the land remains unencumbered.

· You demolished a house that was located on the property.

· The subdivision involved construction of hundreds of metres worth of road and provision of services to connecting points for the lots. Construction has been completed.

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

Summary

The subdivision of the property and the subsequent sale of the subdivided lots are considered to be an enterprise and therefore GST will be payable on your sale of the subdivided lots.

Detailed reasoning

Under A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are liable for GST on any taxable supply you make.

A supply is taxable if it is:

· made for consideration

· made in the course or furtherance of an enterprise carried on by the entity making the supply

· connected with Australia, and

· made by an entity registered or required to be registered.

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

All of the conditions set out above must be satisfied in order for a supply to be taxable.

The supply of the subdivided lots will be for consideration, and the supply will be connected with Australia as the land is situated in Australia.

There are no provisions in the GST legislation that treat the supply of vacant land for residential purposes as either GST-free or input taxed in your circumstances.

Therefore, the remaining requirements are:

· the supplies of the land will be made in the course or furtherance of an enterprise carried on, and

· you are registered or required to be registered.

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 of $75,000.

Paragraph 9-20(1)(a) of the GST Act provides that enterprise includes 'an activity or series of activities done in the form of a business'. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. Some of those 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.

There is no single test that determines whether a business is being carried on.

To be conducted in the form of a business the activities would need to have the essential appearance or characteristics of a business.

Although there is clearly an intention to make a profit and it is likely the subdivision will be profitable, you have held the property for many years and have not been involved in any business activity prior to this proposed subdivision. Therefore, based on the facts provided, we are satisfied that you are not presently in the business of land development.

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise includes an adventure or concern in the nature of trade.

If a subdivision is not substantial and only minimal work is needed to meet council requirements to sell the land, then these activities may not be in the form of an adventure or concern in the nature of trade. Such minimal activities include:

· surveying the land

· lodging plans with council

· obtaining council consent for the subdivision

· the provision of access, drainage, water meters, electricity and telephone to the subdivided lots, and

· arranging a real estate agent to market and sell the subdivided lots.

However, this general rule will not apply where:

· the land is bought with the intention of resale at a profit

· the land is further developed by way of building on it,

· the land requires significant activity such as major road works to provide access; and

· in circumstances where the entity has been involved on ongoing subdivision or a series of subdivisions.

The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 266 of MT 2006/1 states:

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.

Each case is examined on its facts and in reviewing the works proposed in your subdivision of the property into lots for sale, it is accepted that on the particular facts of this case, it will be an adventure or concern in the nature of trade. This is due to the fact that significant activities were required to complete the subdivision of the land, such as major road works and the major work involved in connecting services to such a large number of lots and the fact that this subdivision is significant enough to require it to be undertaken in stages.

Having applied all the principles listed above to your circumstances, we have concluded that the subdivision and development of the property and subsequent sale of the subdivided lots amounts to an enterprise for GST purposes. The sale of the subdivided lots is regarded as more than just the mere realisation of a capital asset.

As such, you are carrying on an enterprise and you will be required to register for GST when your annual turnover meets the registration turnover threshold of $75,000, The sale of the proposed lots will be subject to GST and you will be entitled to any input tax credits for GST paid on any acquisitions to subdivide and sell the land, once you are registered.

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