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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012450046329

Ruling

Subject: GST and property subdivision

Question

Will your sale of subdivided lots to the public (except the lot containing your residence), be subject to goods and services tax (GST)?

Decision

Yes, the sale of each lot will be a taxable supply and you will incur a GST liability.

Relevant facts and circumstances

You acquired a rural property about X years ago to be used as your residence. You originally acquired the land for private use by yourself. You always wanted to live in a rural environment as it provides clean air, solitude and a relaxed lifestyle.

Your property has been used exclusively for residential purposes. It has never been used for any income producing purpose.

Recently, your local council has rezoned the properties in your area as Residential 1, which means your property can be subdivided into smaller lots.

A number of developers have made inquiries from you to buy your property for the purpose of subdivision and sale. Instead of selling your property to developers, you have decided to develop the property yourself and sell the subdivided lots.

You plan to subdivide the property into a number of lots. One of the lots will contain your residence. You plan to retain this lot and sell the other lots.

Our records indicate that you are not registered for GST.

Your expected plan of property development

You have consulted your tax advisors on the best possible way of selling your excess land. Inquiries have revealed that the sale of undivided land would realise unacceptably low returns.

You have previously never undertaken any property development enterprise.

You have already engaged surveyors and prepared a subdivision plan. You intend to apply for an approval for subdivision and if approved, carry out the subdivision.

You intend to appoint a project manager to undertake the entire land subdivision project. You intend to engage two real estate agents to market the subdivided lots.

In order to minimise your risk, you have been advised to borrow the minimum amount and complete the project in two stages. You expect to borrow $X for stage one. Thereafter, the project will be self funding. You have been advised to restrict the project to two stages, as more stages would increase the costs.

You are unsure of whether this will be the case as no cash flows or detailed budgets have been prepared yet. All you have at this stage are the estimates provided by surveyors.

It is your intention to carry out the minimum amount of clearing and earth works as required by statutory bodies. There will not be a site office or any other building erected on the land except your current family home.

You will not have any business organisation, manager, office, secretary or letter heads. Currently you work for wages.

You will hand over the entire project to a project manager. Once the land is subdivided, the subdivided lots will be handed over to two real estate agents for sale. You will not build any buildings whatsoever on the subdivided lots. You will not undertake any concerted advertising campaign. You will not be involved with the marketing of the lots. You will not take time off from your occupation to work on the project.

You have not kept any records of the project yet. You have been advised to use a particular software package to keep your records.

You do not intend to undertake any other property development project after this project.

No applications have been made to government and other statutory bodies in relation to this project so far.

Additional facts provided by your tax agent

The interest expense on the funds borrowed will not be claimed as a business deduction. Interest expense will be capitalised and will become a part of the capital costs.

If you sell the entire property with the house, you would be able to get about $Y. There will be no GST payable and the CGT exemption for the main residence would apply.

On the other hand if you subdivide and sell N lots, each lot could be sold for about $XXX,000. There will be a development cost of about $YY,000 for each lot. You will retain your house.

You very much depend on the precedent of the Statham Case to justify that your property development activities are not an enterprise. You consider that your subdivision and sale of subdivided lots is a mere realisation of a capital asset in an enterprising way.

Relevant legislative provisions

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 11-5

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 11-15

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-20

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-40

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

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 23-15

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 188-10

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 188-20

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

Reasons for the decision

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make.

Section 9-5 of the GST Act states:

You make a taxable supply if:

you make the supply for *consideration; and

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

the supply is *connected with Australia; and

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.

In your case, you will supply the subdivided lots for consideration. The supply will be connected with Australia as the lots are situated in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act will be satisfied.

The supply of subdivided lots is not a GST-free or an input taxed supply under any provision of the GST Act.

Therefore, what needs to be determined is:

Enterprise

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done:

……

Miscellaneous Taxation Ruling MT 2006/1 (MT 20061) refers to the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN).

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the principles of MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes.

Paragraph 244 of MT 2006/1 states:

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Based on the information provided, we consider that you are not carrying on a property development business as you are not engaged in developing properties on a regular and continuous basis. However, it remains to be considered whether your property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

Isolated transactions and sales of real property

Paragraphs 262 - 302 of MT 2006/1 refer to isolated transactions and sales of real property. The ruling explains that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraphs 264 - 269 of MT 2006/1 provide guidance for determining whether the activities involving the sale of real estate are business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. These paragraphs state:

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:110

Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) refers to the meaning of GST turnover. Paragraphs 31 -36 of GSTR 2001/7 state:

When you sell the subdivided lots at market prices, the subdivided lots will not be capital assets of an enterprise at the time of the expected sale. There will also be a change of purpose from which the land was previously held.

As per facts, additional land will not be acquired to be added to the original land and your land will not be formally brought into account as a business asset.

You claim that there will not be a manager, office and letter heads. However, you will entrust the entire project to a project manager. In that situation, there is no need for you to have a separate manager, office, letter heads etc. The project manager could carry out all the necessary operations from the person's own office with timely inspections.

You will borrow approximately $X for the capital works and other expenses of stage one. Thereafter, the project will be self funding.

You claim that the interest on borrowed funds will not be claimed as a business deduction. However, it will be capitalised and become a part of the capital expenses. We consider that capitalisation of the interest expense would reduce any capital gains tax payable by you.

You have mentioned that there will not be development of the land beyond that is necessary to secure council approval for subdivision and new buildings will not be erected on the subdivided lots.

We consider that you have a coherent plan for the subdivision of the land. You have already engaged surveyors and prepared a subdivision plan. You intend to apply for an approval for subdivision and if approved, carry out the subdivision. You intend to appoint a project manager to undertake the entire land subdivision project. You intend to engage two real estate agents to market the subdivided lots. In order to minimise the risk and capital requirements, you will undertake the project in two stages. All these steps are similar to the steps undertaken by a professional property developer in subdividing land.

Taken as a whole, we consider that your intended project could be treated as an adventure or concern in the nature of trade, rather than a mere realisation of a capital asset.

Statham & Anor v FCT 89 ATC 4070 (Statham)

We consider that the facts of your case can be distinguished from those in the Statham case as outlined below.

In your case the main driver for the subdivision and selling of your land is the recent rezoning of the land in your area by the local council. After the rezoning, land developers became interested in your property, as they could make substantial profits by subdividing and selling your land.

After consulting your tax advisors, you decided to retain a small area including your house for your personal use. The rest of the land will be subdivided into N lots in two stages and sold to the public. You claim that this is a mere realisation of a capital asset in an enterprising way.

In the Statham case, the deceased taxpayer could not achieve the objectives of a cattle raising partnership due to factors beyond his control such as a depressed cattle market, employment transfers and his deteriorating health.

The actual subdivision work was done by the local council. The owners did not borrow any funds. They only provided a bond to the council by way of a bank guarantee. The owners did not advertise for the sale of the lots. They did not entrust the project to a project manager.

We consider that, taken as a whole, your case could be sharply contrasted from the facts of the Statham case.

Examples of subdivision of land that are enterprises

MT 2006/1 has listed a number of examples, where the subdivision of land has been treated as carrying on an enterprise. Example 30 is very relevant in deciding whether your proposed sale of subdivided lots is a mere realisation of a capital asset. It is quoted below.

Example 30

Similar to the facts in the above example, in your case there will be a change of purpose for which the whole property was held. You have a comprehensive plan for the development of the property. The subdivision will be carried out in a business like manner. For example, a project manager will be appointed and there will be significant development costs and the subdivided lots will be sold through two local estate agents. A fairly substantial loan will be taken to finance the development.

Conclusion

After taking all these factors into consideration, we consider that the supply of your subdivided lots will be made in the course or furtherance of an enterprise that you will carry on and paragraph 9-5(b) of the GST Act will be satisfied.

Whether you are required to be registered

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act which states:

You are required to be registered under this Act if:

you are *carrying on an *enterprise; and

your *GST turnover meets the *registration turnover threshold.

As explained above, you will be carrying on a land development enterprise and paragraph 23-5(a) of the GST Act will be satisfied.

Subsection 188-10(1) of the GST Act states:

You have a GST turnover that meets a particular *turnover threshold if:

your *current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

your projected GST turnover is at or above the turnover threshold.

Subsection 188-20(1) of the GST Act states:

(1) your projected GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made or are likely to make during that month and the next 11 months other than:

supplies that are *input taxed; or

supplies that are not for *consideration (and are not *taxable supplies under section 72-5) or

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

Section 188-25 of the GST Act states:

In working out your *projected GST turnover, disregard:

any supply made or likely to be made by you by way of transfer of ownership of a capital asset of yours; and

any supply made or likely to be made by you solely as a consequence of:

ceasing to carry on an *enterprise; or

substantially and permanently reducing the size or scale of an enterprise.

Subsection 23-15(1) of the GST act states:

(1) 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 the registration turnover for an entity which is not a non-profit body is $75,000.

Supply of subdivided lots

As explained above, your sale of subdivided lots will not be a transfer of capital assets of an enterprise. They have not previously been part of the profit yielding subject of an enterprise. At the time of selling the subdivided lots, they assume the character of trading assets of an enterprise.

You will make the supply in the course or furtherance of a property development enterprise. We consider that you will not be making the supply solely as a consequence of ceasing to carry on an enterprise or substantially or permanently reducing the size of your enterprise. Accordingly, the sale of the subdivided lots will not be disregarded when calculating your projected GST turnover.

Consequently, the GST exclusive value of the lots will be included when working out your projected turnover. As per the facts, the GST inclusive sale price of a lot will be approximately $200,000. The GST exclusive value of a lot will exceed $75,000. Consequently, when you sell the first subdivided lot, your projected turnover would meet the registration turnover threshold and paragraph 23-5(b) of the GST Act will be satisfied. You will be required to be registered and paragraph 9-5(d) of the GST Act will be satisfied.

When you sell the first subdivided lot, you will satisfy all the requirements of section 9-5 of the GST Act. Therefore, the sale of each subdivided lot will be a taxable supply. You will incur a GST liability equal to 1/11th of the sale price of the lot.


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