Edited version of your private ruling

Authorisation Number: 1012495576926

Ruling

Subject: Sale of subdivided land and other matters

Questions:

1. Is the sale of the new subdivided lots subject to GST?

2. If the Owners' Corporation register for the GST, can it claim input tax credits on the acquisitions made in subdividing and selling of the new lots?

3. Can the Owners' Corporation claim input tax credit for the acquisition of the past and future services of a registered surveyor in surveying the existing lots to create survey-strata titles and also in the surveying of the new lots?

4. Can the Owners' Corporation claim input tax credit for improvements that will be carried out to the existing units?

5. Once registered for GST, can the Owners' Corporation claim input tax credit on acquisitions it makes for the maintenance of the units?

Answers:

1. Yes, the sale of the new subdivided lots is subject to GST.

2. Yes, provided the date of registration is on or before the date of acquisition.

3. Yes, provided the date of registration is on or before the date of acquisition.

4. Yes, provided the date of registration is on or before the date of acquisition.

5. Yes.

Relevant facts and circumstances

· You are a body Corporate (an Owners' Corporation) in consisting of several members.

· You are requesting this ruling on your own behalf and those of your members.

· The Owners' Corporation manages and maintains the buildings and common property belonging to the members.

· Members pay an amount to the Owners' Corporation for this purpose.

· You have an Australian Business Number (ABN).

· You are not registered for the goods and services tax (GST).

· The members of the Owners' Corporation are not collectively registered for the GST as an entity. However, one member is registered for the GST on his/her own for an enterprise he/she is carrying on.

· Your current turnover is less than $75,000 in any 12 consecutive months.

· You have permission from the State's Planning Commission, based on an agreement reached by all the members, to change the strata title to that of a survey-strata title through the subdivision of the land so that each of the Owners' Corporation members (unit Owners) will individually own some land around each unit.

· The subdivision will create some additional lots and the title to each lot will be held by the members as tenants in common.

· The Owners' Corporation will undertake the subdivision of the property and the linking of utility services to the newly created lots as necessary under relevant council and/or Planning Commission requirements.

· The Owners' Corporation will sell the new subdivided lots to third parties on behalf of the members of the Owners' Corporation.

· The members will be listed as the vendor in each of these sales.

· On receipt of sale revenue, the members will pay the Owners' Corporation an amount as fees to enable the Owners' Corporation to settle the bank loan, interest and other costs.

· The Owners' Corporation expects the sale value of the new lots in total will be in excess of $75,000.

· In the course of undertaking this work, the Owners' Corporation will also carry out some changes to the existing residential units. Namely, the installation of separate water meters to the units, connecting electricity meters of the units to the mains directly, and some fencing. These will be carried out after the subdivision work and the sale of the new lots, depending on the availability of funds.

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 - section 9-20

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

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

A New Tax System (Goods and Services Tax) Act 1999 - section 11-20

A New Tax System (Goods and Services Tax) Act 1999 - section 23-10

Reasons for decision

Question 1

Who is making the supply?

In this case the members of your Owners' Corporation are making supplies of subdivided land, as tenants in common, to third parties. We consider the members of the Owners' Corporation as 'a tax law partnership'. Goods and Services Tax Ruling 2004/6 (GSTR 2004/6) explains what a tax law partnership is. Paragraph 18 of GSTR 2004/6 states:

A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership) ... in receipt of ordinary income or statutory income jointly'.

An association of persons is described in GSTR 2004/6 at paragraph 20 as follows:

The reference in the GST Act definition of a partnership to an 'association of persons' means that there must be some link, connection, or existence of a mutual or common purpose between the persons.

There is a common purpose between the members in relation to the subdivision and sale of the new lots of vacant land. On the sale of the subdivided lots the members of the Owners' Corporation will be in receipt of ordinary income.

Paragraph 27 of GSTR 2004/6 states:

The expression 'in receipt of ordinary income...jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

The members have, or will, commence activities that will give rise to a right or entitlement, to receive jointly an amount or payment of a revenue nature.

All of the above demonstrate that the members are a "partnership" for the purpose of tax law and we consider this as the entity that is making the supply of the seven subdivided lots to third parties.

Whether the members of the Owners' Corporation (herein after referred to as the Partnership) is making a taxable supply would depend on whether the provisions of section 9-5 of the GST Act are, or will be, satisfied when the sales are made.

Is the sale of the subdivided lots taxable?

Whether or not a sale (a supply) will be subject to GST would depend on whether the provisions of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Section 9-5 of the GST Act 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.

(Definitions of the terms marked with asterisks are given in section 195-1 of the GST Act)

In this case, the Partnership will be making the supply of the subdivided lots (which are in Australia) for consideration. Therefore, paragraphs 9-5(a) and (c) of the GST Act are satisfied. It remains to be determined whether the supply is made in the course or furtherance of an enterprise the Partnership is carrying on and whether the Partnership is required to be registered for the GST.

Is the Partnership carrying on an enterprise of land subdivision?

In this case, we need to consider whether the Partnership's activities of land subdivision constitute an enterprise.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Section 9-20 of the GST Act provides that an enterprise is an activity, or a series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) ….

d) …..

In the form of a business" is explained in Miscellaneous Ruling MT2006/1 (MT2006/1) starting at paragraph 170.

170. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

170A. In FCT v. Swansea Services Pty Ltd at paragraph 99, McKerracher J. observed that the words 'in the form of' do not support a suggestion that form alone may prevail over substance. However, he said that they do 'have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby.'

170B. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. In the case of non-profit entities, the Commissioner considers that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business. In addition, smaller superannuation funds that arguably are not carrying on a business were however intended to be covered by the original definition of enterprise (that is, 'in the form of a business') and this was put beyond doubt by an amendment to section 5.

In the form of an adventure or concern in the nature of trade" is explained in MT 2006/1 commencing at paragraph 233.

233. There is no definition of 'in the form of an adventure or concern in the nature of trade' in the ABN Act. However, the concept of 'an adventure or concern in the nature of trade' has arisen in the context of Australian and United Kingdom (UK) revenue law. While UK law is of assistance in understanding this concept, it is considered that Australian revenue law and judicial decisions should be the starting point to give it meaning.

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.

235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

In this case, the Partnership owns a strata titled property. The partners in the Partnership obtained permission from the relevant authorities to change the strata title to that of a survey-strata title through the subdivision of the land so that each partner (members of the Owners' Corporation members and unit owners) will individually own some land around each unit.

Further, the Partners decided to create additional lots from the remaining common property with the title to each lot being held by the Partners as tenants in common. The Partnership engaged another legal entity, the Owners' Corporation, to carry out the subdivision of the common land to new lots, provide the necessary services to them to satisfy the council requirements through the engagement of other entities, and carry out a series of activities to enable the new lots to be sold. Furthermore, the Owners' Corporation intends to borrow money to fund these works and the members (the Partnership) will pay the Owners' Corporation to settle such funding costs from the proceeds the Partnership will receive from the sale of the subdivided lots.

The Partnership makes an investment in undertaking this venture with the expectation that it would make a profit at the end of it. It is not a mere disposal of a capital asset but clearly an engagement in a speculative undertaking expecting to gain from it.

Therefore, based on the facts provided, we consider that the Partnership is carrying on an enterprise as provided in MT 2006/1.

We further consider the subdivision and the sale of the newly created lots is a supply made in the course or furtherance of an enterprise the Partnership has undertaken. Consequently, paragraph 9-5(b) of the GST Act is satisfied.

The Partnership is currently not registered for the GST. However, the Partnership is required to be registered as its projected turnover will exceed the GST registration turnover threshold. Therefore, paragraph 9-5(d) of the GST Act is also satisfied.

As such the supply of the new lots satisfies the requirements of section 9-5 of the GST Act. Furthermore, the supply is neither GST-free nor is input taxed as the provisions of Division 38 and Division 40 of the GST Act do not apply in this case.

Therefore, the sale of the new subdivided lots is subject to GST and the Partnership will have to remit 1/11^th of the consideration it receives for the sale of the lots as GST.

Question 2 to 5

Section 11-20 of the GST Act states:

You are entitled to the input tax credit for any *creditable acquisition that you make.

Section 11-5 of the GST Act states that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose, and

(b) the supply of the thing to you is a taxable supply, and

(c) you provide, or are liable to provide, consideration for the supply, and

(d) you are registered or required to be registered.

For an acquisition to be creditable all of the four conditions above must be satisfied.

The meaning of a creditable purpose is given in section 11-15 of the GST Act. Subsection 11-15(1) states that:

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

The Owners' Corporation is carrying on an enterprise in that it provides services to its members for which the members pay some consideration as fees. The Owners' Corporation is carrying on an enterprise is further evidenced from the fact that it has an ABN. Although it is not registered or required to be registered, the Owners' Corporation can choose to register for the GST under section 23-10 of the GST Act. Subsection 23-10(1) of the GST Act states:

You may be registered under this Act if you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold.

The Owners' Corporation has, and or will, make acquisitions, including the following, for purposes of carrying on its enterprise of providing services to its members.

· Acquisitions made for the subdivision of land.

· Acquisitions of services of registered surveyors.

· Acquisitions to make improvements to the units owned by the members under strata titles.

· Acquisitions for the maintenance of units owned by the members under strata titles.

As long as these acquisitions are for creditable purposes and they are supplied as taxable supplies and the Owners' Corporation provides or is liable to provide consideration for the supplies and, finally, the Owners' Corporation is registered for the GST, these acquisitions will be creditable acquisitions and the Owners' Corporation can claim input tax credits. Please note that under Division 23 of the GST Act, an entity may backdate the date of GST registration.

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