Edited version of your private ruling

Authorisation Number: 1012538963134

Ruling

Subject: Goods and services tax and land subdivision

Question

Is the sale of lots resulting from the subdivision of the property subject to goods and services tax (GST)?

Answer

No, the sale of lots resulting from the subdivision of the property is not subject to GST.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

You purchased two hectares of rural land (the Property) to build a family home. You were seeking a large allotment for lifestyle purposes. The Property was not used for income producing purposes.

You experienced a number of health issues over the years which made it impossible for you to maintain the large allotment. As a consequence you decided to reduce the size of the Property by approximately half.

Your city council initiated a new town planning scheme whereby the land was reclassed as residential under the Local Area Plan (LAP). You were unaware of this reclassification until you made the decision to downsize and made enquiries with your city council in relation to the subdivision.

Following this, an application for subdivision of the Property was prepared and lodged with your city council by surveyors in consultation with an engineering firm.

Conforming to the LAP, the application for subdivision was approved and one hectare of vacant land from the Property was subdivided into numerous residential allotments.

The approval of the subdivision required a certain amount of work to be undertaken as part of the subdivision and included:

· dividing the area into allotments along two existing road boundaries

· kerbing and channelling and construction of concrete footpaths along existing road boundaries

· minor extension of an existing cul-de-sac

· provision of sewer and stormwater drainage within the subdivision

· reticulation of town water within the subdivision

· installation of underground electricity and telephone lines within the subdivision

The costs of the above works were minor compared to the pre-subdivision valuation of the land.

None of the above works involved the cooperation of adjoining land owners. No prerequisites or conditions were imposed on these works by your city council. There was no rezoning or application for a change of land use in obtaining the subdivision approval.

You are still living on the remaining portion of the Property of approximately one hectare on which the family home is located.

No additional land was acquired and added to the original land area.

The land was not brought into account as a business asset nor was it purchased with the intention of carrying out a future residential subdivision.

All subsequent sales of subdivided lots were accounted for on capital account in your tax returns.

There was no office, no managers, no staff and no letterheads in relation to the subdivision.

No funds were borrowed to undertake the subdivision and as such no interest was claimed in relation to the subdivision.

The land was not developed beyond the basic council requirements to approve the subdivision.

No streets were named or street signs erected on the subdivision.

No buildings were erected on the subdivided lots.

The subdivision was completed in one step and not staged in any way.

More than half of the numerous subdivided lots have been sold. The lots were not sold in one period but have been sold over time.

The land was not advertised for sale or otherwise marketed before, during or after the subdivision. The sales of the subdivided lots have eventuated as a result of direct enquiries with you.

All subsequent sales of the lots have been inclusive of GST.

You have not developed any land or property before and since this subdivision.

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 subsection 9-20(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. This section 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)

In your case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the sales of the subdivided lots were made for consideration and the sales are connected with Australia as the subdivided lots are situated in Australia. There are no provisions in the GST Act that would allow your supply of the lots for residential purposes to be GST-free or input taxed. 

Therefore, what needs to be determined is whether the sales of the subdivided lots will be in the course or furtherance of an enterprise that you carry on.

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:

(a) in the form of a *business; or

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

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

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.

You have subdivided the Property which you have been using as your private residence since its acquisition into numerous lots for the purposes of sale. You advised that you have not previously carried out any land or property development activities nor have you carried out any land or property development activities since the subdivision.

As such, we consider that you are not carrying on a property development business as you are not engaged in developing properties on a regular or 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.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transactions and sales of real property. The ruling provides 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.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

However, it is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset has changed to one of trade.

You contend that your activities are a mere realisation of a capital asset and consider the guidelines of MT 2006/1 at paragraphs 262 to 302 to be applicable.

Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit making undertaking or scheme.

In Casimaty the taxpayer acquired a farming property on which he erected a homestead and conducted a primary production business. Because of growing debt and ill health, the taxpayer had to subdivide and sell off a large part of the property. In all, there was a total of eight separate subdivisions. The proceeds from the subdivisions and sales were held not to be assessable as there was no change of purpose for which the land was held. The taxpayer acquired and continued to hold the property for use as a residence and the conduct of the business of primary production. Accordingly, the subdivisions were considered to have occurred as part of the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether the activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. 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.

In your case, you have advised us as follows:

· There is no change of purpose or object with which the land is held; you acquired and continue to hold the property for use as a residence.

· You did not acquire any additional land to add to the original parcel of land.

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

· You did not set up a business organisation to deal with the subdivision - for example a manager, office and letterhead.

· You did not borrow any funds to finance the subdivision and therefore no interest claims were made.

· A minimal amount of work was undertaken in order to prepare the land for sale.

· The only work undertaken on the land was that necessary to secure approval by the council for the subdivision.

· You did not erect any buildings on the subdivided lots.

· The subdivided lots were not advertised for sale or otherwise marketed before, during or after the subdivision. The sales of the subdivided lots have eventuated as a result of direct enquiries with you.

· The lots were not sold in one period but have been sold over time.

Having given consideration to the above factors, it is our view that the activities carried out in regard to the subdivision of the Property and the subsequent sale of the subdivided lots is a mere realisation of a capital asset and does not amount to the carrying on of an enterprise for GST purposes.

Accordingly, the requirements of paragraph 9-5(b) of the GST Act are not satisfied and the sales of the subdivided lots are not taxable supplies in accordance with the GST Act and will therefore not be subject to GST.

It is not necessary to consider the application of paragraph 9-5(d) of the GST Act as all the paragraphs need to be met before section 9-5 of the GST Act is applicable.

Other relevant comments

For further information in relation to correcting GST mistakes, please refer to our website at www.ato.gov.au and also Miscellaneous Taxation Ruling MT 2010/1Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953.

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