Edited version of your private ruling

Authorisation Number: 1012558421157

Ruling

Subject: GST and the subdivision and sales of land

Issue

Are the sales of the subdivided lots of land located in Australia by XXX (you) subject to goods and services tax (GST)?

Answer

No. The sales of the subdivided lots of land are not subject to GST when you are neither registered nor required to be registered for GST.

Relevant facts and circumstances

XXX (you) is not currently registered for goods and services tax (GST). You are a salary worker, and not a property developer.

You inherited a XX hectare land located in Australia (property) when your parent XXX passed away in 20XX. You are the sole beneficiary and executor of your parents will.

The land was owned by your parents family since 1960s, and your parent acquired complete share of the property in the 1980s.

Your parent had applied to subdivide the XX hectare land into three lots of approximately X hectare each in 200X (that is, several years prior to your inheritance). However, the development progressed slowly as it required the re-alignment of the road reserve.

Since your inheritance of the property in 20XX, you have decided to continue with the subdivision of the property. This involves you overseeing and ensuring the re-alignment of the road reserve and the design stage for the engineering work.

You engaged a contractor to commence the engineering work in 20XX (that is, several years after your inheritance). Work is expected to be completed by 20XX.

You are considering selling two of the steeper subdivided lots of land, and intend on living on the third block. This is because currently you are living on an adjacent residential block in the original dwelling since the 1980s. The residential block (your house) and one of the rural blocks are relatively steep and maintenance is becoming difficult for you.

You have provided the following documentation:

- Certificate of title

- Maps of the land that you inherited, and the proposed subdivision

- Notice of determination for the subdivision.

Additional information provided:

You advised that the residential block that you live in is not part of the XX hectare land that is being subdivided into the lots. Your residential block is separate from this subdivision plan.

The current structures on the land (that is, the property) consists of fencing and sheds, each approximately X metres, which has been and continue to be used as shelters since 1980s. However, these sheds will be removed from the subdivided lots before they are sold.

In relation to the property, your parent used the land for agistment. Owners paid agistment fees to your parent who declared the income on his/her tax returns. The estimated total income for 2009/10 was $XXXX. The estimated expenses were for land rates and water rates of $XXX.

You clarified that since your inheritance of the property; you have continued to allow the land to be used for the agistment. You have declared the income for this in your income tax returns for 2010/11 (total of $XXXX), and 2011/12 (total of $XXXX). Estimated expenses (for land rates and water rates) are $XXX. That is, you had a net profit for each year but the amount(s) is less than $75,000.

You advise that you have not carried out any other property development activities previously. You have not prepared a coherent business plan in relation to the subdivision and sales of the subdivided lots. You have not set up any business organisation (hire any manager, office and so on). Other than continuing to allow the land to be used for agistment since your inheritance, you have not used/accounted for the land as business assets.

You have borrowed funds to assist with the financing of the subdivision. Last year, you obtained a line of credit. However, you have not claimed any interest on the line of credit.

You have obtained advice on the value of the subdivided lots of land from a certified practicing valuer. The estimates indicate that you will make profit on the sale of each lot of land.

The total estimated cost of engineering works is $XXXXXX (inclusive of GST).

The work to be done involves the planting of street trees, and placing of turf around the storm water outflow point. The engineering works involve installation of water supply, sewerage works, road and drainage. The work to be done is necessary for council approval.

The only new structure will be the new boundary fences to replace the boundary fences along the road reserve that were removed to allow for the engineering work to be done, and new boundary fences along the new boundaries between the subdivided lots.

No building will be erected on the subdivided lots of land that would be sold.

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 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(a)

Reasons for decision

A supply will be a taxable supply where the requirements 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

(* denotes a defined term under section 195-1 of the GST Act)

Based on the facts provided, you will satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the sales will be for consideration and the properties are located in Australia respectively.

We need to consider:

· whether your subdivision and sales of the subdivided lots of land are in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

· whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (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

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The meaning of 'enterprise' is considered in Miscellaneous Taxation Ruling MT 2006/1 and Goods and Services Tax Determination GSTD 2006/6. The principles outlined in these ruling and determination are applied to your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or
one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you are a salary worker and are not currently registered for GST. You are not a property developer, and have never been involved in property development before. You inherited the property from your parent in 20XX and your activities in relation to the subdivision and sales represent a one off transaction on the original property that you had inherited. In the absence of other facts, it is considered that your activities are not carried out in the form of a business, nor the beginning of an ongoing property development business.

As your activities relate to an isolated transaction, it is necessary to determine whether the subdivision and sales of the subdivided lots of land will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

In the form of an adventure or concern in the nature of trade

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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature (paragraph 13 of GSTD 2006/6).

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. The issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade (paragraph 265 of MT 2006/1). These factors include whether:

· 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 for council approval for the subdivision, and

· buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 also provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

The facts indicate that the original property (XX hectare of land) was first acquired in the 1960s, and by the 1980s your parent acquired the whole original property from his/her family. Prior to your inheritance of the original property from your parent in 20XX, the land was used for agistment, and your parent had applied to subdivide the original property (in 200X which is several years prior to your inheritance). Since your inheritance of the original property from your parent in 20XX, you have continued to allow agistment on the land, and continued to go ahead with the subdivision and sales of the subdivided lots of land. The engineering works for the subdivision commenced in 20YY.

You stated that the continued maintenance of some of the property is becoming more difficult for you. You are considering selling two of the (steeper) subdivided lots, and moving into one of the subdivided lots.

You did not purchase additional land to add to this property. You advise that you have not carried out any other property development activities previously. You have not prepared a coherent business plan in relation to the subdivision and sales of the subdivided lots. You have not set up any business organisation (hire any manager, office and so on). Other than continuing to allow the land to be used for agistment since your inheritance, you have not used/accounted for the land as business assets.

You have borrowed funds to assist with the financing of the subdivision. That is, last year you obtained a line of credit. However, you have not yet claimed any interests on the line of credit.

The work to be done involves the planting of street trees, and placing of turf around the storm water outflow point. The engineering works' involve installation of water supply, sewerage works, road and drainage. You will also place boundary fencing on the subdivided lots. These activities on the subdivided lots of land are considered necessary for council approval of the subdivision and your sales of the subdivided lots of land.

You will not erect any new residential buildings on the subdivided lots of land that will be available for sale.

On the basis of these facts, we consider that your subdivision and sales of the subdivided lots of land is the mere realisation of a capital asset. The activities undertaken by you do not constitute an adventure or concern in the nature of trade, and therefore you are not in the course of carrying on an enterprise.

On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

The facts indicate that your parent had used the land (that is, property) for agistment in return for the agistment fees from the owners. Since your inheritance of the property in 20XX, you have continued to allow the land to be used for the agistment in return for the agistment fees (until the subdivision and sales of the subdivided lots of land).

An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. Further it is noted that activities can be excluded from the definition of enterprise if they are carried on by an individual without a reasonable expectation of profit or gain.

Paragraph 307 and Example 40 in MT 2006/1 are of relevance:

307. A gratuitous lease, licence or other grant of an interest in property made by an individual (other than a trustee of a charitable trust or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN) or a partnership where all or most of the partners are individuals will not, by itself, amount to an enterprise. It should have a commercial basis underlying it. This is because there needs to be a reasonable expectation of profit or gain for an enterprise carried on by an individual (other than a trustee of a charitable trust) or a partnership (where all or most of the members are individuals), see paragraph 9-20(2)(c) of the GST Act. However, where there is a reasonable expectation of profit or gain by the individual or partnership a gratuitous lease, licence or other grant of an interest in property may amount to an enterprise...

Example 40 - use of property on a continuous basis which is not an enterprise

321. Klara owns acreage and allows her neighbour to permanently agist a couple of mares on part of her land. She only charges a small amount for the agistment because her neighbour is a very good friend. Klara receives $20 per month agistment fees but this is insufficient to cover the costs of the rates for this part of the land.

322. Klara is not entitled to an ABN. She has granted a licence on a continuous basis for the neighbour's horse to graze on her property. However, the activity will not qualify as an enterprise on the basis that there is no reasonable expectation of profit or gain.

As stated above, the property was used for agistment in return for the agistment fees from the owners. You advised that the estimated net income after expenses were $XXXX for 2009/10; $XXXX for 2010/11; and $XXXX for 2011/12.

Although your activities are conducted in a small way, we consider that your circumstances are different from Example 40 of MT 2006/1 (where the agistments fees are insufficient to cover costs) as you are obtaining a profit or gain after covering your costs on a continuous basis.

As provided in section 9-20 of the GST Act, activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property are activities in carrying on an enterprise. Activities done by the entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise (paragraph 122 of MT 2006/1).

Further, carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. A change in purpose or use of all assets could result in the termination of an enterprise (paragraphs 140 and 142 of MT 2006/1).

Accordingly, you are carrying on an enterprise if you continued to grant a lease or licence on a continuous basis for another party to graze on your original property, and then dispose of (sold) that property. We note that in this circumstance, as discussed above, your disposal of the property would still be the mere realisation of a capital asset (and not a revenue asset), and the sales of the subdivided lots may be excluded from the calculation of your GST turnover (and hence you may not be required to register for GST).

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sales of the subdivided lots of land.

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.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b) supplies that are not for consideration.

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

d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

The property has been held by your parent and then yourself for a long time and rental income (agistment fees) has been derived from this property. As discussed above, your subdivision and sales of the subdivided lots of land is the mere realisation of a capital asset. The sales of the subdivided lots of land constitute the transfer of a capital asset and paragraph 188-25(a) of the GST Act applies to exclude the sales (amount) of the subdivided lots of land from the calculation of your projected GST turnover.

Further, you are a salary worker (that is, the salary is also excluded from your GST turnover) and your annual income from the agistment fees is less than $75,000. You are also not receiving income from carrying on any other enterprise.

Accordingly, you are not required to be registered for GST (and not currently registered for GST), and the sales of the subdivided lots of land are not subjected to GST.

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