Edited version of your private ruling

Authorisation Number: 1012563430662

Ruling

Subject: GST and cancellation of GST registration prior to making a supply of land

Question

If you deregister for GST prior to making the supply of the Property, will the supply of the Property be a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999?

Answer

The Commissioner will not cancel your GST registration prior to you making the supply of the Property. Therefore, your supplies of the Property will be taxable supplies to the extent they satisfy section 9-5 of the GST Act, and are not input taxed.

Relevant facts and circumstances

You are a company incorporated in Australia that is registered for GST.

You own a large piece of land that comprises X lots and is located in Australia. Some of the lots are vacant land and a discrete portion of one of the lots contains a number of residential premises. The premises are separated by distances of between 30 and 80 metres. The residential premises occupy approximately one hectare of one of the lots

You are now considering selling the Lots to one or more eventual purchasers in their current state. The form of the sales may be as follows:

· all the lots all in one line

· the sale of a lot or lots separately, or

· the sale of an interest as tenant in common in one or more of the lots.

The above lots are the remaining land from a much larger piece of land that you purchased some time ago.

You purchased the land as a long term investment and to hold the land as an income earning real property investment which would be subject of a long term lease whereby the lessee also used the property for agistment. The land is in a rural area and had a number of residences and other buildings (modified to enable them to be lived in) and animal facilities.

You have consistently derived income from the lease of the land. Initially horses were agisted on the whole property and subsequently the land was simply used for residential purposes by the lessees. In the previous financial year you received income from renting the residential premises on the property of an amount less than $75,000.

During the period of time you have held these properties you have incurred a number of expenses. You have not claimed any GST on the expenses incurred for the rental of the residential premises. However you advised that you have believe you have mistakenly claimed expenses in relation to various costs including costs associated with the X sales of land or interests in the land in and the current sale process. You have undertaken to revise your BAS to exclude these claims if it is ruled that there is no development enterprise.

You advised that costs for the non rental portion of the property were:

§ fees paid for professional advice in connection with

o (1) the broad acre subdivisions undertaken

o (2) concept planning consistent with local government and state planning authority requirements. These include fees paid to town planning, environmental, water management, engineering and surveying consultants

§ costs of general maintenance of the non-rental portion of the property including payments for firebreak contractors, tree loppers and some removal of old machinery from the property

§ Amounts paid for borrowings to mortgage brokers, valuers and legal firms

§ Accounting and legal services and the balance of

§ Amounts paid for advertising and a property consultant for specialist advice in relation to the current sale process.

§ You are currently advertising the property.

You have dealt with your property a number of times since you acquired it in preparation for expected sales.

You advised that you received unsolicited offers in relation to your property.

Relevant legislative provisions

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 25-55,

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

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

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

Reasons for decision

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.

Note: The terms marked with an asterisk are defined in section 195-1 of the GST Act.

Under paragraph 9-5(d) of the GST Act, one of the requirements for making a taxable supply is that the supplier is:

(i) registered for GST, or

(ii) required to be registered for GST.

You are currently registered for GST but have asked that if you were to deregister for GST prior to making the supply of the Property will you be making a taxable supply. Under the circumstances, we need to consider section 25-55 of the GST Act, which provides:

(1) The Commissioner must cancel your *registration if:

(a) you have applied for cancellation of registration in the *approved form; and

(b) at the time you applied for cancellation of registration, you had been registered for at least 12 months; and

(c) the Commissioner is satisfied that you are not *required to be registered.

Note: Refusing to cancel your registration under this subsection is a reviewable GST decision (see Subdivision 110-F in Schedule 1 to the Taxation Administration Act 1953).

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

On the facts provided, you satisfy paragraph 23-5(a) of the GST Act as you are carrying on an enterprise that includes the leasing of property to tenants who reside in the residential premises.

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

(1) Your registration turnover threshold (unless you are a non-profit body) is:

(a) $50,000; or

(b) such higher amount as the regulations specify.

The A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) specifies that that for paragraph 23-15(1)(b) of the GST Act, the amount is $75 000.

Paragraph (a) of the definition of 'GST turnover' in section 195-1 states that in relation to meeting a turnover threshold - has the meaning given by subsection 188-10(1) of the GST Act, and the subsection states:

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

(a) 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

(b) your projected GST turnover is at or above the turnover threshold.

Under section 188-15 of the GST Act, generally:

(1) Your current 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 the 12 months ending at the end of that month, other than:

(a) supplies that are *input taxed; or

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

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

Under section 188-20 of the GST Act, generally:

(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:

(a) supplies that are *input taxed; or

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

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

In your case, the income you have derived in the current month and the preceding 11 months has been income derived from:

lease of residential premises and

bank interest

Lease of residential premises and bank interest are generally input taxed supplies under Division 40 of the GST Act and therefore will be excluded in calculating your current and projected GST turnover. Accordingly, your current GST turnover may not meet the GST registration turnover threshold of $75,000.

Additionally, in calculating projected GST turnover, section 188-25 of the GST Act provides:

In working out your *projected GST turnover, disregard:

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

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

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

Of relevance for consideration in this case is paragraph 188-25(a) of the GST Act.

Goods and Services Tax Ruling GSTR 2001/7, Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover includes guidelines on the meaning capital assets. GSTR 2001/7 explains:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject'¹⁴ of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.¹⁵

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income.....

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'.¹⁶ An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock¹⁷) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.¹⁸

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

In your case, when you supply the Property you will be supplying:

(a) residential premises, that is property that comprises the residences and the part of the land that relates to the residences, and

(b) vacant land

(a) Residential premises

In considering the explanation in GSTR 2001/7, we consider the supply of the part of the lots that comprises residential premises will be the supply of a capital asset used in yielding the lease income. Accordingly, the supply will satisfy paragraph 188-25(a) of the GST Act, that is, the supply will be made by you by way of transfer of ownership of a capital asset of yours and disregarded in working out the projected GST turnover.

(b) Vacant land

When you supply the parts of the land that are vacant land, we need to consider whether the land is 'capital asset' or 'revenue asset' and therefore for the purposes of GST whether you were conducting an enterprise in regards to your activities on the land, outside of the leasing enterprise

Enterprise

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'.

§ a business encompasses trade engaged on a regular basis.

§ an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 explains that 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. It refers to 'the badges of trade' and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

· Assets can be categorised as trading/revenue assets or capital/ investment assets. 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.

· Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

The property in part was held as part of your leasing enterprise. We acknowledge that the property was held as a capital asset for the purposes of that leasing enterprise.

However, the relevant issue in your circumstances is whether you changed your intention in regards to portions of your property and conducted a development enterprise.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From these 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 as opposed to the mere realisation of a capital asset.

Paragraphs 178 of MT 2006/1 set out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions

Indicators of carrying on a business.

§ 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.

Factors used to examine an isolated transaction:

§ 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 addition other factors that may be relevant include:

§ the length of time the property had been held and the purpose to which it was put to in that time; and

§ the personal involvement in the development activity.

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.

In applying the above factors to this case, we acknowledge that:

§ The lots of land that you propose to sell are the remaining land from the original land purchased a significant time ago.

§ You have consistently used portions of your land as a capital asset to derive income from the lease of the land. Initially, horses were agisted on the land as well and subsequently the land was only used for residential purposes by the lessees.

§ Your original intention in purchasing the land was to hold it as an income earning long term investment. The characteristics of the land predisposed the land to this use, as the land is rural in nature and contains a number of residences, and other buildings converted or partly converted into residences and animal facilities.

§ You advised that you did not approach either the initial or current developers and that you were not intending to conduct a development enterprise.

§ Although you reported supplies from this activity and claimed credits you believed this was a mistake.

§ In addition you contend that the activities were no more than was necessary to gain council approval.

§ Although there have been more than one sale they are spaced over a number of years and you have advised that the current sale is due to the age of your director and their needs to ease into retirement.

While the factors above in isolation would support the view that you are merely realising a capital asset when you sell the lots, we consider that the following factors lend support to the conclusion that your supplies are made in the course or furtherance of an enterprise of subdivision and sale:

§ In the period of your ownership of the Property you have carried out several separate subdivisions of the Property in preparation for sales and a number of activities which resulted in the earlier sales and the current proposed sale.

§ Your current activity involving preparing the property for sale is a significant commercial activity and you intend to make a profit

§ You intended to engage in the activity as you have earlier engaged in similar activities

§ The activity is conducted in a similar manner to other entities similar in size and structure to yourself

§ You have had experience in these developments and where you didn't have the experience you engaged relevant advisers

§ You incurred borrowing costs and costs associated with mortgage brokers, valuers and advisors in relation to the subdivision and sale of the lots over the last XX years

§ Although we accept that you were approached by the purchasers, you (personally and through your legal advisors) have conducted the subdivision, sought finance and advice on how to get the best price.

§ Your sale proceeds are expected to be significant and

§ You are currently marketing the property for sale.

On weighing up these factors there are for's and against's. However we note that:

§ You are a company and the relevant land was purchased in your company's name.

§ You registered for GST in anticipation of a sale of the land and claimed credits on your costs associated with that broadacre subdivision and the later developments.

§ you have held yourself out as registered for GST for a significant period of time and claimed GST credits on this activity up until the lodgement of this ruling application.

In considering all the relevant facts surrounding your circumstances, we consider the purpose for which that portion of the land not used for the residential leasing activity has changed over time

On balance, we consider that over the period that the land was held by you, its character has changed from capital to revenue. Therefore, when you sell the remaining three lots we consider the part or parts of the land that are not residential premises will not be the sale of a capital asset. Accordingly, paragraph 188-25(a) of the GST Act will not apply and the supply (likely to exceed $75,000) will be included as your projected turnover.

Under the circumstances the Commissioner is not satisfied that you are not required to be registered for GST. Therefore, the Commissioner will not cancel your GST registration under subsection 25-55(1) of the GST Act if you apply to deregister prior to the supply of the relevant land.

This means your supply of the Property will be a taxable supply under the GST Act where all the requirements of section 9-5 are met, other than any parts of your supplies that will be input taxed.

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