Edited version of private advice

Authorisation Number: 1012629699330

Ruling

Subject: Goods and services tax (GST) and the sale of property

Question

Will GST be payable on your sale of the property?

Answer

No.

Relevant facts and circumstances

The partnership (you) acquired a large parcel of land (the property), which included a house, many years ago. The property is located in Australia.

You used the land in a farming operation, which you ceased to operate many years ago.

You (as a partnership) have not used the property for any purpose since you ceased farming on it.

One of your partners used the house as their family's residence until a number of years ago. It has not been used for any purpose since then.

In a certain year, you were registered for GST as your business turnover was over the compulsory registration threshold.

From a certain year to the present, you have continued to derive business income from contract agricultural services.

You deregistered for GST a number of years ago due to the business turnover being below the compulsory registration threshold. Your income from contract services is under $75,000 a year.

You entered into an option agreement with a group of property developers that you approached, for the sale of the land.

The eventual sale of the land and the exercise of the option by the purchaser was subject to the purchaser obtaining the necessary council approvals for the development of the land.

The land has now undergone realignment of lots on the parcel of land in consultation with local council. All plans, submissions and costs for this approval process have been borne done/borne by the purchaser. Your partners have facilitated where necessary to enable the realignment to take place. However, you have not actively participated in the process nor do you hold an interest in doing so other than to allow the eventual sale of the land to take place.

There are currently multiple lots on the property, which will be sold under multiple separate contracts. The total proceeds from the sale of lots under any given contract will be over $75,000.

You will not undertake any construction or development work in relation to the subdivision. This will be done by the buyers after sale.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1)

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

Reasons for decision

Summary

GST will not be payable on your sale of the property because you are not registered for GST and will not be required to be registered for GST when you sell the property.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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)

You will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act because you will supply property, by way of sale, for consideration and the property is located in Australia.

Supply in the course or furtherance of an enterprise

In accordance with subsection 9-20(1) of the GST Act, an enterprise includes

• an activity or series of activities done in the form of a business (paragraph

9-20(1)(a) of the GST Act); and

• an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act).

Section 195-1 of the GST Act provides that 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of an enterprise.

Isolated transactions and sales of real property

Miscellaneous Taxation Ruling MT 2006/1 provides the Australian Taxation Office view on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTR 2006/1 provides that MT 2006/1 can be relied on for GST purposes.

Paragraphs 262 and 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraph 258 of MT 2006/1 distinguishes between trading assets and investment (capital) assets. It states:

258. United Kingdom cases categorise assets as either trading assets or 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.

Paragraph 295 of MT 2006/1 provides a list of factors that assist in determining whether a property subdivision activity is an enterprise. 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 accordance with example 30 in MT 2006/1, where a subdivision involves major construction/development work, this is an indicator that the subdivision is an enterprise.

You have held the property for a reasonable period of time as an income producing asset, you used the land for your farming enterprise. You have not used the property for any purpose since you ceased farming on it. Therefore, you have been holding the property as a capital/investment asset.

Additionally, you will not do any construction/development work in relation to the subdivision. The buyers will do this work after sale.

Therefore, you are not carrying on a property development/trading enterprise and your sale of the property will be the mere realisation of a capital asset.

Activities done in the course of the termination of an enterprise

Paragraphs 140, 142, 143 and 148 of MT 2006/1 discuss the process of terminating an enterprise. They state:

140. 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. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

142. A change in purpose or use of all assets could result in the termination of an enterprise. A change could occur where an asset is no longer used by the entity in the enterprise and is instead used for private purposes.

143. If some assets continue to be held by the entity because they cannot be disposed of or converted to another use and those assets are worthless or likely to be of little value, the enterprise can still be said to have terminated.

Example 13 - an enterprise that has not terminated

148. Joel, who has been farming cotton for a number of years, decides to retire, sell up everything and move to town. All assets are sold with the exception of a number of bales of cotton. Joel expects to sell the cotton at some future time and pays to have it stored in a commercial warehouse. The enterprise has not terminated until the cotton is sold or is determined to be worthless or of little value.

In accordance with paragraphs 140, 142, 143 and 148 of MT 2006/1, your farming enterprise will not terminate until you have sold the property as:

• you used the property in your farming business; and

• you did not convert it to another purpose or use; and

• the property has substantial value; and

• you will sell it.

Therefore, your sales of the lots will be something you do in the course of terminating the farming business (which you ceased to operate in a certain year). Hence, these sales will be supplies you make in the course or furtherance of a farming enterprise that you will be carrying on at the time of sale. Therefore, you will meet the requirement of paragraph 9-5(b) of the GST Act.

GST registration

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise; and

(b) its GST turnover meets the registration turnover threshold of $75,000.

You will be carrying on an enterprise when you sell the lots. Therefore, you will meet the requirement of paragraph 23-5(a) of the GST Act.

Subsection 188-10(1) of the GST Act sets out when GST turnover meets a particular turnover threshold. It states:

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.

Section 188-15 of the GST Act sets out how to calculate current GST turnover.

Subsection 188-15(1) of the GST Act provides that 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 (with some exclusions).

Subsection 188-20(1) of the GST Act provides that 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 (with some exclusions).

In accordance with paragraph 188-25(a) of the GST Act, in working out your projected GST turnover, you should disregard any sales of capital assets.

Your projected GST turnover at the time of sale of any of the lots will not include the proceeds from the sales of the lots because these sales will be sales of a capital asset. Additionally, since your income from contract services is under $75,000 a year, your projected GST turnover will be under $75,000 a year when you sell the lots. Hence, the requirement of paragraph 23-5(b) of the GST Act will not be met. As you will not meet all of the requirements of section 23-5 of the GST Act, you will not be required to be registered for GST when you sell the lots.

Additionally, you are not registered for GST.

Hence, you will not meet the requirement of paragraph 9-5(d) of the GST Act.

As you will not meet all of the requirements of section 9-5 of the GST Act, you will not make taxable supplies when you sell the lots. Therefore, GST will not be payable on your sales of the lots.

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