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Edited version of private advice

Authorisation Number: 1012654571929

Ruling

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

Question

Are you making a taxable supply when you sell subdivided vacant land?

Answer

No. Consequently, you must repay the GST credits claimed for the subdivision expenses.

Relevant facts and circumstances

You are a partnership carrying on a commercial leasing enterprise in relation to shops.

Your turnover for the commercial leasing enterprise is below the GST registration threshold.

You have registered for GST as you believed that you would be carrying on an enterprise in regards to a subdivision of land and wanted to claim the GST credits.

You now believe that you are not carrying on an enterprise in regards to a subdivision of land and should not have registered for and claimed GST credits.

In your private capacity, you purchased land (land 1) and built a house, your primary residence.

In your private capacity, you purchased further adjacent land (land 2). You have run steers on this land to keep the grass down. It has not been used for commercial purposes.

You have subdivided Land 1 into two blocks, a block with your primary residence (Lot 1) and another block (Lot 2). You have subdivided Land 2 into two blocks (Lots 3 and 4).

These Lots are in a different location to your shops and are not part of the commercial leasing enterprise.

You are selling the three subdivided blocks, Lots 2, 3 and 4.

The Shire approved the subdivision subject to various conditions. You have provided a copy of the Planning Permit.

You have claimed GST credits on the development costs.

All of the Shires conditions have been met and they have approved the subdivision.

You have engaged a real estate agent to sell the blocks of land. None have been sold at this stage.

You have funded the development partly with personal capital and partly with a bank loan. You have not claimed the interest on the bank loan as a business expense.

The zoning of the land is residential and has not changed.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1).

Reasons for decision

In this ruling, please note:

You must pay the GST payable on any taxable supply that you make.

Section 9-5 states:

In your case, you will make a supply of land in Australia for consideration and you are registered for GST satisfying subsections 9-5(a), (c) and (d). Further, the GST-free and input tax provisions do not apply in your circumstances.

While you carry on an enterprise of commercial leasing, it is necessary to determine if the supply of the land is made in the course or furtherance of an enterprise you carry on.

Enterprise

Subsection 9-20(1) states:

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 carrying on an enterprise.

Paragraphs 262 and 263 of MT 2006/1 state:

Your subdivision and sale of the property will be a 'one-off' or isolated real property transaction.

Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade' and state:

In your case, the purpose for which the land was held remains residential. The additional land acquired was acquired a long time ago and you have not been involved in property developments previously. You had a coherent plan for the subdivision in that you have lodged the development application and completed all the requirements to obtain the subdivision approval and you have also engaged a real estate agent to sell the properties. However, the level of development on the land consisted only of that necessary to obtain Shire approval for the subdivision and no buildings have been erected on the land. Also, while you have borrowed funds to partially finance the subdivision, you have not claimed the interest as a business expense.

We consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the subdivision does not amount to an enterprise and is a mere realisation of a capital asset.

Therefore, you did not satisfy paragraph 9-5(b) in relation to the subdivision of land. As all the requirements of section 9-5 are not satisfied if you proceed with the sale of the land in the manner outlined, you will not be making a taxable supply. There will be no GST on the sale of the land.

As you have claimed GST credits in relation to the subdivision you will need to pay back the GST credits. There is information available on the ATO website ato.gov.au titled, Correct a mistake or dispute a decision that may be of assistance.


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