Edited version of your written advice

Authorisation Number: 1012660654015

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Ruling

Subject: GST and property development

Questions

1) Will you be carrying on an enterprise for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2) Will you be required to register for goods and services tax (GST) for the purposes of your property development and account for GST?

Decisions

1) Yes, you will be carrying on an enterprise for the purposes of the GST Act.

2) Yes, you will be required to be registered for the purposes of your property development and account for GST.

Relevant facts and circumstances

• You purchased your family home over 20 years ago. It was your first home and it was a small house on a large block of land.

• You used this house as your home for over 20 years and raised your children there. Your original intention was to remain in this property as an extended family into your future generations.

• The large block enabled the lifestyle your family enjoyed. Recent developments throughout your suburb had an impact on your family's lifestyle. It has driven you to make a decision to want to leave this suburb for a new place similar to what your suburb was 23 years ago.

• Considering your decision to leave your suburb and to maximise what money you can leave with to purchase your new property, you contacted real estate agents and other professionals for advice. The best solution suggested was to sign up with a builder to completely demolish your house and build a number of units.

• You have already obtained the designs for the proposed unit development. This development including selling all units would take approximately 2 years to complete.

• You still have a mortgage on your property. You believe that your bank will approve the loan required for the development.

• When all the units are sold, you will be able to have enough money to purchase a property similar in content to the family home purchased by you over 20 years ago and have a lifestyle similar to what you had.

• You and your spouse have never before purchased and developed any land or undertaken activities in relation to land development.

• For the proposed development, you will be entirely dependent on the builder, the real estate agent and others for expertise.

• Our records indicate that you are currently not registered for GST.

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 - section 23-5

Reasons for the decisions

Decision 1

Taxable supply

Section 9-5 of the GST Act provides that:

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.

You will make a supply of your property for consideration to future purchasers by way of newly constructed units built on subdivided land. Your supply will be connected with Australia as the units are located in Australia. Therefore, you will satisfy paragraphs 9-5(a) and (c) of the GST Act.

The supply of newly constructed units is not a GST-free or an input taxed supply under any provision of the GST Act.

Accordingly, in order to determine whether your proposed sale of property will be a taxable supply, it is necessary to determine whether:

• the supply will be made in the course of furtherance of an enterprise that you carry on; and

• you will be required to be registered for GST.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act has defined what constitutes an enterprise for the purposes of the GST Act. Paragraph 9-20(1)(b) of the GST Act provides that amongst other things, an enterprise is an activity or series of activities done in the form of an adventure or concern in the nature of trade.

Your proposed sale of your property by way of newly constructed units on subdivided land can be treated as a once off sale or an isolated transaction of sale of property. It is necessary to determine whether your isolated transaction could be treated as an enterprise carried on in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) refers to the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

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.

Paragraph 265 of MT 2006/1 provides guidance for determining whether 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.

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.

In your case, there is a change of purpose for which the land was held, as you want to demolish the house and build a number of units. There is a coherent plan to subdivide the land and build new units. You have consulted experts in this filed and devised this plan of subdivision.

You will not carry out the project yourself. However, you have decided to subcontract the entire project to a builder.

You will be using a substantial loan obtained from your bank to finance this project. It is not known whether you will claim the interest on borrowed money as a business expense.

There will be a level of development of the land beyond that necessary to secure council approval for the subdivision. You will build new units on the land.

Considering the above arguments, we consider that your proposed activities taken as a whole constitute an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. This can be further confirmed by Example 31 given in MT 2006/1, which is quoted below.

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for :

•   their house to be demolished ;

•   the land to be subdivided ;

•   a builder to be engaged ;

•   two houses to be built ;

•   water meters, telephone and electricity to be supplied to the new houses ; and

•   a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

We consider that your project is very similar to the project quoted above. In the example, the clients built only two new units, whereas you will be building a large number of units. We consider that your proposed activities taken as a whole will constitute an enterprise and you will be entitled to an Australian Business Number (ABN). Therefore, paragraph 9-5(b) of the GST Act will be satisfied.

Decision 2

Registration for GST

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold.

As your enterprise will be to construct new units and sell them, the new units will be your trading stock.

As per the GST Act and regulations, current GST registration turnover threshold is $75,000. As each of your new units will be worth more than $75,000, you will meet the registration turnover threshold and will be required to be registered for GST. Therefore, paragraph 9-5(d) will be satisfied.

Accordingly, you will satisfy all the requirements of section 9-5 of the GST Act. The sale of each new unit will be a taxable supply. You will be required to account for the GST liability on each unit you sell.

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