Edited version of your written advice

Authorisation Number: 1012679256521

Ruling

Subject: GST and sale of land

Question 1

Is the entity required to be registered for GST?

Answer

Yes.

Question 2

If the entity is required to be registered for GST, will the sale of the lots be a taxable supply?

Answer

Yes.

Relevant facts and circumstances

The entity has been registered for GST for a number of years.

The entity has a number of corporate investors and beneficiaries.

The entity has progressively purchased a number of adjacent properties.

The contract for the sale of the first property shows that the property was purchased with settlement deferred for a number of years. The contract provides that the entity was to subdivide the property and give some of the subdivided lots to the vendor. The contract provided that in the event of the authorities not granting approval for the subdivision, the entity was required to pay an additional sum of $X to the vendor.

Around the same time that the contract for the sale of the first property was exchanged, the entity entered into contracts to acquire a number of other adjacent properties. The settlements of these properties were also deferred for a number of years.

Under the contract of sale of the above properties the entity was required to pay a specified amount as a deposit and the balance was payable on settlement.

Given the capital outlay required, the parties to the entity opened up an opportunity to some of their family members and associates to invest in the entity. The acquisitions were funded by bank loans and members' funds.

Prior to the settlement dates of the contracts of sale of some of the above properties, the entity determined that it may be the right time to release the asset. As such, the decision was made that the properties would be advertised in various media for sale.

Prior to marketing the above properties, the entity negotiated with a number of other adjacent/adjoining property owners and took out options to purchase these properties. The options were to be exercised at a time close to the deferred settlement dates of the properties for which contracts were exchanged. The entity included this additional land in the parcel that it placed on the market. As the offers were unsatisfactory, the entity did exercise the options to purchase the additional properties.

Shortly after, the contracts of sale of some of the properties with deferred settlements were completed.

After a period of time since the settlement date of the first property the entity paid the additional sum of $X to the vendor of that property.

A few years later additional investors joined the entity and cleared the bank debt.

The entity then sold one of its properties. The entity wanted to keep a specified part of the property as it was of future value to them. Steps were taken by the entity to subdivide the property in order to keep the specified part of the land. However the subdivision did not proceed. Instead the parties entered into the option to purchase agreement under which the purchaser granted the entity an irrevocable option to repurchase the specified part of the land for a nominal amount within a certain period. The contract of sale provides that the purchaser of this property is not permitted to sell any part of the property without first offering it to the entity.

On a specified date the entity entered into the contract to purchase further adjacent properties as they provided access to the main roads. These acquisitions were fully funded by bank loans. Also, in the same month the entity entered into a development management agreement with a specified entity (development manager) for development and sale of the above properties. The development costs will be financed by a bank loan.

According to the development management agreement, the option land is included as part of the land which is to be developed by the development manager.

The entity remains the registered proprietor of the land during the development and is the beneficial owner of the land. The development manager has no beneficial interest in the land. The entity has entered into the development management agreement to realise the value of the land and is not involved with the provision of the development management services.

Some parts of the subject land cannot be subdivided into small blocks. However the zoning of other parts of the land allows for smaller lots. The process of having a large area of land re-zoned to allow for smaller house lots has commenced. The entity entered into the development agreement to be in a position to act should the re-zoning process be successful.

Should the entity choose to develop the land, rather than sell it after re-zoning takes place, the subdivision would be funded via borrowings from a financial institution. It would be a staged process and require the support of a financial institution. Currently, the entity has no indication of the position of the infrastructure work or the costing.

A few of the properties acquired by the entity contain old houses and the entity has leased the residential premises.

The total land holding equates to approximately X hectares and is situated in Australia. The entity intends to develop and subdivide the land into Y number of residential lots.

The main business of the entity has been described as 'land development and subdivision' in its income tax returns.

Since its inception, the entity has claimed some input tax credits in relation to accounting, legal fees and other general expenses.

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 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 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Questions 1 & 2

Summary

The entity is required to be registered for GST as it is carrying on a land development enterprise and the proceeds from the sale of the land are included in its GST turnover.

The sales of the proposed subdivided lots will be taxable supplies as the supplies are made in the course of a land development enterprise carried on by the entity.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. This section 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)

In this case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the sale of the land in its entirety to a developer or as subdivided lots will be for consideration and connected with Australia.

Therefore, what needs to be determined is whether the sale of the land in its entirety or as subdivided lots will be in the course or furtherance of an enterprise that the entity carries on, whether the entity is required to be registered for GST and whether the sale is input taxed or GST-free.

Whether the sale of the land is in the course or furtherance of an enterprise that the entity carries on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, 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 …

Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the word 'enterprise' for the purposes of entitlement to an ABN. The principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

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 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 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 an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions these include TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.

Income Tax Ruling TR 92/3 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. Paragraph 6 of TR 92/3 states:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Paragraph 7 of TR 92/3 provides that the relevant intention or purpose of the entity (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 13 of TR 92/3 outlines some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

(a) the nature of the entity undertaking the operation or transaction;

(b) the nature and scale of other activities undertaken by the taxpayer;

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out;

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h) the timing of the transaction or the various steps in the transaction.

Further, Taxation Determinations TD 92/126, TD 92/127 and TD 92/128 provide that where land is purchased for the purpose of development, subdivision and sale, the sale of the land is on revenue account even if:

• the project ceases and recommences some years later

• the development is abandoned and the land is sold in a partly developed state some years later, or

• the development and subdivision do not proceed and the land lies idle until it is eventually sold some years later.

Consistent with the views expressed in the income tax public rulings, MT 2006/1 states at paragraph 270 that:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

The facts of the case indicate that the entity acquired the properties for no other purpose than for resale at a profit and this was its intention since it acquired the first property. The entity has taken elaborate steps in acquiring land for the purpose of resale at a profit. Since its establishment, the entity has been actively involved in purchasing or attempting to purchase adjacent/adjoining parcels of land to increase its landholding and add to the sale value of the land. The entity has been financing the acquisitions through borrowing funds from financial institutions or opening up opportunities to its associates or new investors. The nature of the entity; the manner in which the transactions were entered into; the nature, scale, complexity and timing of the activities undertaken by the entity support the view that the activities of the entity are an adventure or concern in the nature of trade. The entity is not disposing of a long term investment asset.

As stated earlier where land is purchased with the intention of resale at a profit the activities are an enterprise. This is the case whether the land is sold as is or whether it is subdivided before sale. Therefore the sale of the land in its entirety or as subdivided lots will be in the course or furtherance of a land development enterprise that the entity carries on. Consequently, the requirement of paragraph 9-5(b) of the GST Act will be met.

Whether the entity is required to be registered for GST

The entity is currently registered for GST but considers that it is not required to be registered for GST as there was no intent to develop the land.

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act. This section 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.

Based on the information provided, the entity is supplying residential premises by way of lease. The entity it is not required to be registered for GST in respect of this enterprise as the supplies of residential premises by way of lease are input taxed and the value of these supplies is not included in calculating the GST turnover of the entity.

Further, section 188-25 of the GST Act requires an entity to disregard the following when calculating its projected annual turnover:

• any supply made, or likely to be made, by the entity by way of transfer of ownership of a capital asset of it; and

• any supply made, or likely to be made, by the entity solely as a consequence of:

• ceasing to carry on an enterprise; or

• substantially and permanently reducing the size or scale of an enterprise.

The ATO view on the meaning of annual turnover and the effect of section 188-25 of the GST Act on projected annual turnover is set out in Goods and Services Tax Ruling GSTR 2001/7.

GSTR 2001/7 provides that if the means by which and entity derives 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 (paragraph 35). Further, when an isolated transaction consists of acquiring a single asset for resale at a profit, the activity will be an enterprise. In this situation, the disposal of that single asset is neither the transfer of a capital asset nor a transfer solely as a consequence of ceasing to carry on an enterprise (paragraphs 46 and 47).

In this case, the entity is also carrying on a land development enterprise as it acquired land for the purpose of resale at a profit. The sale of the land, in its entirety or as subdivided lots, is therefore a sale of a revenue asset rather than a capital asset. As such, the sale of the land does not fall within the exclusions in section 188-25 of the GST Act.

The value of the land or the subdivided lots will be included in calculating the entity's projected annual turnover. The entity will be required to be registered for GST as its projected annual turnover will meet the registration turnover threshold. Therefore, the sale of the land or subdivided lots also meets the requirements of paragraph 9-5(d) of the GST Act.

Whether the sale of the land in its entirety or as subdivided lots is input taxed or GST-free

The sale of land will be input taxed if it meets the requirements of section 40-65 of the GST Act.

Based on the information provided, the sale of land in the circumstances described will not be GST-free.

Conclusion

Where the supply of the land or the subdivided lots is not input taxed or GST-free as the case maybe, the supply meets all the requirements of section 9-5 of the GST Act and the sale is a taxable supply. The entity is liable to pay an amount equal to 1/11 of the consideration that it receives for the supply of the land or the subdivided lots as GST.

Margin Scheme

Where a sale of real property is a taxable supply, the sale may be made under the margin scheme pursuant to Division 75 of the GST Act provided certain requirements are met.

Information on the margin scheme is available on our website.

Entitlement to input tax credits

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out when an entity makes a creditable acquisition. It states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Section 11-15 of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise, however, you do not acquire the thing for a creditable purpose to the extent that:

• the acquisition relates to making supplies that would be input taxed, or

• the acquisition is of a private or domestic nature.

The entity is entitled to input tax credits for acquisitions relating to the sale of the land provided the acquisitions meet all the requirements of section 11-5 of the GST Act.

It should be noted that the entity is not entitled to input tax credits in relation to acquisitions that relate to the supply of the residential premises by way of lease.

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