Edited version of your written advice

Authorisation Number: 1012699510533

Ruling

Subject: GST and registration

Question 1

Are you required to be registered for goods and services tax (GST) in respect of the subdivision of your property and the subsequent sale?

Answer

No.

Question 2

Can you backdate the cancellation of your GST registration?

Answer

Yes.

Question 3

Will the Commissioner exercise the discretion under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to refund any incorrectly remitted GST from your supply of land?

Answer

No.

This ruling applies for the following periods:

1 July 2010 to 30 June 2014.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You owned a property ('the property').

You are a partnership registered for GST.

The property

You purchased the property prior to the introduction of GST and you have used it solely as your main residence until around 200X when you decided to sub-divide the property. The property contained your house and surrounding land and gardens.

You moved out of the house to an adjoining property.

Title to the property was held as joint tenants.

You had a valuation of the property carried out in 20YY.

The development

You subdivided the property into a number of residential allotments.

The lots varied in size.

You had a valuation of the property done.

You appointed an entity as managers of the project.

You had little direct involvement in the physical activity of the land development.

The level of development of the land was enough to secure Council approval for the subdivision. You did not undertake any development past that required for Council approval.

You funded part of this development through bank finance. You have produced a property development feasibility study.

You sold a number of the lots yourself by interested parties approaching you with interest to buy.

You engaged a local real estate agent to sell some of the lots on your behalf.

You have not subdivided property or conducted a property development enterprise before. The property was not brought into account as a business asset. You did not acquired additional land as part of the development. You have not claimed the interest on money borrowed to defray subdivisional costs as a business expense.

Your contracts of sale stated that the price includes GST.

Your contracts of sale stated that you agreed to use the margin scheme to calculate the GST.

You claimed input tax credits on your acquisitions and also remitted GST on your supplies in your activity statements.

You state that the purchasers of the blocks of land were not registered for GST.

You have not reimbursed the purchasers for any GST included in the purchase price of the blocks of land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 7-1

Section 9-5

Section 9-20

Section 23-5

Taxation Administration Act 1953

Section 105-65 of Schedule 1

Reasons for decision

Question 1

Summary

You are not required to be registered for GST as your property development is not an enterprise but a mere realisation of a capital asset.

Detailed reasoning

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act defines a taxable supply. It 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 is *GST-free or *input taxed.

Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act.

In your case, you have made supplies for consideration and the supplies are connected with Australia. It must now be determined whether the supplies were made in the course or furtherance of an enterprise that you carry on, and whether you were required to be registered for GST.

Under section 23-5 of the GST Act you are required to be registered if:

• You are carrying on an enterprise; and

• Your GST turnover meets the registration turnover threshold.

'Enterprise' is defined in subsection 9-20(1) of the GST Act. It states:

An enterprise is 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; …

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 discusses when an entity can be said to be carrying on an enterprise. Goods and Services Tax Determination

GSTD 2006/6 Goods and services tax: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? GSTD 2006/6 provides that the reasons in MT 2006/1 are considered to apply equally to the term 'enterprise' in the GST Act and can be relied on for GST purposes.

Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity or a series of activities that amount to an enterprise. Paragraph 159 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. Example 15 in MT 2006/1 provides that an activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if an enterprise has been carried on.

In the form of a business

An enterprise includes an activity, or series of activities, done in the form of business. MT 2006/1 presents some indicators of business derived from case law. These are:

• 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.

There is no single test to determine whether a business is being carried on.

In your case, you have not conducted a significant commercial activity and you did not intend to engage in a significant commercial activity. You intended to make a profit from the subdivision activity and it was expected that the activity would be profitable. You have not subdivided property before. The subdivision activity was carried on in a businesslike manner and records were kept, but the subdivision activity was managed by a project manager appointed by you. The activities were of a reasonable size and scale. No business plan existed and there were no commercial sales of product. You do not have relevant knowledge or skill in subdividing property, and you engaged contractors and a real estate agent. Considering these factors, the sale of the subdivided lots was not in the form of a business.

In the form of an adventure or concern in the nature of trade

There is also no single test to determine what is an adventure or concern in the nature of trade.

MT 2006/1 recognises case law stipulating that an adventure or concern in the nature of trade implies a commercial, profit-making undertaking or scheme. Paragraph 244 of MT 2006/1 provides that this undertaking must have the characteristics of a business deal and be of a revenue nature. Paragraph 247 of MT 2006/1 provides that where the property being sold provides personal enjoyment to the owner it is more likely to be an investment rather than a trading asset. Paragraphs 249 to 255 of MT 2006/1 provide that the length of ownership, the frequency of the transactions, supplementary work on the property, the circumstances that were responsible for the realisation and the motive are also relevant factors when determining whether an activity is in the form of an adventure or concern in the nature of trade.

In your case, you owned the property for a long period of time as your primary residence. The property provided personal enjoyment to you as your home. You engaged in the subdivision activity in an attempt to realise the value of your property. This subdivision activity is infrequent, as you did not make any other earlier attempts to subdivide the property. Considering these factors, the sale of the subdivided lots was not in the form of an adventure or concern in the nature of trade.

Isolated transactions and sales of real property

MT 2006/1 also provides guidance on whether an entity is carrying on an enterprise where there is a 'one off' sale of real property. Paragraph 266 of MT 2006/1 provides that in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. 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.

Paragraph 265 of MT 2006/1 states factors to consider when determining whether an isolated sale of real property is a business or a concern in the nature of trade. These are:

• 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 your case, there is no change of purpose for which the land was held; it was your primary residence. You did not acquire any additional land. The parcel of land as a whole was not brought into account as a business asset. You have borrowed money to finance the subdivision; however, you have not claimed the interest on the borrowed funds as a business expense. You engaged contractors and project managers to carry out the subdivision. You did not develop the land beyond that necessary to secure Council approval for the subdivision. You did not erect any buildings on the land as part of the subdivision. Considering these factors, your sale of subdivided lots is the mere realisation of a capital asset.

As the sale of the property is a mere realisation of a capital asset, it is not made in the course or furtherance of an enterprise that you carry on.

As you are not carrying on an enterprise you are not required to be registered for GST. Therefore, the requirements in section 9-5 of the GST Act are not met. As you do not meet all the requirements of section 9-5 of the GST Act, the sales of your subdivided lots are not taxable supplies. There is no requirement to report GST on the sale of the lots and you cannot claim input tax credits for the associated acquisitions.

Question 2

Summary

As you are not carrying on an enterprise you are not entitled to register for GST. You were never required to register for GST therefore you can backdate the cancellation of your GST registration.

Detailed reasoning

Under section 23-5 of the GST Act you are required to be registered if:

• You are carrying on an enterprise; and

• Your GST turnover meets the registration turnover threshold.

As you are not carrying on an enterprise you are not required to register for GST.

Further as you are not carrying on an enterprise, any acquisitions you have made would not be for a creditable purpose. Therefore you are not entitled to claim any input tax credits on your acquisitions.

Following the decision in Naidoo & Anor v FC of T, 2013 ATC 10-323 (Naidoo) the Commissioner accepts that the activity statements in question should reflect the correct amounts of GST payable for the periods in question. The Commissioner will correct the activity statements to reverse any incorrect input tax credits claimed.

Question 3

Summary

As you were not carrying on an enterprise you are not entitled to claim any input tax credits on your acquisitions as they were not for a creditable purpose. Further your supplies were not subject to GST and there was no GST payable by you to be remitted to the Australian Taxation Office (ATO).

The Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply.

However, the Commissioner is not satisfied that you reimbursed a corresponding amount to the recipient of the supply and so need not give you a refund.

Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. Your circumstances do not warrant the exercise of the discretion to refund to you the GST amounts you have incorrectly remitted to the ATO.

As stated previously, following the decision in Naidoo the Commissioner accepts that the activity statements in question should reflect the correct amounts of GST payable for the periods in question. The Commissioner will correct the activity statements. However, this does not mean that a refund will issue.

Section 105-65 does not apply to restrict a refund where the customer has already been reimbursed. Therefore this option is always open to suppliers. Otherwise, it is for the supplier to demonstrate that its circumstances make it appropriate for the Commissioner to give a refund.

Detailed reasoning

Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the TAA.

However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied.

Whether subsection 105-65(1) of Schedule 1 to the TAA applies to your circumstances

The restriction on refunds of overpaid GST under subsection 105-65 (1) of Schedule 1 to the TAA will apply if all three of the following conditions are satisfied:

• there was an overpayment of GST,

• a supply was treated as a taxable supply when it was not a taxable supply or the arrangement does not give rise to a taxable supply to that extent, and

• either the recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST.

Miscellaneous Tax Ruling MT 2010/1 provides the view of the Commissioner on the application of section 105-65 of Schedule 1 to the TAA.

In your case, you remitted GST on the sale of your blocks of land under the margin scheme and reported an amount in your activity statements when the supply of the blocks were in fact not a taxable supply. It follows that you remitted more GST than was legally payable and that there has been an overpayment of GST.

You have advised that the recipients of your supply were not registered for GST purposes and have not claimed any part of the GST included in the acquisition of your blocks as an input tax credit. You have also advised that the recipients have not been reimbursed for any amount corresponding to the GST overpaid.

As the three conditions of section 105-65 of Schedule 1 to the TAA are satisfied, the section applies and the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA.

However, it is the view of the ATO in paragraph 27 of MT 2010/1 that the Commissioner may exercise a discretion and choose to pay a refund even though the conditions in paragraphs

105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied.

Paragraphs 116 and 117 of MT 2010/1 state:

116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.… However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(1)(a), 105-65(1)(b) and 105-65(1)(c) are satisfied. It is to that limited extent that the Commissioner has a discretion.

117. The Commissioner considers that the words "need not", in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances….

This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of CoT 2010 ATC 10-119 at 57 when the AAT referred to "residual discretion":

The question then becomes whether, in these circumstances, the discretion to pay the refund to you should be exercised.

Paragraphs 122 to 127 explain further:

122. The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 3) Bill 2008 (which amended section 105-65 in 2008) at paragraph 2.2 states:

Without the restriction on refund requirement, there is a potential for a windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of the tax.

123. The GST Act presumes GST is ultimately borne by end consumers. A key design feature of the GST system to ensure this occurs and to avoid double taxation is to generally allow a corresponding input tax credit to a recipient of a supply in business to business transactions. The GST Act envisages a degree of symmetry between the GST payable and the input tax credit which may be claimed in business to business transactions.

124. Further, where a business cannot fully claim an input tax credit this cost will ultimately be covered as a foreseeable cost of business and borne by the end consumer in the price paid for the good or service. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states at paragraph 5.4

You do not charge GST on supplies that are input taxed. However, you are not entitled to input tax credits on acquisitions relating to the supplies. The effect is that you have borne GST on those acquisitions and will pass on that cost in the price of the supply.

125. It is these factors that underlie the position that the Commissioner need not, that is, is under no obligation to, pay a refund where the condition in subparagraph 105-65(c)(ii) is satisfied. That condition is satisfied when the recipient of the supply is registered or required to be registered or, in other words, broadly, in business to business transactions.

126. The discretion contained in section 105-65 must be exercised within a framework that the GST Act is structured on a basis that GST is passed on when a supply is treated as a taxable supply. As such, factors outlined in Avon at paragraphs 9 to 12, albeit in a sales tax context, would equally apply in a GST context:

…

127. It is clear from the scope and purpose of section 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion.

It follows from the above that it is important when exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipients.

Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states:

128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles:

(a) The Commissioner must consider each case based on all the relevant facts and circumstances.

(b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations.

(c) The Commissioner must have regard to the subject matter, scope and purpose of section

105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non registered end consumer.

(d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following:

(i). ….

(ii). The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon, 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment … has not been passed on'.

(iii). The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST.

In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated.

Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated.

Application to the present case

It is important in the present case to determine who has borne the burden of the GST in relation to the supply of the blocks of land by you to the purchasers.

In answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 10-12 of in Avon Products Pty Ltd v. Commissioner of Taxation [2006] HCA 29 (Avon). It is considered that the guidance provided by the Avon case about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect.

Those paragraphs are reproduced as follows:

10. As has been explained, it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment of sales tax has not been passed on. Where the whole or part of the economic burden of sales tax may have been passed on indirectly through prices, the inquiry in this regard is likely to be complex. The complexity arises because prices may be set with reference to a wide range of factors (including considerations of cost of production, competitive advantage, operational cash flow and customer goodwill). However the starting point must be the seller's pricing policy and practice.

11. In this way, the question is to be approached with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. That knowledge includes the belief that the component of sales tax which later proves to have been an overpayment is a real cost of doing business. Accordingly, it is unsurprising that a seller's intention, whether subjective or objectively ascertained, will generally be to pass the burden of the impost on to the purchaser. Since the onus of proof lies upon the taxpayer, it will be for it to establish that a price which is set so as to ensure that it recovers its cost does not include the economic burden of the sales tax.

12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequence that proof to the contrary will occur comparatively seldom.

The factors from Avon which we consider equally apply in a GST context are stated in paragraph 126 of MT 2010/1.

• in an economy geared to making a profit GST is expected to be passed on;

• businesses set prices to cover foreseeable costs;

• GST is a foreseeable cost that forms part of the cost recovery and pricing structure of doing business;

• GST will be passed on in the usual course of doing business;

• as it is inherent in an indirect system that GST will be passed on, proof to the contrary will seldom occur; and

• the fact that GST is presumed to be passed on forms the basis for permitting the corresponding input tax credit in business to business transactions.

Paragraph 126 in MT 2010/1 sets out the framework for the exercise of the discretion and provides, that the presumption is that in an economy geared to making a profit, the supplier will pass on to the recipient all the costs incurred in the making of the supply, including GST. This means that the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier in the usual course of doing business. It is for the supplier to prove that the GST has not been passed on. The case must be assessed on its merits to determine if the GST has been passed on to the recipients.

In this case, the contracts for the sale of the blocks of land specifically mentioned that GST was included in the price and that the margin scheme was being used to calculate the GST. Based on the contracts, you believed from the outset that the supplies were taxable and therefore it is considered that you would have factored in the cost of the GST when setting the sale price for the blocks of land. In other words, you passed the cost of the GST on to the recipients.

As the contracts of sale specifically refer to GST as being included in the price it is reasonable to conclude based on this alone that when you supplied the blocks of land, that GST was a component of the price paid. It is also reasonable to conclude that this would be your belief and the belief of the purchasers at the time the supplies were made.

In the absence of other evidence to the contrary, the Commissioner considers that the basis used to arrive at the price would have taken into account the fact that GST was normally payable. It is considered that GST has been included in the price charged to the purchasers and accordingly has been borne by the recipient (as intended by the GST regime).

To provide a refund to you would therefore result in a windfall gain contrary to the underlying purpose of section 105-65 of Schedule 1 to the TAA. Under paragraph 128 of MT 2010/1, the Commissioner must take this into account in relation to the exercise of the discretion.

In conclusion, the Commissioner is satisfied that you have overpaid an amount because you treated a supply as a taxable supply when the supply was not a taxable supply. However, the Commissioner is not satisfied that you reimbursed a corresponding amount to the recipient of the supply and so need not give you a refund. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. However, your circumstances do not warrant the exercise of the discretion.

The Commissioner will not exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for the supply of the blocks of land.

Application of section 105-65 to "no enterprise" cases

As a result of the Naidoo decision, where a taxpayer is found to have overpaid GST in circumstances where section 105-65 of Schedule 1 to the TAA applies, the taxpayer's assessment of the net amount for the relevant tax period will be amended to reflect the correct net amount for the tax period.

For those cases where a taxpayer is found to have not been carrying on an enterprise, the Commissioner will (subject to time limits) amend the assessment of their net amount for each tax period to zero. He will recover any refund of a negative net amount and, where appropriate, impose a shortfall penalty based on the amount of the refund. For those tax periods where the taxpayer returned a positive net amount, section 105-65 may apply to restrict a refund to the extent that the taxpayer has actually overpaid a positive net amount for a tax period.

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