Edited version of your written advice

Authorisation Number: 1012731856647

Ruling

Subject: Goods and services tax - enterprise and margin scheme

Question 1

Is your sale of the duplex a supply made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, your sale of the duplex is a supply made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act.

Question 2

Can the margin scheme apply to your sale of shares in a company?

Answer 2

No, the margin scheme will not apply to your sale of shares in a company.

Relevant facts and circumstances

1. You carry on a business as a sole trader.

2. The turnover of your business is above the minimum threshold (currently $75,000) and as such you are registered for GST.

3. You purchased a property together with your child and their spouse. You had a 50% share in the property. Both your child and their spouse had a 25% share in the property.

4. In a specified year you purchased the 50% interest in the property owned by your child and their spouse.

5. The property is a residential property. It has been rented during that time except for relatively short periods where it was empty for reasons beyond your control, but was available for rent through a real estate agent at those times.

6. The property was not purchased for the purpose of redevelopment but as an investment.

7. You are not a developer and have never undertaken a development project either personally or through any entity (partnership, trust, etc.)

8. You wish to demolish the existing building and replace it with a duplex being new residential premises. You intend to sell the duplex.

9. You do not know whether the specified Council will approve your development plans. You believe that the Council is likely to approve some kind of development. However, the type of legal ownership to the duplex is uncertain. It depends on the Council.

10. The Council may only approve the development of the duplex where the property is owned under a company title. You will own shares in the company. The company will own the duplex. You intend to sell the shares to purchasers. The purchasers will then own shares in the company. Therefore, a person by virtue of the ownership of shares in the company, has the right to occupy a defined area, namely a particular unit in the building owned by the company.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b)

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1)

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

Income Tax Assessment Act 1997 subsection 124-190(3)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Is your sale of the duplex a supply made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act?

Paragraph 9-20(1)(b) of the GST Act states that an enterprise is an activity, or series of activities, done 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 (MT 2006/1) provides advice in respect of subdivisions of land that are enterprises.

Paragraphs 264 and 265 of MT 2006/1 state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

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 addition, paragraphs 284 to 287 of MT 2006/1 provide an example:

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 proposed development of land and sale of the duplex is an activity, or series of activities, done in the form of an adventure or concern in the nature of trade. It is not the mere realisation of an asset because several of the factors referred to in paragraph 265 of MT 2006/1 are present. Therefore, your sale of the duplex will be a supply made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act.

Question 2

Can the margin scheme apply to your sale of shares in a company?

Subsection 75-5(1) of the GST Act sets out the criteria that must be satisfied for the margin scheme to apply. The subsection states:

The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a *stratum unit; or

(c) granting or selling a *long-term lease;

if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply.

(* denotes a defined term at section 195-1 of the GST Act).

We note for your information that section 195-1 of the GST Act, among other things, defines the meaning of the term 'stratum unit'. The term 'stratum unit' has the meaning given by subsection 124-190(3) of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 124-190(3) of the ITAA 1997 states that:

A stratum unit is a lot or unit (however described in an *Australian law or a *foreign law relating to strata title or similar title) and any accompanying common property.

(* denotes a defined term at section 995-1 of the ITAA 1997).

We consider that the shares that you own in a company are not a freehold interest in land, stratum unit or a long term lease. Therefore, subsection 75-5(1) of the GST Act is not satisfied. Accordingly, the margin scheme does not apply to your sale of shares in a company.

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