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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012797394753

Ruling

Subject: GST and the sale of subdivided land

Question

Will your supplies of the X lots be a taxable supply?

Answer

No

Relevant facts and circumstances

You are not registered for GST.

On ddmmyyyy you acquired a property (the Property) for $XX.XX. Your plan was to hold the property as a long term investment strategy.

The Property was approximately X acres and was divided into 3 areas:

The rental income from the residential lease and lease of the mobile phone tower site is less than $75,000.

On ddmmyyyy you amended the lease to the families. The new lease was for a X acre paddock on a different portion of the property close to a water corridor at the bottom of your property.

Your spouse, began renovating the house and the property on ddmmyyyy. In mmyyyy, the house renovation was completed and you listed the house for rent. The house has been available for rent since that time.

In mmyyyy, the families leasing the X acres cancelled their lease. At the same time tenants moved into the house. Due to the size of the property and its set up, it was generally leased by tenants who kept horses. The property has been leased continually since that time and the tenants have had access to the whole property.

On ddmmyyyy, the City Council (CC) held a public meeting for consultation on a development plan for the area.

In mmyyyy, CC released a further concept plan for the area and this plan showed that % of your property would be rezoned for a wildlife corridor.

You entered into negotiations with CC about the effect of this rezoning on your property and to ensure that the value of your land was preserved and maximised and that a practical solution was found as to what parts of the land were to be preserved as wildlife conservation land.

On ddmmyyyy, you received a notice from BCC about a resumption of land on your property which related to the water corridor.

After negotiations you sold CC about X acres of your property for $XX.XX and received a Special Planning Agreement (the Agreement). Part of the Agreement was that xx% of your property was for wildlife conservation and the house was to be located on that part of the land. This agreement preserved your right of ownership of the wildlife conservation land regardless of what development might occur on the rest of the block. The balance of the property was available for development.

After your initial purchase, a number of offers were made by developers for the property over a period of time. In yyyy a developer offered $X million, however, you did not accept any of the offers.

You later made approaches to a developer, which had acquired adjacent properties in the area, to gauge their interest in the purchase of the property as a single lot. None of the offers the developer made to you were acceptable and in the end the developer decided not to acquire any more properties in the area for the foreseeable future, due to an internal policy. The offer for the whole property was around $X million with development approval.

In mmyyyy, you had a meeting with a town planner to discuss obtaining development approval (DA) for your property. Your spouse also had a meeting at this time with a property developer, (the Developer) and discussed various options for the development so as to retain the house and mobile phone tower. Your spouse had known the Developer before as he had completed small jobs for him/her on other matters.

The town planer has prepared an application which provides for the subdivision of the current property into the following:

On ddmmyyyy, you received development approval.

The Developer intends to enter into a contract with you to develop the X lots through his company. The costs of the development are expected to be between $X and $Y million and you expect sale proceeds to be in the order of $A to $Z million.

It is intended that you will pay the developer out of the sale proceeds you receive from the development. You will pay the developer under the following formulae:

As part of the development process, the developer expects that:

Your agent advised that:

You have not undertaken any other property development.

You own two other properties:

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 and

A New Tax System (Goods and Services Tax) Act 1999 section 23-5.

Reasons for decision

In this reasoning, please note:

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

Section 9-5 provides that you make a taxable supply if:

On the facts supplied, paragraphs 9-5(a), 9-5(b) and 9-5(c) are satisfied. Further, the supply of the vacant lots in your factual situation will neither be GST-free nor input taxed.

However, we must determine whether you are required to be registered for GST.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 relevantly defines enterprise as an activity, or series of activities, done:

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade.

Your activity does not amount to a business engaged in a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

The property in question was a capital asset held as part of your leasing enterprise. However your turnover from this enterprise is below the GST registration threshold and you are not registered for GST.

The relevant issue in your circumstances is whether the nature of the asset has changed from a capital asset used in your leasing enterprise to a trading asset as a consequence of you engaging the Developer to subdivide and sell the Lots.

MT 2006/1 sets out a number of indicators that provide guidance as to whether an activity is undertaken in a businesslike manner. 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 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) involving subdivision and development of properties that were originally held as capital/investments assets. In these cases, the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

You intended to hold the property for a long period of time and realise the investment as a capital asset. However, when you could not sell the property as a single supply, you applied for and received subdivision approval from the council and approached a property developer to subdivide your property and sell off the subdivided lots.

You advised that your intention was always to hold the property as a long term investment asset as part of your investment portfolio and realise its value after a significant time.

The formulae for calculating the development fee indicates that you will receive $X million plus share any profit after the developer is paid for his services. $X is a similar amount to some of the offers you had received earlier for the whole property.

You advised that your involvement in the development activities is to be minimal.

Although you will bear some risk by allowing securities to be placed against the property, you have advised that the risk in this particular property market is small.

The above factors indicate that your subdivision and sale of the Lots in the proposed manner does not constitute carrying on an enterprise of property development. The sale of the Lots will be the sale of a capital asset used in your enterprise of leasing property.

Registration

As provided in section 23-5, you are required to be registered if:

Under section 188-10, your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

As provided in subsection 188-10(2), your GST turnover does not exceed a particular threshold if:

Before the sale (settlement) of the property, your current GST turnover was only derived from the lease of the mobile phone tower site, as residential rental income is input taxed in accordance with section 40-35. Accordingly, your current GST turnover is less than the threshold. However, at the time of settlement of the Lots, the sale proceeds will also be included in your current GST turnover, and will consequently exceed the registration turnover threshold.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold.

Paragraph 188-25(a) provides that, in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

We have already determined that your supply of the Lots will be the realisation of a capital asset. Accordingly, the proceeds of the sale will not be included in your projected GST turnover.

As a result you do not meet the registration turnover threshold and you are not required to be registered for GST.

Conclusion

As you are neither registered nor required to be registered for GST, your supplies of the lots will not be taxable supplies pursuant to section 9-5.


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