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Edited version of your written advice
Authorisation Number: 1012837972648
Date of advice: 9 July 2015
Ruling
Subject: GST and subdivision of enterprise asset
Question
Will your sale of subdivided lots be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
Answer
No. Your supplies of the subdivided lots will not be taxable supplies because you are not registered for GST nor required to be registered for GST.
Relevant facts and circumstances
You registered as a sole trader in ddmmyyyy for GST.
You acquired property on which you reside and used to conduct two separate business's under two different trading names.
Your turnover does not exceed $75,000 from these activities and as of ddmmyyyy you cancelled your GST registration.
You have recently retired from paid employment. To help transition into and fund retirement, you propose to subdivide a portion of your property into X lots. You intend to retain a lot with the residential premises and retain a significant portion of the land at the rear of the property.
You:
• will not acquire any additional land to add to the original parcel of land and will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the development approval conditions
• have no formal business plan or timeline for completing the subdivision works and selling the subdivided lots
• have no business organisation for the subdivision
• have no office, no secretary and no letterhead in relation to the subdivision activities
• have no experience in property development and intend to use consultants and contractors to perform the subdivision activities
• expect to borrow funds to finance the subdivision activities and meet interest obligations
• intend to advertise the subdivided lots for sale through local real estate agents and
• have not claimed any expenses in relation to the current subdivision as deductions for income tax purposes nor claimed any input tax credits in relation to the subdivision for GST purposes.
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 and
A New Tax System (Goods and Services Tax) Act 1999 Section 23-5.
Reasons for decision
In this reasoning, unless otherwise stated,
• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au
• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act
GST is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:
(a) you make the supply for consideration
(b) the supply is made in the course or furtherance of an enterprise that you carry on
(c) the supply is connected with the indirect tax zone (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.
For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.
In your case, you will be selling vacant lots for consideration. The property is connected with the indirect tax zone as it is located in Australia and the supply of the vacant lots in your factual situation will neither be GST-free or input taxed.
Therefore we need to consider whether the activity of subdividing the property is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.
Are you conducting an 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:
• in the form of a business or
• in the form of an adventure or concern in the nature of trade.
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.
• A business encompasses trade engaged in on a regular basis.
• An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.
Your activity does not amount to a business engaged in on 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:
• Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.
• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.
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 acquired by you as a business and private asset. Although it was partly used in your enterprise activities this current subdivision activity is not a part of those activities. Therefore the relevant issue in your circumstances is whether the nature of the asset has changed from a capital/private asset to a trading asset as a consequence of developing 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 intend to keep a portion of your property to operate your businesses and you will continue to live on the property.
However you plan to sell a portion of your property to fund your retirement. You do not intend to do anything to the property while you are preparing for subdivision and intend that the only changes to the property will be council requirements.
This indicates, along with the other facts you have supplied that your subdivision and sale of the lots in the proposed manner does not constitute carrying on an enterprise of property development.
Registration
As provided in section 23-5, you are required to be registered if:
• you are carrying on an enterprise, and
• your GST turnover meets the registration turnover threshold (currently $75,000).
As you are not carrying on an enterprise in relation to this activity, and your turnover from your other activities does not exceed $75,000 you are not required to be registered for GST.
Conclusion
As you are not carrying on an enterprise 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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