Edited version of your written advice

Authorisation Number: 1012917587954

Date of advice: 4 December 2015

Ruling

Subject: GST and the subdivision of property

Question 1

Will the subdivision of the Land and the partitioning of Blocks W, Z and X be taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Will the development and subsequent sale of Block Y be a taxable supply under section 9-5 of the GST Act?

Answer

Yes

Relevant facts and circumstances

The co-owners purchased the Land as tenants in common in MMYY for $X.

The Land comprised a residential block with a derelict home.

The purchase was financed jointly with an owner/occupier loan.

Each co-owner is responsible for a third of the liability.

The co-owners have opened an off-set account in which to deposit monthly repayments.

The co-owners intend to demolish the old home and sub-divide the Land into Y smaller blocks.

The co-owners do not intend to rent the current residence prior to subdivision and development of the Land.

After subdivision each co-owner will transfer their interest in X blocks such that each co-owner will have ownership of one block. Each co-owner intends to build their principal place of residence thereon. Each co-owner will finance and construct their own home.

The co-owners will construct a house on Block Y to sell as a house and land package as they wish to ensure the design of the house is in keeping with the design of their own houses.

Block Y will continue to be held as tenants in common until sold.

None of the co-owners are registered for GST.

None of the co-owners have ever engaged in any property development.

When the co-owners signed the contracts they expected to subdivide into only X blocks in total, however, following further investigation it was established that the Land could be sub-divided into Y blocks.

A subdivision application for Y blocks has been lodged with Council for approval.

The original loan for the Land will be paid down when individual blocks are transferred.

The co-owners communicate regularly to update each other with latest developments and to consider further action.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1

A New Tax System (Goods and Services Tax) Act 1999 Section 188

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

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

In this reasoning please note:

• 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 terms marked by an *asterisk are defined terms in the GST Act.

Question 1

Will the subdivision of the Land and the partitioning Blocks be taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

For the supply of interests in the Land to be taxable supplies all of the requirements in section 9-5 must be satisfied.

The primary issue here is whether the co-owners are making a supply when the land is subdivided and partitioned and whether that supply is made in the course of an enterprise.

Supply

'Supply' has the meaning given by section 9-10 and is any form of supply whatsoever.

The intention is to subdivide the Land into Y blocks transferring X of the blocks such that each of the parties will have sole ownership of a block on which they will then build their principle residences. This transaction is called partitioning by agreement. The Y block will continue to be held as tenants in common while a house is constructed. It will then be sold.

The Commissioners view on partitioning is found in the Public ruling 'Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land. (GSTR 2009/2) The term 'partition' is not used or defined in the GST Act. It is defined for the purpose of this ruling by reference to its ordinary and property law meanings.

For the purposes of GSTR 2009/2 partitioning refers to the division of land and the transfer of the subdivided parts between the co-owners, so that one or more co-owners become the owner in severalty of a specific part of the land.

The subdivision of land by co-owners does not constitute a supply for the purposes of GST and, by itself, does not involve a transfer of any interests in the land between co-owners. Therefore, in your case, the subdivision of the Land does not constitute a supply.

However, under a partition by agreement, the transfer or conveyance by each co-owner of their respective interest in the land to be taken by the other co-owners in severalty is a supply as defined in subsection 9-10(1).

Further, paragraph 57 of GSTR 2009/2 states:

57. It is the Commissioner's view that if land is applied or intended to be applied in an enterprise carried on by a co-owner, a supply of that co-owner's interest in the land under a partition by agreement … is in connection with the enterprise and is a supply in the course or furtherance of that enterprise.

We must therefore consider whether the partitioning is in connection with an enterprise and is a supply in the course or furtherance of an enterprise being carried on by the respective parties.

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among other things, 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 intention of each of the co-owners in entering into the partitioning arrangement is to construct a house on their block for use as their primary residence. The purpose of the arrangement is private and domestic in nature and does not amount to carrying on an enterprise.

The supply of an interest through the partitioning of the Land is not made in the course or furtherance of an enterprise that the co-owners carry on. Therefore, subsection 9-5(b) is not satisfied and consequently the partitioning of the land is not a taxable supply in accordance with section 9-5.

Question 2

Will the development and subsequent sale of Block Y be a taxable supply under section 9-5 of the GST Act?

The co-owners will remain as tenants in common, intending to develop and sell Block Y in the subdivision.

Entity

GST and the co-ownership of property is examined in Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6). The following paragraphs are relevant.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

…

25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income.

26. In our view, the expression 'in receipt of' may be read broadly to include, not only the actual receipt of income, but also all the steps leading to the right or entitlement to that income.

…

30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach.

We consider that you have a joint entitlement to income and have become a tax law partnership from the time you jointly commenced the activity of developing the Y block of land.

Therefore we will now be ruling to the tax law partnership created and will refer to this tax law partnership as you in this part of the reasoning.

As outlined in Question 1, the elements of a taxable supply are contained in section 9-5. Subsections 9-5(a) and (c) are satisfied as the sale of the property in Australia will be made for consideration. In addition there are no provisions whereby the supply could be GST-free.

We will now examine whether the remaining elements of section 9-5, being 9-5(b) and 9-5(d) are satisfied.

In the course or furtherance of an enterprise that you carry on

As outlined in Question 1, section 9-20 provides that the term 'enterprise' includes, among other things, 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 phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Paragraph 234 of MT 2006/1 distinguishes between these activities:

• 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 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be an adventure or concern in the nature of trade (profit making undertaking or scheme), as opposed to the mere realisation of a capital asset.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each 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.

A list of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade are provided in paragraph 265 of MT 2006/1. 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:

• 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

• buildings have been erected on the land.

Of relevance here is example 31 in MT 2006/1:

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.

In this case, the creation of the Y block together with the construction of a house for sale involves a number of activities, going beyond the minimal activities needed to sell the subdivided land. We consider that this is an adventure or concern in the nature of trade and therefore that an enterprise is being carried on.

Having established that an enterprise is being conducted, we need to determine whether it is you (the tax law partnership) or each co-owner (in their own right) that carries on the enterprise. Paragraph 61 of GSTR 2004/6 provides that such a determination requires the objective evaluation of all the facts and circumstances of a case, including the conduct of the co-owners of the property. Paragraph 62 of GSTR 2004/6 lists a number of factors which may indicate that the enterprise is being carried on by you. Paragraph 66 of GSTR 2004/6 lists factors that may point to an enterprise being carried on by each co-owner in their own right, and not by you.

In this case, with reference to the indicators in paragraphs 62 and 66 of GSTR 2004/6:

• the Land was jointly acquired under a single contract

• the Land is held as tenants in common

• the acquisition was funded out of joint borrowings or funds

• the joint activities of the co-owners of the property are for the mutual benefit of all the co-owners

• each co-owner pays loan payments into a joint mortgage offset account

• the co-owners do not act independently when making decisions about the Land.

Given the above, we consider that you are a partnership conducting an enterprise in respect of the development and sale of Block Y.

Registration for GST

You are conducting an enterprise as set out above and you may choose to register for GST. However, section 23-5 will require you to be registered if your turnover meets or exceeds the registration turnover thresholds of $75,000.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold or

(b) your projected GST turnover is at or above the turnover threshold.

Section 188-20 provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than input taxed supplies.

Of relevance to you is your projected GST turnover. In undertaking the sale of Block Y you will be required to be registered when your projected GST turnover is at or above $75 000.

Therefore by the time you supply Block Y, you will be required to be registered for GST.

You therefore meet the requirements in paragraphs (a) (b), (c) and (d) of section 9-5. However, it remains to be determined if the supply is input taxed.

Residential premises

Under subsection 40-65(1), a sale of real property to be used predominantly for residential accommodation (residential premises) is input taxed. However, subsection 40-65(2) in part states that the sale is not input taxed to the extent that the residential premises are:

…

(b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Input taxed means that there is no GST payable on the supply and there is no entitlement to an input tax credit for anything that is acquired to make the supply.

The definition of residential premises in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be, and is capable of being, occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

Based on the information submitted, the house is residential premises, and was not used for residential accommodation before 2 December 1998.

New residential premises

The term 'new residential premises' has the meaning given by section 40-75, which in part states:

40-75 Meaning of new residential premises

When premises are new residential premises

(1) *Residential premises are new residential premises if they:

(a) have not previously been sold as residential premises…;

(b) …; or

(c) ….

Paragraphs (b) and (c) have effect subject to paragraph (a).

…

(2) However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

(a) if paragraph (1)(a) applies (…) - the premises first became residential premises; or

…

Based on the information submitted, the house will not previously been sold and it will be less than five years since the house became new residential premises.

Therefore, your sale of Block Y with a house you construct will be a supply of new residential premises.

Conclusion

As all the requirements of section 9-5 have been met and the supply is not GST-free or input taxed, the supply of the house and land on Block Y will be a taxable supply.

Other relevant information

As you are conducting an enterprise you may be registered from the time that you commence the activity of developing Block Y. This may be a time prior to when you are required to be registered. If the activities do not progress beyond the commencement stage, you will need to cease registration.

As a registered partnership you will have all the rights and obligations that apply under the GST Act. For further information search for 'QC 16958' on the ATO website www.ato.gov.au

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