Edited version of your written advice

Authorisation Number: 1013044352962

Date of advice: 2 August 2016

Ruling

Subject: GST and property development

Question

Will your supply of the subdivided lots be a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No

Relevant facts and circumstances

You, acquired a property located in Australia. The property is X,000 sqm in size and contains a house and a garage/granny flat. You have used the house as your family home since you acquired the property. You are not registered for GST.

In the X0 years of your private ownership in the area, neighbouring properties are being developed. Approaching your retirement age, you believe that this large property will be harder to manage and the costs of maintaining the property are increasing. Therefore you have decided to develop the property by subdividing it and selling the lots and related infrastructure under a 'Community title' development. Throughout the whole process you will retain the family home as your residence.

You will undertake the initial subdivision and sale of the vacant lots. As a part of this process a Community Corporation Company (the Company) will be created and it will undertake further development.

You sought and received development approval on ddmmyyyy and began development on ddmmyyyy. You have spent approximately $XX.00 to date on project expenses. The subdivision activities are expected to be in the order of $XX0,000 and you will finance the development from your own savings and engage the contractors yourself. You have not claimed any of the subdivision expenses in your tax returns.

You supplied a copy of the Development approval which included the general requirements of providing parking, drainage etc

You have created a website to showcase your plans and generate interest in the sale of the lots.

Your plans show that Stage 1 comprises lots which have been set aside for free standing residences and some other lots zoned for duplexes. The land on which your house and the granny flat are located will form part of the community title and be initially known as lot X. Part of the land within the new community title will be set aside for car bays including space for disabled parking and the development lot will be set aside for the Company to construct communal facilities.

In stage 2 you will subdivide your family block into X lots and retain the lot on which your family home is located. The company will construct the communal facilities

You advised that when you sell a lot in Stage 1 to a purchaser they will pay an additional $XX,000 which will be held on trust for the Company for the construction of the communal facilities.

When the Community title is registered the Company will be created which will be responsible for the administration, management and control of the common property. It will also be responsible for the construction of any structures on the common property including the communal facilities.

You created a website to attract interest in your development.

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 9-40.

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

Question

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

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

• you make the supply for consideration; and

• the supply is made in the course or furtherance of an enterprise that you carry on; and

• the supply is connected with the indirect tax zone (Australia) and

• 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.

In your case we are considering only the activities you will undertake to create the subdivision and not the activities the Company will undertake. Therefore the future construction of the communal facilities by the Company is not considered in this ruling as it is a separate legal entity conducting separate activities.

The supplies of the lots will be made for consideration, and the property is located in Australia. However neither you nor your wife are registered for GST either individually or together as a partnership. Therefore the relevant issues in this case are whether

1. Your subdivision activities amount to an enterprise and subsequently

2. You are entitled or required to be registered for GST.

In addressing these issues we will initially consider whether your activities are in the course or furtherance of an enterprise that you carry on.

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 done in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. In your case you have not previously conducted activities of this sort and therefore this is considered to be an isolated transaction.

Paragraph 263 continues by stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or 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 relation to your situation, this means, the activities undertaken by you to subdivide your private property into individual lots of vacant land for the purpose of sale, are either an enterprise and the sale of land is a revenue asset or the sale of lots will remain a capital asset.

The cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham), Casimaty v. Federal Commissioner of Taxation 97 ATC 5135 (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

• 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.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

A third case Stevenson v Federal Court of Taxation 91 ATC 4476 (Stevenson) deals with an individual who's landholding was reduced from 476 acres down to 90 acres by two sales to unrelated entities. He then embarked upon a multistage development of the remaining acreage which involved the creation of some 220 lots and the demolition of the family home to make way for the development. The court ruled that in this case the income was assessable income and that the development was a profit making scheme.

While this case has some features and circumstances similar to your case, it is noted that while you have been living on the property you have never applied the property to any income producing purpose and that your family home will remain untouched during the development process. In addition your activity involves a single property containing the principal place of residence of you and your spouse. The Property has only been used for private purposes and has been held by you and your wife for some X0 years.

You advised in your application and subsequent phone conversations that:

• Additional land was not been acquired by you in order to effect the subdivision.

• The property has been your principal place of residence since purchased and a portion will always remain that way.

• You have not borrowed any funds to date to finance the subdivision process.

• Although you have a plan for the subdivision of the land you are only doing what is required to get council approval to sell.

• Although ultimately buildings will be constructed on the property this construction work will be done by the Community Corporation and not yourself.

• Subdivision costs have not been claimed as an expense for income tax purposes.

• You will keep your house and it is the land around the house that is sold off.

Your circumstances can be differentiated from Stevenson in which the whole property was ultimately developed and where there was a change of purpose during the development process. On balance we do not consider that your activities constitute 'carrying on an enterprise' for the purposes of GST Act and involve the 'mere realisation of a portion of your private asset your family home. This is so in part because you will continue to hold a portion of the property as your own private residence, the property was going to become too large for you to manage, and you only undertook to complete the work required by the council.

GST registration

A requirement of being entitled to register for GST is that you must be carrying on an enterprise. As discussed above, we do not consider that your activities amount to carrying on an enterprise. Consequently you are entitled to register for GST.

Conclusion

As you are not entitled to be registered for GST, the sale of the vacant subdivided lots will not be taxable supplies pursuant to section 9-5.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).