Edited version of your written advice

Authorisation Number: 1013045337090

Date of advice: 10 August 2016

Ruling

Subject: GST and sale of real property

Question

Is the subdivision and sale of land that is jointly owned by A and B as tenants in common that was previously used for a farming business a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Section 9-5 of the GST Act applies from the perspective of the partnership of A and B (the Landowners) who are the suppliers of the subdivided blocks.

The sale of the subdivided blocks is made in the course or furtherance of the Landowners' leasing enterprise. However, the Landowners are not required to be registered for GST. Accordingly, if the Landowners are not registered for GST not all the requirements of section 9-5 of the GST Act are met and the sale of the subdivided blocks is not a taxable supply.

However, as the Landowners chose to register for GST the partnership of A and B from Year XXXX, any supplies made while the Landowners are registered, including the sale of the subdivided blocks which are capital assets, are taxable supplies unless they are GST-free or input taxed.

Relevant facts and circumstances

A and B purchased land consisting of several titles and held the land as tenants in common.

A and B resided on the land and used the land for farming purposes.

A partnership of A and B carrying on a farming business was registered for GST but was cancelled when the enterprise ceased.

A commenced a farming business on the land as a sole trader and registered for GST. When the farming business ceased, the GST registration was cancelled.

As A and B were advancing in age, a decision was made to sell the land.

An application for subdivision of land was made and approved in Year XXXX. Land was to be subdivided into a number of large blocks.

All of the land was used by A's farming business prior to subdivision commencing.

Only the minimum works is done to subdivide land.

All the subdivision works are carried out by third party contractors and A oversees the processes and administration.

The blocks are still considered rural land and the market for selling these blocks is limited. Therefore, subdivision is not undertaken on further stages until the first blocks are sold. The subdivision is financed purely from cash resources derived mostly from the sale of previously subdivided blocks.

All blocks are marketed through a real estate agent.

A and B received a private ruling which provides that the proceeds from the sale of pre-CGT farmland is not income under ordinary concepts but constitutes the mere realisation of a capital asset carried out in an enterprising way. The proceeds of sale fall for consideration under the CGT provision. However, since the land is a pre-CGT asset, any capital gain or loss made on the sale is disregarded.

On advice from a previous accountant, a partnership of A and B applied for an ABN and registered for GST effective from the commencement of the subdivision activities. The following information relates to the partnership:

• No business plan exists.

• The land is not considered as a partnership asset. It is owned by And B as tenants in common.

• There are no financial statements for the partnership.

• For income tax purposes, income and expenses from the subdivision were not included in the tax returns.

• Activity statements were lodged reporting the land sales and claiming GST credits for subdivision costs.

No income and expenses from the subdivision is shown in the individual tax returns.

A lived on the remaining land until recently.

Portions of the land were leased to third parties in recent years. The combined annual lease is less than $75,000.

The remaining phases will create a number of blocks. The subdivision is financed from cash resources derived from sale of previously subdivided blocks. A will oversee the administration and subdivision process with third party contractors engaged to perform the required tasks. The subdivided blocks will be marketed through a real estate agent. Each block is expected to sell for over $75,000 and sales are expected in the next two to three years.

A and B have not been involved previously in any subdivision or development activities having been farmers throughout their working life.

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 23-5.

A New Tax System (Goods and Services Tax) Act 1999 section 23-10.

A New Tax System (Goods and Services Tax) Act 1999 section 72-5.

A New Tax System (Goods and Services Tax) Act 1999 section 188-5.

A New Tax System (Goods and Services Tax) Act 1999 section 188-10.

A New Tax System (Goods and Services Tax) Act 1999 section 188-15.

A New Tax System (Goods and Services Tax) Act 1999 section 188-20.

A New Tax System (Goods and Services Tax) Act 1999 section 188-25.

Reasons for decision

GST is payable on the sale of the subdivided blocks if you are making a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with 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.

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

The land where the subdivision was carried out is owned by two individuals (A and B), thus we first need to examine whether the subdivided blocks will be supplied by each individual separately or by a partnership for GST purposes.

The term 'you' in the GST Act applies to entities generally.

The meaning of entity as defined in section 184-1 of the GST Act includes an individual and a partnership.

Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Paragraph 25 of Goods and Service Tax Ruling GSTR 2004/6 (GSTR 2004/6) provides that a tax law partnership exists only if there is an association of persons in receipt of income jointly. When the subdivided lots are sold, both A and B will receive the income from the sales proceeds. Therefore, the entity will be the partnership of A and B (the Landowners).

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the Landowners, who are the supplier of the subdivided blocks.

In addition, A was granted the use of the land by the Landowners for their farming business. Although no rent was paid by A to the Landowners, A paid expenses in relation to the land on behalf of the Landowners. We consider this to be the commencement of the Landowners' leasing activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. Please note that to be in receipt of income jointly, it is not necessary to have actually received the income. Accordingly, from January 2003, there was a tax law partnership.

Based on the information provided, the sale of the subdivided blocks is for consideration and the sale is connected with Australia as the land is in Australia. As such, the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied.

It remains to be determined whether the sale of the subdivided blocks is made in the course or furtherance of an enterprise that the Landowners carry on under paragraph 9-5(b) of the GST Act, whether the Landowners are required to be registered for GST under paragraph 9-5(d) of the GST Act, and whether the sale is GST-free or input taxed.

Whether the sale of the subdivided blocks is in the course of an enterprise that the Landowners carry on

Goods and Services Tax Ruling GSTR 2004/8 considers the requirement in paragraph 9-5(b) of the GST Act that the supply be made in the course or furtherance of an enterprise. Paragraphs 28 and 29 state:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent

Paragraph 30 of GSTR 2004/8 lists the following characteristics which strongly indicate that a sale of a thing has a connection with an enterprise:

• at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

• at the time of sale it was applied in carrying on your enterprise to at least some extent; and

• it is sold as a transaction of your enterprise.

Each of these points will indicate a connection, and not all of the points need to be satisfied.

The Landowners own the land as tenants in common. They used the land for the farming business of a partnership. At the time of the commencement of the subdivision and sale activities, the partnership's farming business has already ceased, and the land is leased to A for their own farming enterprise. Hence, the sale of the subdivided blocks is not made in the course or furtherance of the farming enterprise that the partnership carried on.

The Landowners have granted use of the land to A for little or no consideration. This constitutes a leasing enterprise as an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The sale of the subdivided blocks is considered to be made in the course of a leasing enterprise that the Landowners carry on since the subdivided blocks is part of the land which the Landowners use to carry on their leasing enterprise.

In Year XXXX, the Landowners commenced the subdivision activities.

We need to discuss if the subdivision activities amounts to a separate enterprise of land development and if the sale of the subdivided blocks is made in the course of a land development enterprise that the Landowners carry on.

An 'enterprise' is defined in section 9-20 of the GST Act to include, amongst other things, an activity, or series of activities, done:

• in the form of a business

• in the form of an adventure or concern in the nature of trade

• on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian business number. 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.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraph 265 of MT 2006/1 provides a list of factors for determining whether activities are a business or an adventure or concern in the nature of trade.

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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

Examples 28 to 31 in MT 2006/1 are examples of subdivisions of land that are enterprises and Examples 32 to 35 are examples of subdivisions of land that are not enterprises.

The Landowners undertook only the work necessary to secure approval by the council for the subdivision. The subdivision which commenced in Year XXXX was/is carried on in phases and each further phase is not undertaken until the previously subdivided blocks are sold. The subdivision is financed purely from cash resources derived mostly from the sale of previously subdivided blocks.

Based on all the facts and circumstances in this case, we do not consider that the subdivision activities which the Landowners carry out on the land amounts to a business or an adventure or concern in the nature of trade. Hence the sale of the subdivided blocks is not in the course or furtherance of an enterprise of property development. 

In summary, as the subdivided blocks formed part of the land that the Landowners granted to A for use in their farming business, the sale of the subdivided blocks is made in the course or furtherance of the Landowners' leasing enterprise. As such, the requirements in paragraph 9-5(b) of the GST Act are satisfied.

Whether the Landowners are required to be registered for GST

It was argued that A and B should not have been registered in the first place and that the registration was only done due to incorrect advice. Therefore, we need to consider whether the Landowners are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered if:

(a) you are carrying on an enterprise, and

(b) your GST turnover meets the registration turnover threshold of $75,000.

As discussed above, the Landowners only carry an enterprise of leasing of the land, and the supply of the subdivided blocks is carried out in the course of the leasing enterprise. We therefore need to determine whether the income from leasing and the proceeds from the sale of the subdivided blocks are included in working out the GST turnover.

The leasing enterprise

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

• your current GST turnover is at or above $75,000, and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

• your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In working out both your current and projected GST turnovers, you disregard certain supplies including supplies that are not for consideration and are not taxable supplies under section 72-5 of the GST Act--paragraph 188-20(1)(b).

Section 72-5 of the GST Act is about supplies to associates for no consideration. A did not pay rent to the Landowners in relation to the land he used for their farming enterprise. A is one of the Landowners and was registered for GST for their farming business. As A is an associate of the Landowners, we need to consider Division 72 of the GST Act to see if the Landowners' supply of the leasing of the land to A is a taxable supply, and if yes, the value of the taxable supply should be the market value of the leasing of the land

The Landowners' associate, A, used the land for their farming enterprise and was registered for GST for their farming business hence the acquisition of the use of the land satisfies sections 11-15 (creditable purpose) and 72-40 (acquisitions without consideration) of the GST Act. As A acquired the use of the land from the Landowners solely for a creditable purpose, the Landowners' supply of the leasing of the land to A is not a taxable supply under section 72-5 of the GST Act. Therefore, the supply of the leasing of the land to A is disregarded when calculating both current and projected GST turnovers.

The next step is to consider if the sale proceeds of the subdivided blocks is a transfer of ownership of a capital asset and hence excluded from the Landowners' projected GST turnover.

Are the sale proceeds of the subdivided blocks a transfer of ownership of a capital asset?

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you by way of transfer of ownership of a capital asset.

The meaning of capital assets is discussed in Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 32 of GSTR 2001/7 state:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as the 'business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

In this case, the Landowners derive income from leasing the land. As such, the land is considered the profit yielding subject of the leasing enterprise. That is, the land is a capital asset of the leasing enterprise. As such the subdivided blocks are capital assets of the leasing enterprise. Hence, the sale proceeds of the subdivided blocks are disregarded in the calculation of the projected GST turnover.

The consideration for the sale of the subdivided blocks is included in the calculation of the Landowners' current GST turnover but is excluded in the calculation of the projected GST turnover. When the Landowners sell the subdivided blocks, the current GST turnover is at or above $75,000. However, the projected GST turnover is below $75,000. Hence, the Landowners' GST turnover does not meet the registration turnover threshold and the Landowners are not required to be registered for GST.

Accordingly, if the Landowners are not registered for GST, paragraph 9-5(d) of the GST Act is not satisfied. Therefore, as not all the requirements of section 9-5 of the GST Act are met, the sale of the subdivided blocks is not a taxable supply.

There is no need to consider further whether the supply is GST-free or input taxed.

Although the Landowners are not required to be registered for GST because they do not meet the registration turnover threshold under paragraph 23-5(b) of the GST Act, the Landowners chose to register the partnership from Year XXXX. Hence, supplies made while the Landowners are registered, including the sale of capital assets, are taxable supplies unless they are GST-free or input taxed.

Additional information

GST-free supply of farmland

Section 38-480 of the GST Act provides that the supply of a freehold interest in land is GST-free if:

• the land is land on which a farming business has been carried on for at least the period of five years preceding the supply, and

• the recipient of the supply intends that a farming business be carried on, on the land.

The important factor to consider in determining whether a supply of farm land is GST-free under section 38-480 of the GST Act is the use of the land as opposed to the ownership of it. Therefore, as long as a farming business is conducted on the land for at least the 5 years immediately before the sale, the requirement in paragraph 38-480(a) of the GST Act is satisfied, regardless of who has been conducting the farming business for that 5 year period. Likewise, the recipient of the supply need only intend that a farming business be carried on, on the land. They are not required to carry on a farming business themselves in order to satisfy the requirement in paragraph 38-480(b) of the GST Act.

Cancellation

Under subsection 25-55(1) of the GST Act, the Commissioner must cancel an entity's registration if:

• the entity applies for cancellation of registration in the approved form

• at the time the entity applied for cancellation of its registration, it had been registered for at least 12 months and

• the Commissioner is satisfied that the entity is not required to be registered.

The Commissioner will decide the date on which cancellation of an entity's GST registration takes effect. This date may be on a day occurring before, on, or after the day on which the Commissioner makes the decision to cancel the entity's GST registration (subsection 25-60(1) of the GST Act).

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