Edited version of your written advice

Authorisation Number: 1013097871585

Date of advice: 27 September 2016

Ruling

Subject: Re: GST and sale of subdivided land and enterprise.

Question 1

Are the sales of the subdivision lots of land a supply made in the course or furtherance of an enterprise?

Answer

No. The sales of the subdivision lots of land are not made in the course or furtherance of an enterprise.

Question 2

Are the sales of the subdivision lots to be taken in to account in determining whether the owner is required to be registered for GST?

Answer

No. The sales of the subdivision lots are not to be taken in to account in determining whether the owner is required to be registered for GST.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

• The entity is carrying on an enterprise on a very small scale through its company.

• The entity is in the retirement age and not registered or required to be registered for GST.

• The specific trading business has resulted in the entity incurring a substantial amount of debt due principally to a dispute with a supplier.

• The entity borrowed money to meet its own costs of all the litigation and to pay the judgement debt which was ordered by the Relevant Court to pay to the other parties.

• The borrowing was ultimately secured over the property.

• The above property is the primary asset and principal place of residence of the entity.

• The entity decided to retire and determined it necessary to divest itself of the property in order to live in the home free of any of the business related debt.

• The entity applied to the local council to subdivide their property and the council approved the subdivision of the property into YY rural residential community title lots.

• The subdivision was to take place in two stages. The first stage involves limited works such as minor earthworks, drainage and driveway crossovers.

• The early completion of the first stage of the subdivision allows the entity to complete the sale of those subdivision lots to reduce existing debt and interest charges and to fund the second stage works.

• The second stage of the subdivision involves more extensive ground works to be carried out in order for the subdivision to be registered.

• A substantial component of those works is the upgrading of an existing unsealed public road which passes through the property and which will provide the access to the subdivision lots in the second stage.

• The council requires this unsealed public road to be sealed.

• The second stage works also include drainage, driveway crossovers and a fire trail excavation.

• The other works for stages one and two are electricity and telephone infrastructure and very basic wire fencing to delineate subdivided lots and some boundary timber posts and rails.

• The subdivision works which are being carried out are the minimum works required to be undertaken to meet council's requirements for vacant land subdivision.

• The entity does not intend to undertake any development of the subdivided lots. It has no intention of constructing houses on the subdivided lots in the same way that a developer may do to generate a greater return from the sales.

• Each lot has been or will be sold as vacant land.

• The cost of the subdivision has been paid for to date by drawings from the existing loan facility which is secured by mortgage over the property.

• The entity has sold 'off the plan' X of the YY lots in the subdivision to pay out the existing debt.

• The entity will retain the remaining unsold subdivision lots for so long as their financial circumstances in retirement allow.

• The intention of the entity is to continue to reside on the lot within the subdivision on which its current home is situated.

Relevant legislative provisions

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 188-25

Reasons for decision

Question 1

You are liable to remit GST on any taxable supplies you make.

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; and 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.

The supply of subdivided lots of vacant land is not GST-free or input taxed under any provision of the GST Act.

The entity will make the supply of subdivided lots of land for consideration and the supply is connected with the Indirect Tax Zone. However, it is necessary to ascertain whether the supply will be made in the course or furtherance of an enterprise that the entity carry on and whether the entity will be required to be registered for GST.

Carrying on an enterprise

Enterprise is defined in subsection 9-20(1) of the GST Act, which states;

An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) ………………………

Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the meaning of 'an entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the principles in MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Although the entity is not carrying on an enterprise of property development, the nature of the activities in selling the portion of the land indicates that it was of a revenue nature. However, it should be determined whether the activities undertaken by the entity are an adventure or concern in the nature of trade or just an isolated transaction.

Isolated transactions and sales of real property

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property.

Paragraphs 262-263 of MT 2006/1 state:

262. the question of whether an entity is carrying on an enterprise often arises where there are one-off' or isolated real property transactions.

263. 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 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.

Paragraphs 264-269 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ (Statham) and Casimaty v. FC of T ¹⁰⁶ (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

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…. 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 follow:

• 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.

Application of the ATO view to your property development activities

Based on the information provided by you:

• There is no change of purposes for which the property was held. The entity has decided to dispose of the property in order to repay a large amount of debt incurred due to a judgement entered in the Relevant Court.

• There is no coherent plan for the subdivision of the land. The entity conducting the development in two stages by contracting a builder to undertake the subdivision works. The first stage involves limited works such as minor earthworks, drainage and driveway crossovers. And the second stage involves more extensive ground works to be carried out in order for the subdivision to be registered.

• The builder will undertake minimal amount of work to prepare the land for sale. The work undertaken would be necessary to secure the approval of the council for the subdivision. The entity will not construct any building on the subdivided lots of land.

• The entity will draw from the loan account to fund the subdivision and will pay off the loan once it sold all subdivided lots.

• The entity will retain the remaining lots including the residential lot for so long as the financial circumstances in retirement allow.

The above analysis indicates that the activities of the entity would not amount to an enterprise of the property development. There is a need for the entity to dispose part of the property to pay off the debt and plan for the retirement. The entity was not engaged in property development activities in the past and due to changes in the financial circumstances, it has decided to subdivide and sell part of the property in order to secure the retirement plans.

Therefore, we consider that the sales of subdivided lots of land by the entity are not made in the course or furtherance of carrying on an enterprise of property development and not subject to GST.

Question 2

Annual Turnover Threshold

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. In this case, the entity is carrying on an enterprise of specific trading on a small scale and is not registered or required to be registered for GST. This indicates that the GST turnover is less than the registration turnover threshold. As explained above, the entity will not be considered as carrying on an enterprise of property development when it subdivides the property and sells them.

Furthermore, under section 188-25 of the GST Act, supplies made by way of transfer of ownership of a capital asset and supplies made in relation to ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise are also disregarded in the calculation of your projected GST turnover.

The property that the entity has subdivided for sale is the primary assets and principal place of residence. Based on the facts provided, we consider that the proceeds from the sale of the subdivided lots of land will not be included in the calculation of the projected GST turnover for the entity.

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