Edited version of private advice

Authorisation Number: 1013124960839

Date of advice: 16 November 2016

Ruling

Subject: GST and subdivision and sale of land

Question 1

Is your subdivision and supply of land subject to GST?

Answer

No

Relevant facts and circumstances

A and B are a married couple. They purchased property in 20XX as their principal place of residence.

When the property was purchased there was a dwelling at the front of the property which was their place of residence. This dwelling was also used by A to conduct her business as a sole trader.

In 20XX they constructed a dwelling on the property where they currently reside.

The property is approximately X acres.

A and B's personal circumstances changed which caused them to have to obtain finance from the sale of part of the land. A and B have not before been involved in any form of property development.

They are currently planning to further improve their residence such as landscaping, internal stair case, tilling externally, concrete driveway, fixtures and fittings for the ground floor.

They have a line of credit of $X. They intend to clear this debt from the sale proceeds.

A and B intend to subdivide the property into several lots.

Lot X will continue to be their principal place of residence. As per council requirements, the dwelling where A's business is conducted is to be demolished.

They intend to sell X lots and retain one lot on which they intend to construct a building for investment purposes. They intend to use the sale proceeds to cover the construction costs, improvement costs and the personal circumstances costs.

In regards to their involvement in the development, they will avail the services and expertise of professionals to develop the land to meet council requirements. They have not been involved in any property development and hence do not have the expertise or knowledge in this area.

The council has various requirements in order to approve the subdivision without which they will be unable to subdivide the land.

They intend to borrow funds for the development to meet council requirements and have no intention in claiming any interest expenses as a tax deduction as there is no intended business organisation involved.

• Land Title
  Tenants in Common
  A - X% (Sole proprietor)
  B - X% (Sole proprietor)
  A and B - X% (Joint Proprietors)
• Owner of the Land carrying on a business
  B is not carrying on a business and is not registered for GST.
  A is carrying on a business and is registered for GST.

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

Reasons for decision

Land held jointly by A and B

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

1. you make the supply for *consideration; and
2. the supply is made in the course or furtherance of an *enterprise that you *carry on; and
3. the supply *is connected with the indirect tax zone; and
4. 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

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

Based on the facts provided, the vacant land is owned jointly by two individuals, thus we first need to examine whether the property will be provided by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) 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. Therefore, the entity will be the partnership.

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 partnership who will be the supplier of the vacant land.

Based on the facts provided, the partnership satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that will be made is for consideration and the vacant land is located in Australia (hence your supply is connected with the indirect tax zone).

Therefore, we need to consider whether the sale of the vacant land is in the course or furtherance of an enterprise that the partnership carries on (paragraph 9-5(b) of the GST Act) and if so, whether it should be registered for GST as a partnership.

Is the partnership carrying on an enterprise of property development?

The definition of an enterprise in section 9-20 of the GST Act includes (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; or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

We need to discuss whether the activities on the property will constitute an enterprise of property development.

Paragraph 9-20(1)(b) was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

...But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making:

Edwards (Inspector of Taxes) v Barnstow [1956] AC 14;

Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199;

Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344-345 per Mason CJ, Brennan and Gaudron JJ; at 351-351 per Dawson J; and at 360 per McHugh J.

In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

21. The word "enterprise" is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerproperty, was considered by the High Court in Thiel v Federal Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344:

"... an activity, as well as a framework within which such activities are engaged in, may constitute an 'enterprise' for the purposes of the agreement."

22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade:

Edwards v Bairstow (1956) AC 1;

Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135; Thiel at 352 per Dawson J; at 360 per McHugh

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1 the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6 does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

The principles outlined in the ruling and the determination, are applied in your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in property development before and that your activities represent a one-off transaction on the property. In the absence of other facts, it is considered that the activities are not carried out in the form of a business if these activities are part of a one-off transaction on the property, not the beginning of an ongoing property development business.

As the activities of development and sale of the vacant land is an isolated transaction, it is necessary to determine whether the development and sale of the vacant land will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

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

Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

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 opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

• 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 for council approval for the subdivision, and
• buildings have been erected on the land.

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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraph 122 of MT 2006/1 provides that activities done by the entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

There is case law which is in support that your activities on the property are not in connection with a profit making undertaking.

McCorkell v FCT 98 ATC 2199

In that case, the taxpayer was 81 years old and had no family to continue his orchard business. He therefore subdivided his 15 hectare orchard into 37 allotments. The taxpayer did minimal work himself. The AAT held he was not carrying on a business of property development.

The AAT said:

• 'In addition a growing number of residential properties were abutting his land with growing concerns and complaints about spraying the orchard which was, in some instances, within 15 metres of homes.' [paragraph 4]
• 'Mr McCorkell had initially contemplated selling the land as one parcel but had not been able to attract a satisfactory offer.' [paragraph 13]
• 'It may well have been that, if Mr McCorkell had chosen an option involving partners or substantial borrowings, there may have been some indicia of business activities. But he did not.' [paragraph 13]

Casimaty v FCT 97 ATC 5135

The Federal Court found (at 5138):

... at no time did he [Casimaty] do any more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up levy banks on creeklines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities.

The case is similar to yours on the basis that Casimaty did minimal work. You applied for subdivision and took no further additional steps to develop the property.

Mason J commented in relation to the factual scenario in Whitfords Beach Pty Ltd v the Commissioner of Taxation of the Commonwealth of Australia [1983] FCA 97; (1983) 67 FLR 151 WA (25 May 1983): 'All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset.'

We consider that your development of the property and the sale of the vacant land are not in the course of an enterprise and is the mere realisation of a capital asset because:

• No additional land was acquired to be added to the original parcel of land.
• The vacant land is part of the subdivision of an original property which is a private asset.
• The parcel of land was not brought into account as a business asset.
• While there is a plan for the subdivision of the land, this was done purely to maximise its sale income.
• No buildings will be erected on 8 lots of land for sale.
• There is no business organisation put in place for the development.
• You intend to use the sale proceeds to cover the construction costs of the investment property, improve the principal place of residence and for personal circumstances.
• You have a line of credit to fund the renovation of the existing residence and development which will be paid from the sale funds. Interest on borrowed funds are not intended to be claimed as a business expense.
• There is not a level of development of the land beyond that necessary for council approval for the subdivision.

Therefore the activities undertaken by you in the development of the vacant land for sale do not constitute an adventure or concern in the nature of trade.

The partnership is not considered to be carrying on an enterprise of property development as defined in section 9-20 of the GST Act, the sale of the vacant land will not satisfy the requirement of paragraph 9-5(b) of the GST Act and it will not be required to be registered for GST.

Land held by B

B is currently not carrying on a business and is not registered for GST. He will be selling his X% share of land which he holds as a Tenant in Common not part of any enterprise but rather realising a capital asset as an individual for the same reasons set out above.

Land held by A

A is carrying on a business and is registered for GST. She will be selling her X% share of land held as a Tenant in Common, not part of her enterprise or any other enterprise but realising a capital asset which she holds as an individual for the same reasons set out above.

Conclusion:

The development and sale of the land is not a taxable supply by the partnership or either A and/or B. They are not required to remit 1/11^th of the sale price to the Australian Taxation Office.

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