Edited version of your written advice

Authorisation Number: 1051180735863

Date of advice: 18 January 2017

Ruling

Subject: GST and the sale of subdivided land

Question 1

Will the sale of Lot X be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of the Lot X will not be a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

● You are not registered for GST.

● Prior to 2000, you purchased a property to conduct a farming enterprise.

● The farming enterprise was never operated by you personally. It was operated firstly through a partnership, and then subsequently operated through a company.

● You did not charge or receive rent from the partnership or company for the use of the land.

● Some years ago, you decided to realise a portion of the value of the land in the most advantageous manner.

● You obtained a Development Approval to subdivide the land into several blocks.

● Half of the blocks were initially subdivided, sold and realised over a period of greater than 12 months.

● At a later date, a further X blocks were subdivided and sold over a three year period.

● This left the remainder of land which is the subject of the purchase (Lot X).

● No GST was collected on the sale of the subdivided lots and the disposals were treated as pre-CGT capital gains.

● The property has never been brought into account as a business asset.

● You did not borrow funds to finance the subdivision.

● No interest has been incurred or claimed as a tax deduction in relation to the subdivision.

● You have undertaken the subdivision yourself and did not employ the services of project managers or property developers in undertaking the subdivision.

● You have not claimed any subdivision costs as a business expense.

● No buildings have been erected on the land.

● You have entered into a contract to dispose of Lot X to an unrelated third party for consideration.

● You are unsure of whether the third party will be conducting a farming business.

● You have no intention of subdividing and selling in the future.

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 188-25; and

A New Tax System (Goods and Services Tax) Act 1999 section 195-1.

Reasons for decision

Summary

The sale of Lot X will not be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Reasons for decision

GST is payable on taxable supplies that you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) refers to taxable supplies and 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 the indirect tax zone; and

(d) you are registered, or required to be registered.

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

Section 9-10 of the GST Act refers to the meaning of 'supply' and states that a 'supply' is any form of supply whatsoever. It further states that a 'supply' includes, amongst other things, a grant, assignment or surrender of real property. The sale of Lot X is a supply under the GST Act. Therefore, it is necessary to determine whether the sale constitutes a taxable supply.

You will make a supply of Lot X for consideration. Your supply is connected with the indirect tax zone as Lot X is situated in Australia. Therefore, paragraphs 9-5(a) and (c) of the GST Act will be satisfied.

As stated in the facts, you are not registered for GST. Hence, it is necessary to ascertain whether your supply will be made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Course or furtherance of an enterprise

A supply is a taxable supply, if among other things, the supply is made in the course or furtherance of an enterprise that you carry on.

Section 9-20 of the GST Act provides the definition of 'enterprise' for GST purposes. This definition includes 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; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

In the course of an enterprise of property development

The scope of 'enterprise' under the GST Act is much wider than the scope of 'business' for income tax purposes. For GST purposes, an enterprise can include activities that may not constitute a business but have the character of a business transaction.

Section 195-1 of the GST Act provides that 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling, MT 2006/1 contains the ATO view on what constitutes an enterprise.

Paragraph 159 of MT 2006/1 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

For this purpose, we need to determine whether the subdivision and the subsequent sale of the subdivided blocks of land are activities with a commercial flavour that go beyond the mere realisation of an asset. Of most relevance in this case is the character of your property at the time of supply. We start this process by examining the scale and the level of development activities undertaken by you.

Paragraph 180 of MT 2006/1 provides that the larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

Further paragraph 265 of MT 2006/1 list several factors that may be an indication that a business or an adventure or concern in the nature of trade is 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.

From the facts provided,

● You have allowed the partnership, and subsequently the company, to use the property for its farming enterprise for a number of years.

● The scale of the subdivision comprises several lots.

● There is a change of purpose for which the land is held.

● You did not acquire additional land to be added to the original parcel of land.

● You have undertaken the subdivision yourself and did not employ the services of project managers or property developers in undertaking the subdivision.

● The parcel of land has never been brought into account as a business asset.

● You did not borrow funds to finance the subdivision.

● No interest has been incurred or claimed as a tax deduction in relation to the subdivision.

● You have not claimed any subdivision costs as a business expense.

● You have not developed the land beyond what is necessary to secure cancel approval for the subdivision.

● No buildings have been erected on the land.

● The property has never been brought into account as a business asset.

On balance we consider that the subdivision of your property does not have the characteristics of an adventure or concern in the nature of trade.

In the course of an enterprise of leasing

The property was used in carrying on a farming enterprise by the partnership and subsequently the company. You leased the land to the partnership and subsequently the company for no consideration. For the supply 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 circumstance.

Goods and Services Tax Ruling GSTR 2004/8 contains the ATO view on decreasing adjustments on supplies. It also considers the meaning of 'in the course or furtherance in relation to an enterprise'. Paragraph 29 of GSTR 2004/8 states:

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.

As you carry on a leasing enterprise on the property the disposal of that land has a connection with your enterprise. Accordingly, the supply of Lot X will be considered to have been made in the course or furtherance of the leasing enterprise that you carry on. As such, the supply of Lot X will satisfy paragraph 9-5(b) of the GST Act.

Registered or required to be registered

You are not currently registered for GST. Under section 23-5 of the GST Act, you are required to be registered if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

The applicable GST registration turnover threshold is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

In calculating your GST turnover, under Division 188 of the GST Act, certain supplies are excluded.

Goods and Services Tax Ruling GSTR 2001/7 considers the ATO view on the meaning of GST turnover and other related issues.

Paragraph 14 of GSTR 2001/7 summarises the types of supplies that are excluded from the calculation of current and project GST turnover:

● supplies that are input taxed;

● supplies that are not for consideration (and not taxable supplies under section 72-5);

● supplies not made in connection with an enterprise that you carry on;

● supplies that are not connected with Australia; and

● supplies made from one member of a GST group to another member of that GST group.

Further, section 188-25 excludes certain supplies made when working out your projected annual turnover. Paragraph 29 of GSTR 2001/7 states:

Section188-25 requires you to disregard the following when calculating your projected annual turnover.

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of 'capital assets' is not defined in the GST Act. Capital assets are often referred to as structure assets and may be described as the business entity, structure or organisation set up or established for the earning of profits. It can include tangible assets such as your factory, shop or office, your land on which they stand.

It is to be distinguished from 'revenue assets' which are assets whose realisations are inherent in or incidental to, the carrying on of a business.

The sale of Lot X on which you carry on your leasing enterprise is a transfer of ownership of a capital asset by you. Moreover, as discussed above, the subdivision does not amount to an enterprise and accordingly the subdivided land is not an asset of a revenue nature.

Therefore, the supply of the subdivided lots satisfies section 188-25 of the GST Act and as such, the value of Lot X will not form part of the sum of your projected GST turnover. Consequently, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST when you sell Lot X.

As you are not currently required to be registered for GST and there will be no increase in your GST turnover as a result of the supply of the subdivided lots, paragraph 9-5(d) of the GST Act will not be satisfied.

In conclusion, as you are not registered or required to be registered for GST, all the conditions of a taxable supply are not satisfied. The sale of Lot X will not be a taxable supply under section 9-5 of the GST Act.

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