Edited version of your written advice

Authorisation Number: 1051183238765

Date of advice: 25 January 2017

Ruling

Subject: GST and the sale of vacant land

Question 1

Is the supply of the vacant land made in the course or furtherance of an enterprise that you carry on under subsection 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of the vacant land is made in the course or furtherance of your property development enterprise under subsection 9-5(b) of the GST Act.

Question 2

Are you required to be registered for GST under section 23-5 of the GST Act when you sell the vacant land?

Answer

No. You are not required to be registered for GST under section 23-5 of the GST Act when you sell the vacant land.

Question 3

Is the sale of the vacant land a taxable supply under section 9-5 of the GST Act?

Answer

No. The sale of the vacant land is not a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

● You are currently not registered for GST.

● In 20XX, you purchased a residential property comprising an existing house and land.

● The property was purchased for the purposes of deriving income and was held solely for that purpose until 20ZZ.

● No substantial improvements have been conducted on the property, although some renovations including new kitchen, bathroom upgrade and air conditioning were carried out during that time.

● At the time you purchased the property, it was zoned as Residential category 1 and could not be developed.

● In 20YY the State's city plans changed the zoning to medium density with the possibility to develop the property to a unit block.

● In 20ZZ you sought the advice and services of an architect, town planner, project manager and solicitor with the intention of obtaining a development approval for a unit building; the overall intention to maximise the value of the property and to extinguish the debt over the property.

● A development application was successful and the options considered at the time were to:

1. Sell the property with the development approval in place;

2. Hold the property indefinitely; or

3. Consider developing the property.

● You decided to develop the property.

● You are not a developer and have not previously developed land.

● You have not engaged in any subdivision or property development activities in the past and have no intention to do so in the future.

● You intended to build a new residential unit block and sell off some of the units sufficient to pay down debt. The remainder would be held as residential investment property.

● Each unit was expected to sell for $X.

● Funding to finance and construct the unit block was sought with limited success as you had no development experience.

● One funder was prepared to consider funding but was contingent upon a certain number of pre-sales were made.

● The house was removed from the property late 20ZZ upon the advice of the project manager.

● You did not seek accounting advice at that time.

● The parcel of land has not been brought into account as a business asset.

● You did not borrow any funds to finance the demolition.

● You have not claimed any interest on monies borrowed or any expenditure as a business expense.

● Building plans were prepared as necessary for the development application but a building application was not been lodged with council.

● After months of marketing, you had no success in attracting pre-sales and discovered a significant lack of demand for the project and a review with the possible funder was looking decidedly unlikely. Funding was never approved.

● Accordingly, you decided to not continue with the project, and instead sell the vacant land.

● The property was valued at $Y in 20ZZ.

● A verbal offer of $Z has been received for the land.

● The vacant land will be sold with the development approval in place.

● Although there has been a verbal offer made, there has been no conversations as to whether the purchase will include things such as project plans, design work, construction contracts etc.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1,

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 23-15,

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 and

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

Reasons for decision

Question 1

Summary

The supply of the vacant land is made in the course or furtherance of your property development enterprise under subsection 9-5(b) of the GST Act.

Reasons for decision

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines 'enterprise' as 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.

The ATO view on the meaning of the term 'enterprise' is explained in detail in Miscellaneous Taxation Ruling MT 2006/1 'The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' (MT 2006/1).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade:

● A business encompasses trade engaged in on a regular or continuous basis.

● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 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. It refers to 'the badges of trade' and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

● Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

● Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

In your case, you purchased the property for investment purposes, to derive income through a residential lease. We acknowledge that the property was held as a capital asset for the purposes of that leasing enterprise.

However, the relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of you removing the existing house on the property and seeking development approval to build an apartment on the land.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham and Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From these 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 as opposed to the mere realisation of a capital asset.

Paragraphs 178 of MT 2006/1 set out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions

Indicators of carrying on a business.

● a significant commercial activity

● a purpose and intention of the taxpayer to engage in commercial activity

● an intention to make a profit from the activity

● the activity is or will be profitable

● the recurrent or regular nature of the activity

● the activity is carried on in a similar manner to that of other businesses in the same or similar trade

● activity is systematic, organised and carried on in a businesslike manner and records are kept

● the activities are of a reasonable size and scale

● a business plan exists

● commercial sales of product; and

● the entity has relevant knowledge or skill.

Factors used to examine an isolated transaction:

● 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.

In addition other factors that may be relevant include:

● the length of time the property had been held and the purpose to which it was put to in that time; and

● the personal involvement in the development activity.

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.

In applying the above factors to this case, we acknowledge that:

● The original property was purchased in 20XX

● You had consistently used the property as a capital asset to derive income from the lease of the residential property.

● Your original intention in purchasing the property was to hold it as an income earning investment.

● You intended to build a new residential unit block and sell off some of the units sufficient to pay down debt. You intended to retain the remainder of the units as an investment.

● You have not acquired any additional land to the original property that you own.

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

● You attempted to borrow funds to finance the development. However, you were unsuccessful.

● You did not borrow any funds to finance the demolition and removal of the existing house.

● You have not claimed any interest on monies borrowed or any expenditure as a business expense.

● No buildings have been erected on the land.

While the factors above in isolation would support the view that you are merely realising a capital asset when you sell the lots, we consider that the following factors lend support to the conclusion that your supplies are made in the course or furtherance of an enterprise of property development:

● There has been a change of purpose for which the land is held. The land was no longer held for the purpose of your residential leasing activities.

● There is a coherent plan for the development of a unit building. Building plans were prepared as necessary for the development application.

● You sought the advice and services of an architect, town planner, project manager and solicitor to obtain development approval for a unit building.

● You undertook marketing to attract pre-sales for the development of the unit building.

● You have demolished and removed the existing house on the property upon the advice of the project manager. The demolition of the house involves significant physical work on the land. The demolition of the house in this instance is not merely incidental to your residential leasing activities. It is a separate use of the land designed to enhance the profit from the sale of the land.

In considering all the relevant facts surrounding your circumstances, we consider the purpose for which the land was used has changed over time.

On balance, we consider that over the period that the land was held by you, its character has changed. We consider that the supply of the vacant land will be made in the course or furtherance of your property development enterprise.

Question 2

Summary

You are not required to be registered for GST under section 23-5 of the GST Act when you sell the vacant land.

Detailed reasoning

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise; and

(b) its annual turnover meets the registration turnover threshold.

As you are carrying on a property development enterprise the first of these two conditions is met.

What remains to be considered is whether your annual turnover meets the registration turnover threshold.

According to subsection 23-15(1) of the GST Act, the registration turnover threshold is $75,000 unless you are a non-profit body.

Subsection 188-10(1) of the GST Act provides:

'You have an annual turnover that meets a particular *turnover threshold if:

(a) your *current annual turnover is at or above the turnover threshold and the Commissioner is not satisfied that its *projected annual turnover is below the turnover threshold; or

(b) your projected annual turnover is at or above the turnover threshold.'

Subsection 188-15(1) of the GST Act provides:

Your current annual turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are *input taxed; or

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

(c) supplies that are not made in connection with an *enterprise that you carry on.

You advised that you received residential rent from the leasing out the property since you purchased the property in 20XX until 20ZZ. After this time, you have not received any monies in relation to the property. We consider that your current annual turnover is below the turnover threshold.

It is necessary then, to determine whether your projected annual turnover is at or above the turnover thresholder.

Subsection 188-20(1) of the GST Act provides:

Your projected annual turnover at a time during a particular month is the sum of the *values of all supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are *input taxed; or

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

(c) supplies that are not made in connection with an *enterprise that you *carry on.'

In your case, you have stated that you have received a verbal offer for the vacant land. The offer will cause your projected GST turnover to exceed the registration turnover threshold.

However, section 188-25 of the GST Act provides that the following types of supplies should be disregarded in calculating your projected 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 consequences of:

(i) ceasing to carry on an enterprise; or

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

The Commissioner's view regarding section 188-25 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7).

In your case, you intended to build a unit building on your property. Each unit was expected to sell for $X. However, you were unable to obtain funding to commence the development. As a consequence, you have ceased carrying on a property development enterprise. In ceasing your property development enterprise, you have stated that you have received a verbal offer of $Z for the vacant land.

We consider that the supply of the vacant land is made, or likely to be made, 'solely as a consequence' of ceasing to carry on your property development enterprise. We also consider the supply of the vacant land to be a substantial and permanent reduction in size and scale of your property development enterprise. On that basis, the supply of the vacant land is excluded when calculating your projected GST turnover.

According, you are not required to be registered for GST under section 23-5 of the GST Act when you sell the vacant land.

Question 3

Summary

The sale of the vacant land is not a taxable supply under section 9-5 of the GST Act.

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act 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.

One of the requirements of a taxable supply is that you are registered or required to be registered for GST.

You are currently not registered for GST. You may choose to register for GST despite its turnover not meeting the registration turnover threshold (subsection 23-10(1) of the GST Act). However you are not required to be registered for GST.

If you choose not to register for GST, the sale of the vacant land will not be a taxable supply because all of the requirements of section 9-5 of the GST Act will not be met.

You will therefore have no GST liability when you sell your vacant land.

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