Edited version of your written advice

Authorisation Number: 1051197035587

Date of Advice: 1 March 2017

Ruling

Subject: GST and the sale of real property

Question 1

Are you required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

If so, will your supplies of individual lots at the property be taxable supplies pursuant to section 9-5 of the GST Act?

Advice

Not applicable

Relevant facts and circumstances

You are not registered for GST.

Your late father owned the property. There is a house situated on the property.

Your late father passed away in mmyy. By way of the Will, you received the subject property together with all and any farming stock and equipment subject only to the provision that your mother receive a life interest in the house located on the property.

Your mother passed away on ddmmyyyy. You and your mother were appointed as executors of the will and trustees of the estate of the deceased. The formal title transfer for the subject property took place on ddmmyyyy.

You have operated a farming business on the land in partnership with your wife. You took over the commercial operation of the farming business from the date of death of your father.

In recent years, you have derived additional sundry income from the subject property.

You are now elderly and are considering retirement from farming. In addition, the subject property is located in an area where residential development is encroaching and the subsequent potential for rezoning of the property will threaten the viability of the farming business as land holding costs will most likely exceed farming income generated.

You have been approached by a property development company, who have offered to undertake a potential subdivision of the subject property into residential lots. A Development Services Deed (DSD) has been drafted.

You do not have the skills or expertise to be involved in the subdivision of your land and would be completely passive. The Developer would undertake all activities required to develop and realise the land including procuring the planning permit, obtaining all approvals, undertaking all work required by the planning permit or under the approvals, subdividing and attending to registration of any plan of subdivision of the land for the purposes of sale and selling the lots under the plan of subdivision.

The Developer will make all decisions in relation to the marketing of the individual lots. The new DSD outlines the responsibilities of each party during the development process.

You will remain the registered proprietor and beneficial owner of the land during development. In accordance with clause xx of the DSD, you will continue to farm the land.

You will allow the developer to use the land as security to provide a finance facility for making the developer loan and to fund project costs. However, any recourse under that security will be limited to the proceeds from the sale of the land (clause xx).

The Developer will issue invoices to you for Development Services Fees.

The Developer is able to appoint a project manager by-way of a project management agreement.

Under the DSD, the Developer has the following rights and obligations in respect of development activities:

At its discretion engage any contractors and consultants necessary (clause xx);

Is responsible for and must pay on time all Project Costs unless there is a genuine reason for refusing to do so (clause xx);

If the developer is unable to secure debt to fund payment of any Project Cost, the developer must fund the project cost itself (clause xx) ;

Provide quarterly progress reports to the landowner (clause xx);

Obtain a real estate agent to market and sell the lots (clause xx);

Make all marketing and price related decisions regarding lots sales

Handle all proceeds of Lots sales in accordance with clause xx of the DSD.

The agreement states that no partnership or joint venture is formed by the parties by way of the agreement.

You have never been in the business of land acquisition and resale or development.

The Developer is in the business of providing project services to develop the land.

The Developer has no beneficial interest in the land.

You have the right to obtain an advance of funds from the Developer pursuant to the draft Developer Facility Agreement (DFA). In return for the advance of funds, the Developer will register a mortgage over the subject land. You have negotiated the advance of funds to enable you to finance the purchase of a new home and provide for ongoing living expenses. The advance of funds is to be repaid to the Developer from your share of monies from lot sales.

You provided additional information in emails from your tax agent dated ddmmyyyy. In summary the following information was provided:

You currently have xx lambs and xx ewes on your farming property. These numbers have reduced due to your age and ability to manage a working farm;

You were first approached by the developer approximately xx years ago;

You have attended approximately one meeting in regard to the development every month for the last xx months (minutes of meetings supplied);

You have not made any attempts to sell the farm land prior to being approached by the developer;

You and the Developer are not associates;

The scale of the development is proposed as follows:

The land size is xx hectares;

There is proposed to be xx blocks;

The project is scheduled for completion in yyyy;

The development will we phased over xx stages;

It is expected to cost $xx ;

It will be funded 100% by the Developer;

Total estimated gross revenue from the development is $xx;

No additional development, i.e buildings, will be undertaken on the subdivided land;

The total gross primary production and sundry income derived by your partnership with your wife during the last xx years was below the registration turnover threshold.

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 188-10

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

Reasons for decision

In this reasoning,

Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

All legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

As provided in section 23-5, you are required to be registered if:

You are carrying on an enterprise, and

Your GST turnover meets the registration turnover threshold (currently $75,000).

You are not registered for GST because your GST turnover from the farming activity is less than $75,000 per annum. Therefore, we must determine whether your property sales are in the course or furtherance of an enterprise that you carry on and if so, whether you are required to be registered for GST.

Enterprise

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 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.

Your property activity does not amount to a business engaged in, on a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraph 247 considers the subject matter of realisation and provides the following commentary.

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset…

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.

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.

Paragraph 261 of MT 2006/1 provides further discussion on the nature of assets.

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

The property which is the subject matter of this ruling was held as a private asset, (being your principle place of residence). The relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of your entering into an agreement with a developer to develop your property, subdivide and sell the Lots.

Paragraph 178 of MT 2006/1 outlines the main indicators of a business and paragraph 265 sets out the factors when examining whether activities are an adventure or concern in the nature of trade. We have listed these indicators below.

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 adventure or concern in the nature of trade:

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.

It is also relevant to consider:

The length of time the property had been held and to what purpose it had been put to in that time; and

The personal involvement in the development activity.

As stated in paragraph 266 of MT 2006/1, 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.

Your proposed sale of the subdivided land is considered below with reference to these factors:

You have held the property for a considerable time prior to the development being contemplated. Your father passed away in mmyyyy and the property was transferred to you in yyyy. Development negotiations with the Developer only started recently, in the last two years.

The land has been farmed for xx years since your father's passing and is continuing. The reason for subdividing and selling part of the land relates to your retirement.

You have not actively been involved in the development and sale of the subdivided lots. Your involvement has been passive in nature and you will engage the Developer to attend to all matters necessary to effect the land development and sale. This will include the Developer securing planning permits, obtaining approvals, undertaking all works required by the planning permit or under the approvals, subdividing and attending to registration of any plan of subdivision of the land for the purposes of sale and selling the lots under the plan of subdivision. the Developer will also make all decisions in relation to marketing and sale of the lots, dealing with authorities, engaging consultants, builders, engineers, etc.

In accordance with clause xx of the proposed DSD, you will continue to be engaged in your primary production activities on the land subject to the land subdivision and development until such time as the land development activity impedes this.

The proposed development land was zoned by council for farming use when acquired. However, it is situated where residential development is encroaching and the subsequent potential for re-zoning will threaten the viability of farming as land holding costs will increase.

You were originally approached by a property developer associated with the Developer's group of entities. You have not previously tried to sell or develop the land.

Your land is xx hectares and you propose to subdivide into xx lots, with completion scheduled in yyyy.

You have not applied for any rezoning of the land. The intention is for the developer to apply for rezoning in regards the development. You will remain the registered owner of the land.

You will remain the registered owner of the land throughout the development until such time as the subdivided lots are sold. The land will not be transferred to any other entity to effect the development and sale.

Although you will allow the developer to use the land as security to provide a finance facility for making the developer loan and to fund project costs, any recourse under that security will be limited to the proceeds from the sale of the land. You do not bear the costs of the development. Under clause xx of the DSD, the developer is responsible for and must pay on time all Project Costs unless there is a genuine reason for refusing to do so.

You have the right to obtain an advance of funds from the developer subject to the draft DFA. This advance will enable you to finance a new home purchase and living expenses. This advance will be repaid to the Developer out of your share of monies from lot sales. You will not lend personally to finance the subdivision.

You are not required to keep records. The developer will maintain accounts and record all costs and payments made, and make them available to you as per clauses xx and xy of the draft DSD.

Therefore we consider that the supply of the lots by you will not be in the course of an enterprise of property development. Rather, the sale will be in connection with your farming enterprise.

As previously stated, section 23-5 requires you to be registered for GST if you are carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold.

As you are carrying on an enterprise of farming, it is necessary to consider your GST turnover.

Under section 188-10, your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

As provided in subsection 188-10(2), your GST turnover does not exceed a particular threshold if:

Your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold, or

Your projected GST turnover is at or below the turnover threshold.

Before the subdivision and sale of the property, your current GST turnover, being your gross primary production and sundry income derived by your partnership, is less than the turnover threshold. However, as the time of settlement of each lot, the sale proceeds will also be included in your current GST turnover, which will consequently exceed the registration turnover threshold.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold.

Paragraph 188-25(a) provides that in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

The meaning of capital assets is not defined by the GST Act. However 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 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act.  Paragraph 31 of GSTR 2001/7 states the term 'capital assets generally 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.' Paragraph 32 of GSTR 2001/7 also states 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, that are retained by you to produce income.

Paragraph 33 of GSTR 2001/7 further states that capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations' and 'an asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.'

Your late father acquired the property prior to yyyy, and you acquired it when he passed away in mmyyyy. You took over the commercial operation of the farming business from the date of death of your father, operating a farming business on the land in partnership with your wife. Therefore, we consider that the property being sold has taken on the nature of a capital or investment asset. Accordingly, the proceeds of the sale will not be included in your projected GST turnover.

It follows that your GST turnover will not meet the registration turnover threshold and you are not required to be registered for GST.

As you are neither registered, nor required to be registered for GST, your supplies of individual lots at the property will not be taxable supplies pursuant to section 9-5.

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