Edited version of your written advice

Authorisation Number: 1051201058474

Date of advice: 9 March 2017

Ruling

Subject: GST and property

Question

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

Answer

No

Relevant facts and circumstances

You are currently the registered proprietor of the Land.

The Land was originally acquired by a Company which was owned by you and your late spouse.

The Company purchased various parcels of adjacent land in xx year. Part of this land was used in the furtherance of an agricultural business until its cessation in the xx income year. This land was disposed of by the Company to an unrelated third party in the xx income year.

Another part of the land owned by the Company contained the residence in which you and your family lived. This is the Land which is the subject of this ruling application.

The Land was transferred to you as an in specie distribution on dd/mm/yyyy as part of the liquidation of the Company.

The Land comprises approximately x acres on a single title. It includes a residence, surrounding grounds and a shed.

The Land has been used as your main residence since dd/mm/yyyy.

You moved to another location on dd/mm/yyyy.

The Land (including the shed) has not been leased or otherwise used for income producing purposes since its transfer by the Company to you.

The site is included in an approved Structure Plan (mm/yyyy). The Land and immediate surrounds have been nominated for residential development.

You made no applications nor undertook any activities in order to change the zoning of the property. The rezoning affected many properties in the area.

As a result of rezoning the value of the property rose, going from low density zoning to residential zoning. Council rates increased and you needed to consider options for realising the value of the land, due to the rising holding costs.

An unsolicited offer of $x was received for the Land via a 'knock on the door'. This offer was declined. The Property had not been offered for sale.

Subsequently, around mm or mm yyyy, you were approached by an unrelated third party, Entity A with a proposal to develop the Land.

Entity A proposed to carry out works to bring the land to a standard required by the local council and relevant authorities and then arrange the sale of individual, subdivided blocks of land to the public.

Following a number of further meetings with Entity A you decided the best way to maximise the proceeds of the sale of the property was to accept their proposal.

Entity A incorporated a new company, Entity B which will undertake the subdivision of the property in accordance with the draft Development Agreement (DA) originally prepared between you and Entity A.

You wanted to realise the maximum value for the Land in the most enterprising and economically beneficial way with minimal involvement.

You have not previously been involved in the subdivision and sale of land.

You will remain the legal and beneficial owner of the Land throughout the course of the development and will not be involved with the provision of the Project Services.

You will fund the costs you are required to pay under the DA largely from your own resources. At this stage you do not anticipate needing to obtain a loan to fund these costs.

The subdivision of the property will be carried out in one stage, over approximately 12 months.

It is expected by Entity B that there will need to be sales of around xx-xx blocks to enable project finance to be obtained.

A planning application was lodged with the local Council in mm/yyyy and is for the staged subdivision of the site.

You are not registered for GST.

The Developer and the Project

You are proposing to enter into a contract with Entity B to carry out the Project.

Entity B will undertake the Project by carrying out the Project Services as defined in the draft DA.

A copy of the draft DA has been provided.

Relevant clauses from the agreement include:

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20; and

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5.

Reasons for decision

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. The current registration turnover threshold is $75,000.

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 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 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.

In your case, your activity does not amount to a business engaged in on a regular basis as this is the first time you have undertaken this type of activity. 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 Land 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 Land.

Paragraphs 265 and 266 of MT 2006/1 outline factors that indicate whether activities amount to an adventure or concern in the nature of trade.

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 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.

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.

In addition it is 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.

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 find that the following are determinative:

● You have not acquired other surrounding property to better your investment or entered into the subdivision with other parties to share in the profits.

● The fact that you will make a large profit more relates to the capital appreciation in property values since acquisition.

● The scale and extent of the your rights under the DA would be seen as passive and could otherwise be described as simply carrying out the subdivision in an enterprising way.

● Although you may request progress reports and inspect all works undertaken by the Developer this is intended to allow you to be informed about progress and that costs incurred are correctly attributable to the project. This does not amount to control over the project.

● Clause x of the DA states that the purpose of the Agreement is to enable the land to be subdivided and sold and not developed further, specifically no buildings will be erected on the land.

On balance we consider that the activities involving the subdivision of the Land and subsequent sale of the subdivided land is not an adventure or concern in the nature of trade and therefore does not constitute 'carrying on an enterprise' for the purposes of GST.

Conclusion

As you are not carrying on an enterprise in relation to this activity you are not required to be registered for GST under section 23-5.

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