Edited version of your written advice

Authorisation Number: 1051241645415

Date of advice: 26 September 2017

Ruling

Subject: GST and the sale of subdivided land lots

Question 1

Is your supply of the lots subdivided from land located at the specified address in Australia (the Property/the Land) a taxable supply under section 9-5 of the GST Act?

Answer

The GST implications in relation to your supply of the subdivided lots are as follows:

● The supply of the n number of lots (x number of house lots and the y acre lot) that you have already sold is a taxable supply under section 9-5 of the GST Act and GST is payable.

● In relation to the m number of remaining lots, if there is a supply made of these lots in the future, the GST implications will depend on the surrounding circumstances at the time of supply.

Question 2

Will the Commissioner exercise his discretion under subsection 75-5(1A) to extend the time for you and the recipient to make an agreement in writing for the margin scheme to apply in working out the amount of GST payable on the supply of the subdivided land lots, being lot X and lot Y at the specified address?

Answer

Yes, the Commissioner will exercise his discretion to allow a further period for you and the recipient of the taxable supply of the subdivided lots (lot X and lot Y at the specified address) to agree in writing that the margin scheme is to apply in working out the amount of GST payable. This is because we consider you did not choose to apply the margin scheme until after you made the supply due to a genuine mistake. The discretion applies for a further period until ddmmyyyy. This is provided:

● all other requirements for the supplier to be entitled to apply the margin scheme in working out the amount of GST on the supply are satisfied; and

● the recipient of the supply does not, and is not likely to have, an entitlement to an input tax credit or a decreasing adjustment in relation to its acquisition of the real property; and

● the price for the supply was not agreed by the parties on the basis that GST would be ¹/₁₁th of the consideration for the supply; and

● there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.

Relevant facts and circumstances

The entity ‘A & B’ is a partnership entity (the Partnership). A and B Surname (the Surnames) are husband and wife being the 2 partners in the Partnership. The Partnership is registered with an Australian business number (ABN) from ddmmyyyy in carrying on the Z enterprise from the specified address.

The Partnership is registered for GST from ddmmyyyy.

In mmyyyy, the Surnames acquired the Property for the purchase price of $. The Property was vacant land. The Property was never used to carry on the Z enterprise. The intention of purchasing the Property was to divide the Land with the Surnames’ family, retain one block for the Surnames to retire in and sell the remainder.

In mmyyy, shortly after the acquisition of the Property:

● one of the family member’s financial position changed and that family member was not in a position to contribute and no longer wanted a lot.

● another family member’s financial position also prevented that family member from contributing to the acquisition and development of the land lots, although that family member still wished to obtain a lot.

The Surnames then decided to retain a smaller portion of the Land and subdivide the balance into several lots. Subsequently, the Land was subdivided into the y acre lot and a number of house lots ranging in various square meters.

As the family members’ financial position changed shortly after acquiring the Land, only one development application has been lodged, which reflected the changed intention. Subsequently, one family member requested for one lot to be retained for him/her for a couple of years whilst that family member saves money to enable him/her to build a house. The Surnames agreed to his/her request.

The Land was developed over a number of years. Contractors were engaged to conduct the required work and the Surnames dealt with the council requirements themselves. They funded the acquisition from a term deposit. The expenses for the development of the blocks occurred over a number of years and were funded from a mixture of finance and savings:

● Savings account – Personal

● Cheque account – Partnership

● Overdraft account - Partnership

The development costs and holding cost such as Council rates and water rates were around $. No finance was specifically sought for the development. The Surnames have only one loan account, being the Z enterprise’s loan account, from which a substantial amount was used to fund the development of the Property. They find it difficult to identify the exact amount of the loan used towards the development because funds were often drawn down from the loan account into an everyday account, and from the everyday account different expenses were paid including expenses relating to the development of the Property and other private and partnership expenses. The Surnames believe that over several years approximately $ of loan funds was used in funding the development.

The Land was not treated as a Partnership asset. The Partnership did not claim any of the expenses or input tax credits in relation to the development for tax purposes.

The Surnames have sold n number of the subdivided land lots, namely:

(1) Lot A located at the specified address

(2) Lot B located at the specified address

(3) Lot C located at the specified address

The contract for lot C shows that the margin scheme was applied to this transaction, and the contracts for lots A and B have been left blank.

The sales were made in yyyy and yyyy, as follows:

● yyyy – sold one house lot to the family member at cost $

● yyyy – sold one house lot to a 3^rd party for $

● yyyy – sold the y acre lot to a 3^rd party for $

The lots sold to 3^rd parties were listed by an agent and sold at market value.

Sale proceeds from sale have been used to pay off the Z enterprise’s loan:

1. Sale proceeds of one lot were deposited into the everyday account, and the funds were transferred into the loan account the next day.

2. Sale proceeds of another lot were deposited directly into the loan account.

3. Sale proceeds of yet another lot were transferred by solicitors directly into the loan account.

The plans for the other m number of remaining house lots:

● One house lot:

One house lot will be retained for building a residence for the Surnames to live in when they retire at the end of the calendar year at which time they will cease their Z enterprise. Construction has now commenced.

● Other specified number of house lots:

The other specified number of remaining house lots have been removed from the market and are not currently listed for sale. The Surnames now hold them uncertain as to what they wish to do.

The Surnames have not previously involved in any property sales or subdivision of properties. The subdivision of the land at the specified address and the sale of the subdivided lots were the first time they have engaged in subdivision and/or sale of real property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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 9-25(4)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5(1A)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 184-1

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

Income Tax Assessment Act 1997 section 995-1

Detailed reasoning

Section 9-40 provides:

You must pay the GST payable on any *taxable supply that you make.

Section 195-1 clarifies that if a provision of the GST Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

Accordingly, it is necessary to determine the correct ‘entity’ that is making a supply, prior to considering the GST status of the supply.

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) explains:

18. A similar definition of ‘entity’ can be found in section 960-100 of the ITAA 1997. It is intended that the term entity has a common meaning across the ABN, GST and income tax Acts. However, the particular definition of ‘entity’ still needs to be considered in the context of the Act in which it is found…

Which entity is making the supply of the subdivided land lots?

An entity is defined in section 184-1 to include an individual and a partnership.

An ‘individual’ means a natural person.

A ‘partnership’ takes on the definition given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 995-1 of ITAA 1997 states:

‘Partnership’ means:

(a) an association of persons (other than a company or a * limited partnership) carrying on business as partners or in receipt of * ordinary income or * statutory income jointly; or

(b) a limited partnership.

Partnership is further explained in ATO reference materials, including:

● Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnership (GSTR 2003/13)

● Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6)

● 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)

GSTR 2004/6 sets out the guidelines on what a tax law partnership is, and includes the following explanations:

9. The first limb of paragraph (a) of the definition refers to ‘an association of persons (other than a company or a limited partnership) carrying on business as partners’. This reflects the general law definition of a partnership, which is ‘the relation which subsists between persons carrying on a business in common with a view of profit’. We refer to this type of partnership as a general law partnership.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) ‘in receipt of ordinary income or statutory income jointly’. We refer to this type of partnership as a tax law partnership. (Emphasis added)

11. Tax law partnerships exist only for tax purposes. General law does not recognize tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of such property result in a partnership. The receipt of income jointly from investments without carrying on business is outside the definition of a partnership under general law.

15. Broadly, the GST Act has adopted the income tax concept of a tax law partnership as a means for dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property, the exploitation of which for income producing purposes gives rise to receipt of ordinary income or statutory income jointly.

Similarly, MT 2006/1 provides guidance in relation to partnerships, and states in the following paragraphs:

42. This definition of partnership is wider than at common law. The first limb of the definition in paragraph (a) reflects the definition of partnership contained in State and Territory partnership Acts. The second limb of the definition in paragraph (a) extends ‘partnership’ for taxation purposes to include persons in receipt of income jointly.

43. A partnership within the extended meaning for taxation purposes exists, for example, where two or more persons derive income from real estate that they own as joint tenants or as tenants in common. It is an entity in its own right as it is a partnership for the purposes of the ABN Act. (Emphasis added)

110. As explained in paragraphs 41 to 43 of this Ruling, the definition of partnership is wide and has the meaning given by section 995-1 of the ITAA 1997. Partnerships, except incorporated limited partnerships,⁴⁴ are not recognised under the general law as a separate legal person distinct from the members of the partnership. They are an entity for ABN purposes because of the operation of paragraph 184-1(1)(e) of the GST Act. This means that the business the partners carry on in association with each other is taken to be an enterprise carried on by the partnership.⁴⁵ As a result, a partner (that is required to carry on an enterprise to be entitled to an ABN), will not be entitled to an ABN unless they carry on some other enterprise independently of the partnership and in their own capacity.

In accordance with the above explanations as set out in GSTR 2004/6 and MT 2006/1, we consider that for tax law purposes A and B Surname are partners in a partnership in accordance with the second limb of paragraph (a) of the definition of partnership. We also consider that it is this partnership entity that is making the supply of the subdivided land lots, and not A and B Surname making the supply in their individual capacity.

We acknowledge that A Surname and B Surname have been issued with an income tax ruling dated ddmmyyyy that concluded they are not carrying on a business of property development or a profit making undertaking as an isolated transaction and that rather they have merely purchased some land on which to construct their house, helped their family and sold some of the excess.

The provisions of the GST Act apply to supplies generally, and whether GST is payable on a supply is dependent on whether an entity is making a taxable supply, which will be determined by the particular requirements specified in section 9-5.

Accordingly, to determine if GST is payable on your supply of the subdivided lots, it is necessary to consider if you (the Partnership) are making a taxable supply of the subdivided land lots.

Is the Partnership making a taxable supply of the land lots?

Section 9-5 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, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed.

Under subsection 9-25(4), a supply of real property is connected with the indirect tax zone if the real property, or land to which the real property relates, is in the indirect tax zone. ‘Indirect tax zone’ generally means Australia.

In your case,

● you made the supply of the n number of blocks of land for consideration

● the n number of blocks of land are located in Australia

● you are registered for GST from ddmmyyyy

Accordingly, the requirements of a taxable supply as specified in paragraphs 9-5(a), (c) and (d) are satisfied and you are making a taxable supply if:

● the requirement in paragraph 9-5(b) is also satisfied, and

● the supply of the subdivided land lots is not GST-free and not input taxed.

Divisions 38 and 40 provide for certain supplies to be GST-free and input taxed respectively. You have sold n number of the subdivided land lots. We consider both Divisions do not apply to your supply of these n number blocks of the land to make them GST-free or input taxed.

However, when or if you supply any of the remaining blocks of land in the future, whether Division 38 or 40 will apply to make your supply GST-free or input taxed respectively will depend on the facts and circumstances at the time of the supply.

Accordingly, this ruling is concerned with the n number of lots already sold.

Paragraph 9-5(b) - Supply made in the course or furtherance of an enterprise

One of the conditions attached to a taxable supply under section 9-5 is that the supply be in the course or furtherance of an enterprise that you carry on.

The phrase 'in the course or furtherance of an enterprise' is not defined in the GST Act. The phrase is explained in Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land, at paragraphs 61 to 65:

In the course or furtherance of an enterprise

61. The phrase, ‘in the course or furtherance of an enterprise’ is not defined in the GST Act. The phrase forms part of the requirements that must be satisfied in order for a taxable supply to be identified for the purpose of establishing a liability to GST.

62. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the Explanatory Memorandum), at paragraph 3.10, supports a broad meaning of the phrase ‘in the course or furtherance of’. It states:

In the course or furtherance’ is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. In the course or furtherance does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

63. Having regard to the context in which the phrase ‘in the course or furtherance of’ appears and the above statement from the Explanatory Memorandum, the phrase should be given a broad meaning so as to encompass supplies made in connection with the relevant enterprise.

64. The application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise. Given the broad meaning of ‘in the course or furtherance’, the supply of an interest in land under a partition is capable of being made in the course or furtherance of an enterprise where the relevant interest in the land has been applied in an enterprise carried on by the co-owner.

^65. The GST Act does not require that an asset must be applied primarily or principally in carrying on the enterprise for the supply of an asset to be in the course or furtherance of an enterprise. Accordingly, a connection between the supply of the interest in land under a partition and the enterprise carried on by the co-owners exists even if, at the time of the supply, the land is applied in carrying on the enterprise to a minor or secondary extent.⁴⁴

In the course or furtherance of an enterprise requires a connection between the supply and the entity's enterprise, rather than with some other activity, for example a supply that is for a private purpose. The phrase forms part of the requirements that must be satisfied in order for a taxable supply to be identified for the purpose of establishing a liability to GST.

Given the broad meaning of the term 'in the course or furtherance', a supply 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.

In this case we have considered your following circumstances:

● You are registered for GST from ddmmyyyy and carries on an enterprise of haymaking.

● Your business plan in relation to the acquisition of the vacant lot and you have taken the necessary course of action to execute that plan to completion to the extent of selling n number of the specified total number of subdivided lots in yyyy and yyyy as follows;

(i) mm yyyy - the Property was purchased with the intention to divide the land with the family members, retain one block for X and Y Surname to retire in and sell the remainder.

(ii) mm yyyy - a short period after acquiring the Property you decided to retain a smaller portion and subdivide the balance into several lots for sale. A specified number of lots eventuated.

(iii) Mm yyyy - following the subdivision, you retained one lot and n number of lots were sold in yyyy and yyyy.

● You purchased the Property for $ funded by a term deposit. From yyyy to yyyy, the total development expenses and holding costs such as Council rates and water rates were around $.

● You developed the Land by engaging contractors to conduct the required work and you dealt with Council requirements yourselves. The level of development of the Land included council approval, subdivision and sale of the land lots. Agents were engaged to sell the land lots.

● You sold a specified number of the lots to 3^rd parties collectively for $ and one lot to an associate, being the specified family member at $ representing the cost. m number of lots currently remain of which you are building your residence on one and the other lots you withdrew from the market unsure now what you wish to do with them.

● You funded the development works and subdivision from a mixture of finance and savings.

● You accessed your Z enterprise’s loan account to fund the development, although you did not specifically seek finance for the development. An amount of around $ was accessed from your Z enterprise’s loan account to fund the development.

● The proceeds from the sale of the subdivided lots were applied to reduce the Z enterprise’s loan account as follows:

1. Sale proceeds of a specified number of lots were deposited into the everyday account, and the funds were transferred into the loan account the next day.

2. Sale proceeds of other specified number of lots were deposited directly into the loan account.

3. Sale proceeds of yet other number of lots were transferred by solicitors directly into the Z enterprise’s loan account.

● The lots were not held for a private purpose but were sold to 3^rd parties and were listed by an agent and sold.

● At the time of entering into the sale contract for Lot Z, the contract shows that the margin scheme was applied to this transaction, and the contracts for other lots have been left blank.

● You did not treat the Land as a Partnership asset and did not claim any expenses or input tax credits in relation to the development costs for income tax and GST purposes respectively.

Weighing up all the factors in your circumstances, we consider:

(i) the activities in relation to your venture and in particular the financing for this venture was funded significantly by the Z enterprise’s loan account,

(ii) that the sale proceeds from the lots were used to reduce the Z enterprise’s loan account balance,

(iii) that the use of the n number of vacant lots were never intended or held for a private purpose, but were sold as intended,

(iv) the venture has the characteristics of a business deal, and

(v) your contract for sale in relation to Lot Z applied the margin scheme,

provide the necessary connection between the sale of the properties and wider enterprise being undertaken by you overall, being the Partnership’s Z enterprise. Therefore the supply of the n number of vacant lots is made in the course or furtherance of an enterprise that you carry on and the requirement as specified in subsection 9-5(b) is satisfied.

This means your supply of the n number of subdivided lots satisfies all the conditions of a taxable supply under section 9-5. Therefore, the supply is a taxable supply and GST is payable.

When, or if, a supply is made of the m number of remaining land lots in the future, the GST implications will depend on the surrounding circumstances at the time of the supply.

Reasons for Decision to question 2

Detailed reasoning

Subsection 75-5(1) provides, amongst other things, that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes if the entity and the recipient of the supply have agreed in writing that the margin scheme is to apply. Further, subsection 75-5(1A) states that the agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

Guidance in relation to paragraph 75-5(1A)(b) is available in Law Administration Practice statement PS LA 2005/15, The Commissioner's discretion to extend the time in which the agreement in writing must be made to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999.

PS LA 2005/15 explains that when exercising the discretion, the Commissioner must consider the circumstances of each case to consider what would be fair and reasonable. While each case should be considered on its merits, the Commissioner may exercise the discretion if he is satisfied that:

all the requirements (other than the agreement being made) to apply the margin scheme are met, and

there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.2

PS LA 2005/15 also provides examples of cases which may be appropriate to exercise the discretion, including:

the failure to agree to apply the margin scheme was due to a genuine mistake. For example, the supply was mistakenly believed to be a GST-free supply or the supplier mistakenly considered it was not required to be registered for GST

In your case, you have not considered that you (the Partnership) were the entity making the supply of the subdivided lots or that there was an enterprise being carried on in the development and sale of the subdivided lots.

In view of the circumstances, we consider you did not choose to apply the margin scheme until after you made the supply due to a genuine mistake. As such, it would be reasonable to allow the discretion. Accordingly, the Commissioner will exercise his discretion under subsection 75-5(1A) to extend the period for you and the recipient to make an agreement in writing for the margin scheme to apply in working out the amount of GST payable on the supply of the subdivided land lots, being lot X and lot Y at the specified address. This discretion applies until ddmmyyyy. This is provided:

● all other requirements for you to be entitled to apply the margin scheme in working out the amount of GST on the supply are satisfied, and

● the recipient of the supply does not, and is not likely to have, an entitlement to an input tax credit or a decreasing adjustment in relation to its acquisition of the relevant land lot, and

● the price for the supply was not agreed by the parties on the basis that GST would be 1/11th of the consideration for the supply, and

● there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.

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