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Edited version of your written advice
Authorisation Number: 1051271898328
Date of advice: 24 August 2017.
Subject: GST and sale of subdivided land by unregistered owners.
Are the sales of subdivided lots of land by unregistered owners of the property, subject to goods and services tax (GST)?
Yes. The sales of the subdivided lots of land by the unregistered owners of the property will be subject to GST. The owners will be carrying on an enterprise of property development and required to be registered for GST. Please refer to the reasons for decision.
Relevant facts and circumstances
● The owners of the property are not registered for goods and services tax (GST).
● The owners acquired a property as their Principal Place of Residence (PPR).
● The owners did not borrow money to pay for the acquisition. They used their own cash funds as a result of selling their previous PPR.
● The sale of the property to the owners was not subject to GST.
● The property has never been used to generate income.
● The owners wish to pay off their debt and commenced subdivision of the property into X lots. They retained one lot as their PPR.
● The owners will need to build roads, run electricity and services to each lot and ensure that the venture complies with fire and safety regulations etc.
● The owners will rely on professionals such as town planner, engineers etc to complete the development work.
● There are no properties constructed on the land and the owners are merely doing what is necessary to gain the council approvals to sell the lots.
● The owners have provided the following facts in relation to the property development activities:
● The property has always been the PPR of the owners and never used to generate any income in its own right.
● The owners did not acquire additional land to be added to the original parcel of land.
● The parcel of land was not included as the assets of any business.
● There was no coherent plan for the subdivision of the land.
● There was no business established with a manager, letter heads etc.
● The subdivision is financed via a bank loan.
● Interest on the bank loan has not been claimed as part of the cost of the subdivision.
● The owners are carrying on minimal development to secure the council approvals.
● No building have been erected on the land
● A Relevant website provides the following information in relation to the property development:
● The house on the land consists of one bedroom and one bathroom and a garage.
● The new acreage land for sale has been named as “XXXX Estate”.
● The services including City water, Electricity, Telephone at each lot for easy connection.
● A private road (to be sealed) leads to the estate offering tranquil, private place to build your dream home.
● Six minutes to XXXX Village and school.
● Stunning views of surrounding bushland ridges and valleys.
● Development permits were granted to build a swimming pool and duplex.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 – subsection 9-20(1)
A New Tax System (Goods and Services Tax) Act 1999 – section 23-5
A New Tax System (Goods and Services Tax) Act 1999 – Division 75
A New Tax System (Goods and Services Tax) Act 1999 – section 188 -15, 20 and 25
Reasons for decision
You are liable to remit GST on any taxable supplies you make.
You make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with the Indirect Tax Zone; and 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.
The supply of subdivided lots of vacant land is not GST-free or input taxed under any provision of the GST Act.
You will make the supply of subdivided lots of land for consideration and the supply is connected with the Indirect Tax Zone. However, 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 will be required to be registered for GST.
Carrying on an enterprise
Enterprise is defined in subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states;
An enterprise is an activity, or series of activities, done;
(a) in the form of a business; or
(b) in the form of an adventure or concern in the nature of trade; or
(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the meaning of ‘an entity’ and ‘enterprise’ for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).
Goods and Services Tax Determination GSTD 2006/6 provides that the principles in MT 2006/1 have equal application to the meaning of ‘entity’ and ‘enterprise’ for the purposes of the GST Act.
Although the owners have not previously been engaged in property development activities, it is necessary to consider whether the activities of subdividing the land into large portions for sale with a comprehensive marketing campaign, amounts to an enterprise. The owners have decided to subdivide and sell the property which was acquired by them as Principal Place of Residence (PPR) to pay off some of their debts. However, the scale of the development activities carried on by the owners should be considered to determine whether it is an isolated transaction.
Isolated transactions and sales of real property
Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 and 263 of MT 2006/1 state:
262. The question of whether an entity is carrying on an enterprise often arises where there are ‘one-off’ or isolated real property transactions.
263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.
Paragraphs 264 and 265 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:
264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty V.FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the asset.
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 of trade is being carried on. These factors are as follow:
● 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.
The following example from MT 2006/1 explains further on the ATO’s view in relation to isolated transactions of subdividing land for sale is an enterprise. Example 30 states:
Steven buys a 100 hectare property. He believes that the property may be suitable to be developed as a resort. After investigation he decides that it would be more profitable to subdivide and sell the property. He decides to subdivide the property into one hectare lots and sell these.
He engages a town planner and a surveyor to survey the 100 hectare property and to establish how many hectare lots it can be subdivided into. Steven then approaches the local shire council and is advised that he may subdivide his property into 65 one hectare lots.
However, Steven must satisfy various shire council conditions if he wishes to obtain development approval. They are:
● the making of new sealed roads with kerbing and channelling within the subdivision;
● the provision of water, electricity and telephone services to the new lots;
● the provision of culverts and other storm water drainage works; and
● the transfer of certain areas of land to the shire council for parks, environmental and other public purposes.
Steven consults his accountant and legal advisors. Together they prepare a comprehensive business plan for the project. They approach a commercial lender to arrange a substantial loan, secured by the property, to cover all development costs and related expenses.
After gaining development approval from the council, Steven then engages a project manager who arranges for all the survey and subdivisional works to be carried out. Contractors are engaged to put in the roads, complete all the necessary drainage works and install the water, electricity and telephone services.
Steven also investigates a marketing strategy that will provide the best return for his project. Sales agents are retained to carry out the marketing program which involves a comprehensive advertising campaign using a promotional estate name ‘Bush Turkey Hills’.
Steven is entitled to an ABN on the basis that the subdivision is an enterprise and it is more than a mere realisation of a capital asset. Significant factors that relevant which lead to this conclusion are as follows:
● there is a change of purpose for which the whole property is held;
● there is a comprehensive plan for the development of the property;
● the subdivision is developed in a businesslike manner for example there is a project manager, significant development costs, a comprehensive marketing campaign including an estate name for the land; and
● a substantial loan has been taken out finance the development.
Application of the ATO’s view to the property development activities carried on by the owners.
Based on the facts provided and the information available, the following analysis indicates that the activities would amount to an enterprise of property development.
● There is a change of purpose for which the whole property was held. Except one lot that has been retained as PPR, the rest of the whole property will be disposed.
● The owners would be borrowing money to finance the property development.
● The owners have arranged a real estate agent to market the sale of the subdivided land. The subdivided lots have been comprehensively marketed with an estate name for the land.
● The owners did not borrow any funds to acquire the property and the purpose of subdividing and selling the lots of land was to pay off some of their debts. However, considering the size of the land subdivided and the contracted sale prices for these lots of land indicate that the activities would amount to an enterprise.
● The owners will be engaging professionals such as town planner, engineers and real estate agents to complete their property development activities.
Paragraph 266 of MT 2006/1 states:
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.
As explained above, the overall characters of the activities by the owners in relation to the property development activities are neither isolated transactions nor mere realisation of capital assets. Therefore, the owners are carrying on an enterprise of property development.
Annual Turnover Threshold
Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000.
If the owners are not registered for GST at the time they sell the subdivided lots of land, they will be liable for GST on the sale if they are required to be registered for GST. The owners will only be required to be registered for GST if their annual turnover exceeds $75,000.
To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 months period covers the period of the current month and the preceding 11 months, known as your current annual turnover, and the current month and the following 11 months, known as your projected annual turnover.
However, under sections 188-15 and 188-20 of the GST Act input taxed supplies are excluded from calculation of both your current GST turnover and your projected GST turnover respectively. Under section 188-25 of the GST Act supplies made by way of transfer of ownership of a capital asset and supplies made in relation to ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise are also disregarded in the calculation of both your current and projected GST turnover.
Although the owners were not engaged in property development activities in the past, the nature of their activities in subdividing lots of land for sale clearly indicate that it will be an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. Based on the facts provided the consideration the owners will be receiving from the sale of subdivided lots of land will be in excess of $75,000. Therefore, the GST turnover will meet the registration turnover threshold.
As a consequence the owners will be required to be registered for GST for their enterprise and the supply of subdivided lots of land will be taxable supplies and subject to GST.
Division 75 of the GST Act grants the option of applying the margin scheme in some circumstances to reduce your GST liability on taxable supplies.
The margin scheme provides some relief in relation to property transactions and allows for a reduced amount of GST to be paid. It applies to the supply of freehold interest in land, strata units and long-term leases, including those held on 1 July 2000. GST may be calculated on the full value of the supply or on the margin.
The margin scheme cannot be used if a property is acquired through a taxable supply where GST was calculated without using the margin scheme.
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