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Edited version of your written advice
Authorisation Number: 1051327518051
Date of advice: 16 January 2018
Ruling
Subject: GST and sale of subdivided land
Question
Will the sale of subdivided land be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Answer
No.
Relevant facts and circumstances
● You acquired a property jointly with another taxpayer and both are not registered for goods and services tax (GST).
● You and the other taxpayer have never undertaken any property developments in the past.
● The property is a two storey house and the upstairs is rented out and the downstairs is used by you and the other taxpayer on a regular basis. But it is not your principal place of residence.
● The intention of purchasing this property was to use for private residential purposes.
● The existing house has been improved since purchased including painting, electrical work and insulation in the upstairs. The downstairs had the kitchen refurbished, painted and ceiling repairs including insulation.
● The total land area was approximately XXX square metres and you and the other taxpayer are in the process of subdividing the rear section of the land to create a battle-axe block of YYY square metres for sale.
● The remaining land area of YYY square metres and the existing house will be retained by you and the other taxpayer.
● The area of land being subdivided is surplus to the owners and disposing will minimise ongoing maintenance and costs.
● The following additional information were provided in relation to the subdivision:
● Additional land was not acquired.
● Both owners of the property are employed and not carrying on any enterprises.
● The property was not brought into account as a business asset.
● Development and Project Consultant was engaged to design and carry out the work.
● Subdivision is being financed by owner’s personal funds.
● Interest on borrowed funds will not be claimed as business expenses.
● Service conduits and driveway will be constructed as required for the council approval.
● No building was demolished or erected on the land.
● The property will be subdivided into two lots. The rear lot will be sold and the front lot will be retained by the owners.
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
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; the supply is made in the course or furtherance of an enterprise that you carry on; 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 vacant land is not GST-free or input taxed under any provision of the GST Act.
You will make the supply of subdivided vacant 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
(d) ………………
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 ‘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.
You have not previously been engaged in property development activities. The proposed development activities by you may be considered as an isolated or one-off transaction. However, an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Therefore, the scale of the development activities proposed by you should be considered to determine whether it will be an isolated or one-off 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 particular facts of these cases the courts held that the sales were a mere realisation of a capital 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 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.
In applying the ATO’s view to the property development activities we note the following:
● The owners are carrying on minimal development activities to meet the requirements for council approvals.
● The development activities are funded by the personal funds of the owners.
● The purpose of disposing the subdivided lot is to minimise the maintenance activities and the costs.
● The lot that would be sold is surplus to the needs of the owners.
● The scale of the development activities, such as the number of lots subdivided, cost involved in the development activities is low.
● There are no buildings erected or demolished.
The above analysis indicates that the activities undertaken by you and the other taxpayer would not amount to an enterprise of property development. We consider that the sale of the subdivided land would be the mere realisation of a capital asset and not made in the course or furtherance of an enterprise.
Therefore, based on the facts provided, the sale of the subdivided lot of land will not be a taxable supply as the sale will not satisfy all of the requirements of a taxable supply under section 9-5 of the GST Act
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