Edited version of your written advice

Authorisation Number: 1051329050194

Date of advice: 22 January 2018

Ruling

Subject: GST and sale of subdivided land

Question

Will you be carrying on an enterprise of property development when you demolish two existing dwellings and subdivide the two properties into three blocks of land for sale and therefore required to be registered for goods and services tax (GST)?

Answer

Yes. You will be carrying on an enterprise of property development when you demolish two existing dwellings and subdivide the properties into three blocks of land for sale. You may be required to be registered for GST if your GST turnover threshold exceeds $75,000.

Relevant facts and circumstances

● You are not registered for GST.

● You acquired two adjoining properties with dwellings for investment purposes.

● As part of your overall review of your retirement plan and financial position, you engaged a real estate agent to consider your options to downsize.

● You owe substantial amounts on the mortgages of the properties.

● Based on the advice provided by the real estate agent, you engaged design consultants to draw plans to demolish the two dwellings and subdivide both properties into three block of land.

● Currently, you are contemplating of retaining one block to build and reside upon your eventual retirement and sell the other two vacant blocks of land.

● You provided the following information:

● The land has always been held for investment purposes.

● Additional land was acquired to be added to the original parcel of land.

● The parcels of land were not brought into account as a business asset.

● There was no coherent plan for the subdivision of the land when they were purchased.

● There is no business organisation established.

● No finance has been arranged for the development of the properties at this stage.

● No development activities were carried out at this stage. The council approval has been obtained.

● No buildings have been erected on the land.

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 – Division 75

A New Tax System (Goods and Services Tax) Act 1999 – section 188-15 and 20

Reasons for decision

You are liable to remit GST on any taxable supplies you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that 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 lots of vacant land is not GST-free or input taxed under any provision of the GST Act.

When you make the supply of subdivided lots of land, you will be making the supply for consideration and the supply is connected with the Indirect Tax Zone. However, it is necessary to ascertain whether the 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 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.

In applying the above factors to the proposed development activities by the applicant, we note the following:

There is a change of purpose for which the land is held

You acquired two residential properties for leasing purposes and subsequently decided to stop your leasing enterprise, merge the two properties into one, demolish the existing two dwellings, and subdivide the whole property into three lots and selling two of the lots.

We are of the view that there has been a change of purpose for which the land is held when you started the one-off activity or isolated real property subdivision transaction that do not amount to a business, but which has the characteristics of a business deal.

The parcels of land are brought into account as a business asset

It is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

Paragraph 237 of MT 2006/1 provides that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business.

In this situation you owe substantial amounts on the mortgages of the properties. You will undergo further costs in relation to the subdivision of the properties which means that a substantial amount will be expanded on the subdivision of the properties.

Furthermore, in this case a number of activities would have to be undertaken involving the engagement of a real estate agent to consider their options to downsize; engaging taxation agents to discuss the tax implications surrounding the potential sales; engaging design consultants to draw plans to demolish the two dwellings and subdividing both properties into three blocks of land.

Improving a property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade and demonstrates that the transaction has been undertaken in a commercial manner with an intention to profit from the subdivision of the property.

All this indicate that the parcel of land was brought into account as a business asset.

There is a coherent plan for the subdivision of the land

The applicants engaged the services of:

● real estate agent to advise them on their options to downsize;

● design consultants to draw plans to demolish the two dwellings and subdivide both properties into three blocks of land;

● taxation agents to discuss the tax implications surrounding the potential sales.

Moreover, the applicants have carefully estimated the costs associated to the subdivision.

Therefore, the applicants’ activities in respect of the subdivision have been planned and carried out in a businesslike manner and there is a coherent plan for the subdivision of the land.

To recapitulate, paragraph 265 of MT 2006/1 provides a list of factors to determine whether activities are a business or an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 further mentions that 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.

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. Moreover, no single factor will be determinative; it will be a combination of factors that will lead to a conclusion as to the characters of the activities. Whilst each case is affected by its own particular facts, the determination of whether an enterprise exists for GST purposes is generally the result of a process of weighing all the relevant indictors.

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.

In applying the above principles mentioned in MT 2006/1 and based on the facts provided it is our view that activities of merging two properties into one, demolishing the existing two dwellings, subdividing the whole property into three lots and selling two lots would be considered as carrying on an isolated transaction in the form of an adventure or concern in the nature of trade. Therefore, you would be selling those two vacant lots land in the course or furtherance of an enterprise that you would be carrying on.

Furthermore, the applicants were carrying on an enterprise of renting residential properties. The properties used in the enterprise will be subdivided for sale, although one lot would be used to build their permanent place of residence.

The activities of the enterprise carried on by the applicants would be changed from leasing residential properties to development of properties for sale. As explained above in paragraph 266 of MT 2006/1, other relevant factors should be considered in reaching an overall conclusion of whether the activities carried out by the applicants would be an isolated transaction or mere realisation of capital assets.

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 you are not registered for GST at the time you sell the subdivided lots of land, you will be liable for GST on the sale if you are required to be registered for GST. You will only be required to be registered for GST if your 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.

As explained above, the supply of subdivided land will not be GST-free or input taxed under GST Act. Therefore, the sale of two lots of land by you would be included in the calculation of annual turnover threshold for GST registration purposes.

Additional Information

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.

The margin scheme cannot be used if a property is acquired through a taxable supply where GST was calculated without using the margin scheme.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).