Edited version of your written advice

Authorisation Number: 1051436318241

Date of advice: 3 October 2018

Ruling

Subject: Goods and services tax (GST) and sale of vacant land

Question

Will the sale of your land at the specified location in Australia be subject to GST?

Answer

No.

Relevant facts and circumstances

Three entities (you) purchased vacant land at a location in Australia.

You own the land as tenants in common.

Entity X owns a particular percentage interest in the property, which they purchased many years ago. Entity Y and entity Z each purchased a particular percentage interest in the property many years ago, which was many years after entity X purchased their interest.

At the time of purchase, it was anticipated that the land would be developed into retail space when the opportunity arose, and that rental income would be generated from the retail space as a retirement income stream for all owners. At the time of purchase, you intended to hold the land for many years. You did not purchase the land for the purpose of reselling at a profit.

You did not keep any records that set out your intention in buying the land.

You did not proceed with your plan to develop the land and rent out the completed development.

The land is zoned commercial.

You did not seek DA approval to develop the land.

You did not seek rezoning of the property.

Entity X and entity Y are not registered for GST. Entity X is now retired, but they in the past carried on a business (which was not a real estate related enterprise). Entity Y was in the past a service trust for that business.

Entity Z is registered for GST as it carries on a business of investing and farming activities. Entity Z is not related to the other two owners.

None of you have developed land previously apart from entity X, who developed their own home.

You did not use the land in question for any commercial or private activities.

You have now decided to sell the land in question because of entity X’s illness.

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

Summary

GST is not payable on your sale of the land as it will be the mere realisation of a capital/investment asset that does not form part of an enterprise.

Detailed reasoning

GST is payable on taxable supplies

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

(*Defines a term defined in section 195-1 of the GST Act)

The indirect tax zone includes:

● Australia, except for external territories of Australia; and

● certain other areas.

You meet the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act, that is:

The indirect tax zone is Australia.

Section 9-20 of the GST Act defines ‘enterprise’.

Enterprise includes (amongst other things which are not relevant to your situation):

● an activity or series of activities done in the form of a business

● an adventure or concern in the nature of trade (also known as a profit making scheme or undertaking)

● leasing out property on a regular or continuous basis)

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of ‘enterprise’ for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for the purposes of determining whether an activity is an ‘enterprise’ for GST purposes.

Paragraphs 262 and 263 of MT 2006/1 provide guidance on determining whether an isolated real property transaction is an enterprise. They state:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

Paragraphs 258 and 259 of MT 2006/1 distinguish between trading assets and investment assets.

Trade v. investment assets

258. United Kingdom cases categorise assets as either trading assets or 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.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade (in accordance with paragraph 254 of MT 2006/1).

Paragraph 239 of MT 2006/1 refers to a court case in which an entity bought an asset with the intention of reselling it quickly at a profit. In that case, the activity was considered to be a commercial one.

You purchased the property in question to hold as an investment asset, considering that:

● your intention at the time of purchase was to develop it and then lease it out

● at the time of purchase, you intended to hold the land for many years

● you did not purchase the land to resell at a profit

Additionally, you have held the land for many years and have not done anything to enhance its value.

You did not use the property in a business of property development and none of you have developed property apart from entity X’s development of their own home. You have not used the property in question in any other type of business.

You purchased the property with the intention of carrying on a leasing enterprise, but you did not proceed with your plan to generate leasing income from the property.

Therefore, considering all these factors, the sale of the land in question will be the mere realisation of a capital/investment asset and it is not connected with any enterprise that any of you are carrying on. Hence, the requirement of paragraph 9-5(b) of the GST Act is not met. Therefore, GST will not be payable on your sale of the property.

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