Edited version of your written advice

Authorisation Number: 1051440800509

Date of advice: 12 October 2018

Ruling

Subject: GST and requirement to register

Question

Is Individual 1 and Individual 2 required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

Individual 1 and Individual 2 (You) are not registered for GST.

In xxxx you purchased property situated at a specified location (the Property).

The Property has been your principal place of residence since the date acquired.

You intend to subdivide the Property into five separate lots.

The five subdivided lots will then be developed by constructing five residential premises (one on each lot).

The development costs will be funded by a mortgage secured over the Property.

You intend to sell four of the developed lots.

The projected sale price of each of the four lots to be sold is $XX0,000.

The remaining developed lot will be retained as an investment for the purpose of deriving an ongoing revenue stream comprised of rental income.

Your intention is to provide for a self-funded retirement with the sales of the four lots being to reduce the mortgage to a manageable level.

You do not carry on any other business activities and your sole turnover will be from the sale proceeds from selling the developed lots.

You intend to commence the subdivision and construction as soon as practical. Once all approvals are sought and the subdivision is complete, the building works is expected to be completed within 15 months.

You intend to engage an independent third party developer to undertake all works associated with the development of the Property including:

● designing the development and specifying lot sizes

● obtaining all approvals for the works

● determining how to undertake the development and the development timeline

You will be responsible for:

● engaging the surveyor and lawyer to complete the subdivision of the Property

● funding all works for the development including subdivision, marketing and sales

● engaging the selling agent for the final sale of the developed lots.

Relevant legislative provisions

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

Section 9-20

Paragraph 9-20(1)(a)

Paragraph 9-20(1)(b)

Division 188

Section 188-10

Section 188-25

Paragraph 188-25(a)

Reasons for decision

Note: In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 23-5 provides that you are required to be registered for GST if:

● you are carrying on an enterprise; and

● your GST turnover meets the registration turnover threshold (currently $75,000)

Enterprise

The term ‘enterprise’ is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. It refers to ‘the badges of trade’ and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of ‘trade’ and held for income producing purposes, or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are ‘one-offs’ or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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.

The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

● 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.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

Application to your situation

In this case you acquired the Property in xxxx and have used the Property as your principal place of residence since that date. You have subsequently decided to subdivide the Property into multiple lots and construct new residential dwelling on each lot. You intend to sell four of the developed lots and retain one lot as an investment to generate rental income. We consider that as a result, the purpose for which the land has been held or applied has changed from that which it was originally held and used for (being for a private purpose used as your principal place of residence) to being held for the purposes of a property development venture.

You neither brought the Property into account as a business asset nor acquired additional land; however you have formulated a coherent plan to execute your changed purpose for which the land is held. This includes;

● engaging a developer with responsibility for various activities including:

● designing the development and specifying lot sizes

● obtaining all approvals for the works

● determining how to undertake the development and the development timeline

● engage professionals such as a surveyor and lawyer to complete the subdivision of the Property,

● arranging finance such that the source of funding will be repaid to the extent from the proceeds of sale of properties,

● entering into a building contract for the construction of five residential premises, and

● entering into an agreement with a real estate agent for the sale and/or lease of the premises

We consider such activities to constitute a level of development of the Property beyond that necessary to secure council approval for the subdivision. The extent of your development of the Property goes beyond a ‘mere’ realisation’ of the original asset acquired.

An example similar to your situation is illustrated at paragraphs 284 to 287 of MT 2006/1:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

● their house to be demolished;

● the land to be subdivided;

● a builder to be engaged;

● two houses to be built;

● water meters, telephone and electricity to be supplied to the new houses; and

● a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

As such, we regard your activities would constitute an ‘enterprise’ for GST purposes and you therefore fulfil the first requirement of being required to register for GST.

Registration turnover threshold

The next issue to consider is whether your GST turnover meets the registration turnover threshold of $75,000.

The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if:

a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or

b) your projected GST turnover is at or above $75,000.

Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months.

Your ‘projected GST turnover’ is the sum of your turnover for the current month and the next 11 months.

Division 188 provides that amounts from certain supplies are excluded or disregarded when calculating your GST turnover including:

● input taxed supplies (in calculations of both current and projected turnover) such as rental of residential premises

● transfer of ownership of capital assets (for the purpose of calculating projected turnover).

Of relevance in this case is the classification of the developed lots being sold and whether the sales are considered the sale of a ‘capital asset’ or a ‘revenue asset’.

Goods and Services Tax Ruling: Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses the meaning of the term ‘capital asset’. Paragraphs 31 to 36 of GSTR 2001/7 state:

‘31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. …

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction…

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.’

Also on the distinction between capital assets and revenue assets, paragraph 260 of MT 2006/1 states:

‘Assets can change their character but cannot have a dual character at the same time’.

We acknowledge that for a considerable period of time, being the time you acquired the Property and used the Property as your main residence, the Property would be classified as a ‘capital asset’. However, given the discussion in GSTR 2001/7 we consider that the nature of the asset has changed to that of a revenue asset. The four properties that have been constructed for the purpose of sale will not be used for personal enjoyment or for long term investment.

Given the above, the turnover from the sales of the developed lots would not be excluded when calculating your projected GST turnover and given your projected sales figures of $XX0,000 per unit your turnover will meet the registration threshold.

As you are carrying on an enterprise and your GST turnover meets the registration turnover threshold you are required to register for GST.

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