Edited version of your written advice

Authorisation Number: 1051447048034

Date of advice: 8 November 2018

Ruling

Subject: GST and sale of subdivided lots of vacant land

Question

Do the sales of the subdivided lots of vacant land constitute the carrying on of an enterprise of property development for GST purposes and therefore requiring the taxpayer to be registered for GST?

Answer

Yes.

Relevant facts and circumstances

● The taxpayer is the legal and beneficial owner of the property. (Property)

● The taxpayer is not registered for goods and services tax (GST).

● The taxpayer acquired the Property pursuant to a will.

● The Property has risen significantly in value over the years and now represents a substantial portion of the net assets of the taxpayer that will ultimately provide a source of retirement funding once sold.

● There is a road easement that runs through/joins the Property that is currently own by and dedicated to a City Council.

● The taxpayer intends to acquire this easement so as to improve the saleability and realisable value of the Property.

● The taxpayer has entered into a Development/Project Management Agreement (PMA) with an independent property developer (the Project Manager) to develop the Property.

● The Project Manager will provide finance to the taxpayer to acquire the easement under the loan agreements.

● Under the Recitals of the PMA:

● The taxpayer wishes to subdivide the property into xx residential lots.

● The taxpayer has requested and the Project Manager has agreed for the Project Manager to undertake the necessary subdivision and ancillary work on behalf of the taxpayer subject to the terms of PMA.

● The Project Manager has agreed to undertake the work at the Project Manager’s sole cost (except as specifically provided in this agreement).

● Upon completion and in consideration of the Project Manager undertaking the work and subject to the Project Manager exercising the Option Agreement and the registration of the Plan of Subdivision, the taxpayer will transfer proposed Lot x to the Project Manager.

● The taxpayer has no involvement in any aspect of the development other than providing the Project Manager access to the Property for the purpose of the subdivision activities.

● The marketing and sales activities relating to the subdivided blocks will be conducted by the Project Manager.

● Under the PMA, the Project Manager will:

● carry out all required work to the standard as required.

● provide adequate time, effort and resources in order to carry out its duties and exercise its responsibilities;

● provide to the taxpayer all information reasonably requested and required from time to time;

● serve a written notice to commence demolition work;

● control, manage, co-ordinate and supervise all activities involved in the project and shall cause the project to be carried out with due expedition;

● liaise with the taxpayer in relation to the project as required including serving copy of the development application upon the taxpayer prior to lodgement with Council and confirming in writing to the taxpayer once the application has been lodged; and

● pay all the project costs.

● Under the PMA, the taxpayer agrees to:

● grant a non-exclusive licence to the Project Manager to occupy and have full free access to the land.

● give all consents and sign authorities and all other reasonable documents to enable the Project Manager to proceed with the project;

● promptly pay all Council rates, Water Rates and Land Taxes imposed as they fall due.

● Project Manager’s option to purchase:

● In consideration for undertaking and completing the project, the taxpayer agrees to grant to the Project Manager an option to the Project Manager in accordance with the Deed of Option.

Deed of loan:

The deed of loan provides that:

● an agreed amount has been loaned to the tax payer in consideration of an equitable charge over the security of the tax payer;

● the tax payer must repay and discharge the loan on the repayment date;

● payments must be made under the deed without set-off or counterclaim and without any deductions whatsoever;

● where any sum payable by the tax payer under the deed is not paid to, or as directed by the lender on or before its due date for payment, default interest will accrue on the outstanding amount.

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 – section 288-25

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act provides that you make a taxable supply if:

a) you make the supply for consideration;

b) the supply is made in the course or furtherance of an enterprise that you carry on;

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.

The taxpayer intends to subdivide the property into numerous lots of residential land for sale. For the supply of the subdivided land to be a taxable supply, all of the requirements in section 9-5 of the GST Act must be satisfied.

The taxpayer will be selling the subdivided vacant land for consideration and the supply is connected with indirect tax zone. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Furthermore, the supply of the subdivided lots will neither GST-free or input taxed.

Accordingly, it should be determined whether:

a) the sale of the lots are in the course or furtherance of an enterprise that the taxpayer will be carrying on, and

b) if so, whether the taxpayer is required to be registered for GST.

Enterprise

The term ‘carrying on an enterprise’ is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines enterprise to include an activity, or series of activities, done:

● In the form of a business

● In the form of an adventure or concern in the nature of trade or

● On a regular or continuous basis, in the form of a lease, license or other grant of interest in property

The ATO view on the meaning of the term ‘enterprise’ is explained in detail in Miscellaneous Taxation Ruling MT 2006/1 ‘The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number’ (MT 2006/1).

MT 2006/1 at paragraph 154 provides:

154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise.

The taxpayer is currently not registered for GST. However, it is necessary to consider whether the arrangements made with the Project Manager to develop the Property for sale would constitute the carrying on of an enterprise by the taxpayer. Under the PMA the Project Manager is undertaking the development activities (Project) on behalf of the taxpayer. Therefore, it should be determined whether the activities such as demolishing the dwelling, acquisition of additional land, subdivision of land for sale are done in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of an adventure or concern in the nature of trade’ where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

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. Both terms require the features of a ‘business deal’.

Indicators of carrying on a business

Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are:

● a significant commercial activity

● a purpose and intention of the taxpayer to engage in commercial activity

● an intention to make a profit from the activity

● the activity is or will be profitable

● the recurrent or regular nature of the activity

● the activity is carried on in a similar manner to that of other businesses in the same or similar trade

● activity is systematic, organised and carried on in a businesslike manner and records are kept

● the activities are of a reasonable size and scale

● a business plan exists

● commercial sales of product; and

● the entity has relevant knowledge or skill.

In addition it is relevant to consider:

● the length of time the property had been held and to what purpose it had been put to in that time; and

● the personal involvement in the development activity.

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.

Application of the indicators to the activities undertaken by the Client

● The taxpayer will be engaged in significant commercial activities such as negotiating or making decision to purchase the easement, entering into a loan agreement with the Project Manager to finance the acquisition of the easement. Apart from entering into the PMA, the taxpayer will offer a call option to the Project Manager to purchase proposed Lot x. In addition, the taxpayer will authorise the Project Manager to demolish the dwelling in order to subdivide the Property into numerous residential lots for sale.

● Whilst the taxpayer contends that it has no involvement in any aspect of the development activities, this is not the only determinative factor that should be considered. The taxpayer will be engaged in this venture in a commercial and business-like manner by entering into all the agreements to enable the Project Manager to carry out the property development on behalf of the taxpayer. This clearly demonstrates the purpose and intention of the taxpayer of engaging in commercial activities.

● The Property value has significantly risen and there is a clear intention of the taxpayer to make the venture profitable by acquiring the easement, demolishing the dwelling and subdividing the Property for sale.

● The taxpayer will be carrying on the property development in a similar manner to that of other businesses in the same or similar trade. The taxpayer will be taking systematic steps in planning the subdivision by engaging the Project Manager. Under PMA, the Project Manager is required to provide all the relevant information as requested by the taxpayer from time to time. The Project Manager may engage various service providers in relation to the development activities. These are the types of activities routinely undertaken by owners or their service providers engaged in property development.

● The Property will be subdivided into numerous lots for sale and the activities carried out will be of a reasonable size.

● The taxpayer has taken a series of coherent and systematic steps to plan and execute the development Project by engaging the Project Manager.

● The taxpayer will be relying on Project Manager for knowledge and advice in relation to the property development.

Paragraphs 264 to 266 of MT 2006/1 discuss judicial decisions that have 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 subdivision of the land

● there is a business organisation – for example a manager, officer and letterhead

● borrowed funds financed the acquisition or subdivision

● interest on money borrowed to defray subdivisional costs was claimed as a business expenses

● 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.

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. In applying the above indicators to the activities undertaken by the taxpayer, it is noted that:

● there is a change of purpose for which the land is held as the taxpayer has decided to subdivide the Property for sale as the Property has risen significantly in value.

● the taxpayer will be acquiring additional land (easement) to improve the saleability and realisable value of the Property.

● the taxpayer has taken a series of coherent and systematic steps to plan and execute the development Project by engaging the Project Manager.

● the Project Manager will manage the Project on behalf of the taxpayer.

● although the Project Manager will be funding the development, the taxpayer has borrowed funds to finance the acquisition of additional land – easement.

Further factors we have taken into consideration include:

● We acknowledge the fact that the taxpayer has entered into a few agreements with the Project Manager in relation to the project in order to dispose the Property for profit. It is our view that this type of arrangements an owner would usually undertake as they may not have the knowledge and skills to engage themselves directly to dispose the property. The terms and condition of these agreements have the characteristics of a business deal.

● The taxpayer has made no attempts to sell the Property in its entirety to another party or a developer. Instead, the taxpayer has decided to acquire the easement, demolish the dwelling and subdivide the land into numerous lots for sale. This indicates that the intention of the taxpayer is not just to dispose the Property as a mere realisation but rather to engage in a similar manner an entity would carry on an enterprise of property development.

● The financial risk in relation to the Project rests largely with the taxpayer as the taxpayer will be borrowing funds from the Project Manager to acquire the easement. It is noted that although the Project Manager will be funding the development costs and other associated risks, the taxpayer will be providing consideration to the Project Manager by transferring the proposed Lot, upon completion of the Project and subject to the Project Manager exercising the call option.

● The Project Manager is required to provide the taxpayer with all information reasonably requested and required from time to time. This indicates that the taxpayer will be updated with the progress of the development activities and will be engaged in the development process to certain extent and have an involvement in the Project.

● The Deed of Loan is a legal document which provides that the tax payer has responsibilities including interest payment if certain conditions are not met. This indicates that the overall transaction has the flavour of a business deal.

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.

In this case the subdivision is an enterprise and is more than a mere realisation of a capital asset.

Therefore, after examining all the facts and circumstances including the agreements, on balance, it is our view that the activities are a series of activities done in the form of a business and/or a series of activities done in the form of an adventure or concern in the nature of trade. The taxpayer will be carrying on an enterprise of property development and will satisfy the requirements of paragraph 9-5(b) of the GST Act.

Registration

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

(a) you are carrying on an enterprise, and

(b) your GST turnover meets the registration turnover threshold. (The current registration turnover threshold is $75,000)

Your GST turnover does not include the supply of capital assets as per subsection 188-25 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of ‘capital assets’ at paragraphs 31 to 36.

Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

Furthermore, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

We have considered section 188-25 of the GST Act and this section does not apply to the sale of the subdivided lots of land. The subdivided lots will have the character of a revenue asset, rather than a realisation of a capital asset.

As the sale proceeds from the sale of the subdivided lots will exceed the registration turnover threshold, the tax payer will be required to be registered for GST. Therefore, the sale of four subdivided lots will be taxable as the supply will satisfy all the requirements of section 9-5 of the GST Act.

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