Edited version of private advice

Authorisation Number: 1051524808894

Date of advice: 03 June 2019

Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the vacant lots resulting from the subdivision of "Lot A"?

Answer

No.

Relevant facts and circumstances

You are the registered owners of vacant lots resulting from the subdivision of "Lot A". The Plan of Subdivision registered recently lists the vacant lots.

You purchased "Lot A" a number of years ago. The land was zoned residential. "Lot A" contained a house of fibro cement construction with tin roof.

The vendors also owned the adjoining vacant block at "Lot B" and wanted to sell both lots at the same time. The access to "Lot A" was through "Lot B" and you entered through ABC St. There was no access to DEF St as there was a trench in the nature strip for water to travel. You purchased "Lot B" under a separate contract.

The previous owners were granted by the council their application to have both properties rated as one larger property. This was continued when you purchased both properties.

The purchase of "Lot A" was funded with your own savings and a home loan with the Bank. You purchased "Lot A" as your holiday house and to renovate it as you were using it.

One of the first tasks you did was to construct a cross over for "Lot A", remove a few trees, purchase large trucks of crushed rock and make a driveway into "Lot A" from DEF St.

When you purchased "Lot A", you knew that the house needed major renovation but did not realise how extensive and expensive they would be. You painted all areas inside the house, painted the exterior fibre cement walls and replaced the back veranda roof. You also installed a garage at the rear.

You used the house as your holiday home for a number of years until mid-Year 2.

The house was old and you found that despite all your renovations and unexpected extra expense, a lot more work was needed. You realised that you were spending a great deal of money trying to fix up something that would be better demolished and started again. In addition, the house was too small for your family's needs and it was not practical to extend.

In late Year 1, you decided to build on the corner block at "Lot B" because it gave you a larger garden area and by building towards the back of the block you had a better view of the beach. When you built towards the back of the block your front door and garage faced the other street - being ABC St. The council then provided you with a new address, ABC St, and altered all records accordingly.

The house in "Lot A" was demolished in Year 2 and the garage demolished in Year 3. The house demolition costs plus permits from the council were a certain sum. The garage demolition costs were a certain sum. The demolition was funded from your own savings.

"Lot A" has not been put up for sale as a whole. You received advice from local real estate agents that smaller parcels of land would sell better and quicker than a large parcel of land. You noticed that the other large parcels of similar size that had sold now had a number of town houses on them. As you have now built on "Lot B" you did not want a number of townhouses looking over into your new holiday home. You decided to proceed with the lengthy and expensive process of subdividing.

The subdivision activities commenced in Year 8.

You engaged a land surveyor company, to act on your behalf and start the subdivision process by applying for relevant permits from council and the water authorities. They did all the town planning reports, site investigation, obtain planning permits, survey the land, prepare all necessary work/ensure all work complete to enable council to sign off on subdivision and prepare paperwork to lodge to the State titles office.

You provided a copy of the plan of subdivision.

The Planning Permit issued by the Council contains the requirements for the subdivision including the following:

·         a certain number of lot subdivision generally in accordance with the endorsed plans

·         construct site stormwater system including separate connection for each lot to the open drain

·         construct of minimum length wide vehicular crossings

·         remove any redundant vehicular crossings with kerb and channel and the footpath/nature strip area reinstated to match existing construction in the street

·         provision of water supply, drainage, sewerage facilities, electricity, and gas services to each lot

·         provide written confirmation from a telecommunications network or service provider that all lots are connected to or are ready for connection to telecommunication services

The subdivision activities were completed in Year 9, creating a number of vacant lots each with a particular area.

The land value prior to subdivision, based on sales of similar allotments, is between a particular range.

You are in the process of selling the vacant lots and the expected selling price to be a particular price each. Each lot have all services provided, including separate crossovers and gravelled driveways. Both lots are fully fenced.

You provided a list of expenses relating to the subdivision of "Lot A" which show that apart from the building plans, all the remaining expenses relate to providing utilities and access to the subdivided lots.

The subdivision costs were funded by your own savings.

When you purchased "Lot A" you intended to use it as a holiday home and you had no intention of subdividing the land. Even after you built the new house on "Lot B" you had hoped to remove the old house and just have a larger garden and nicely lawned area. However, the property was big and was not suiting your needs.

Since your acquisition, you have never used "Lot A" for income producing purposes. You did not, at any stage, claim an income tax deduction for the interest on the loan on the purchase.

You have never claimed an income tax deduction for the demolition and subdivision costs.

You do not carry on any enterprise either jointly or individually.

You have never previously undertaken demolition of dwelling, subdivision activities or similar activities. This is the first and only time you have undertaken such an activity. You will not be undertaking any subdivisions or any related activities in the future.

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 195-1

Further issues for you to consider

Anti-avoidance rules

Reasons for decision

Summary

You are not making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the vacant lots resulting from the subdivision of "Lot A". This is because although the sale is for consideration and connected with the indirect tax zone:

• the sale is a mere realisation of a capital asset and hence, is not be made in the course or furtherance of an enterprise that you carry on, and
• you are neither registered nor required to be registered for GST.

Consequently, GST is not payable on the sale.

Detailed Reasoning

GST is payable on the sale of a property if you are making a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it 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 Australia; and

(d)  you are *registered, or *required to be registered for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

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

Based on the information provided, the sale of the vacant lots satisfies the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you supply the vacant lots for consideration and the supply is connected with the indirect tax zone as the lots are located in Australia. You are not registered for GST. Furthermore, the sale of the vacant lots, in the circumstances described, is neither GST-free nor input taxed.

It remains to be determined whether the sale of the vacant lots is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Whether the sale is made in the course or furtherance of an enterprise that you on

Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done:

• in the form of a business (paragraph 9-20(1)(b) of GST Act), or
• in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of GST Act).

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. 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.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Paragraph 264 of MT 2006/1 discusses two court cases, Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (Casimaty), involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

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. Paragraph 265 of MT 2006/1 provides the following list of factors:

·        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

·        buildings have been erected on the land.

Examples 28 to 31 in MT 2006/1 are examples of subdivisions of land that are not enterprises and Examples 32 to 35 are examples of subdivisions of land that are not enterprises.

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this case. This requires 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 is determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

We have reviewed your situation and have taken into consideration the following factors:

• You purchased "Lot A" with the intention of using it as your holiday home. You used it as your holiday home for a number of years. You decided to demolish the house because you realised that you were spending a great deal of money trying to fix it. You decided to subdivide the land into a number of lots as they would sell better and quicker than a large parcel of land.
• The purchase was financed by your own savings and a home loan.
• The list of expenses you provided show that apart from the building plans, all the remaining expenses relate to providing utilities and access to the subdivided lots.
• The subdivision costs were funded by your own savings.
• The purchase, demolition and subdivision costs have never been claimed as income tax deduction.

It is our view that your activities are not those of an entity carrying on a business of developing land.

Considering all the facts and circumstances in your case, the subdivision and sale of the vacant lots is the mere realization of a capital asset. Hence, it is not in the form of an adventure or concern in the nature of trade. Accordingly, the sale of the vacant lots is not made in the course or furtherance of an enterprise that you carry on and the requirement of paragraph 9-5(b) of the GST Act is not satisfied.

Although it is not necessary to consider whether you satisfy the condition at paragraph 9-5(d) of the GST Act, for completeness, we discuss the requirements.

You are not registered for GST.

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

(a)  you are carrying on an enterprise and

(b)  your GST turnover is $75,000 or more.

As outlined above, you are not carrying on an enterprise as the activities you have undertaken in subdividing and selling the vacant lots amount to the mere realisation of a capital asset. Hence, the requirement of paragraph 23-5(a) of the GST Act is not satisfied. Therefore, as not all the requirements of section 23-5 of the GST Act are satisfied, you are not required to be registered for GST.

Therefore, as you do not satisfy all the requirements of section 9-5 of the GST Act, the sale of the vacant lots is not a taxable supply.

Additional information

A vendor of residential premises and potential residential land must give a written notice to the purchaser before making the supply. The notice must state whether the purchaser has a GST withholding obligation in relation to the supply.

This requirement applies to all vendors of residential premises and potential residential land, not only those who are registered or required to be registered for GST.

For further information, refer to our website www.ato.gov.au and search GST at settlement.

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