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Edited version of private advice

Authorisation Number: 1051530322029

Date of advice: 24 June 2019

Ruling

Subject: GST and sale of real property

Question

Will the proceeds from the disposal of the subdivided blocks be regarded as being consideration for a taxable supply made in the course or furtherance of an enterprise that the Entity carries on in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

·        Many decades ago, the Entity purchased a property in Australia (Property) with the intention to establish a farming business.

·        The land was vacant and unimproved at the time of purchase.

·        The Entity was unable to raise the required finance to construct the required improvements on the Property in order to establish the intended farming business. Consequently, the Entity did not build any structures and no improvements were made to the land.

·        The Property has been zoned as rural/residential since the 1960s.

·        Since the Property was acquired, the Property has never been used for any purposes and has remained undeveloped.

·        The Property has remained in its same original state as it was acquired by the Entity decades ago, without improvements on the land.

Previous offers to sell the Property

·        Over the years, the Entity has received unsolicited offers from numerous sources enquiring on the possible sale of the Property or expressing an interest to buy the Property.

·        No formal negotiations were entered into by the Entity as it was not interested in selling at the time. No actual prices were negotiated, nor were there any written contracts exchanged with potential purchasers.

Sale of the Property

·        The Entity has now commenced to downsize its various business interests as well as certain assets that are no longer needed. The Property was identified as an asset which has never been used for any purpose and as one to be disposed of.

·        The Entity appointed a real estate agent to market the Property on their behalf.

˗        The Entity received a number of offers for the Property.

˗        The Entity's desired sale price was $Q million.

˗        The best offer for the Property was $Y million from Entity A. This offer was significantly less than the Entity's expectations, and accordingly the Entity declined to sell.

·        Subsequently, Entity A reapproached the Entity with a proposal to achieve the Entity's desired sale price of $Q million. Entity A offered the Entity a Development Agreement under which Entity A could undertake the property subdivision on their behalf to achieve their asking price.

·        The Entity and Entity A have agreed to enter into the proposed Development Agreement.

·        The Development Agreement contains the terms and conditions, including the obligations and responsibilities of the relevant parties.

·        Undeveloped lots will be sold. Buildings will not be constructed on the lots.

·        Neither the Entity nor any entities that they control or are affiliated with, have any relationship or prior involvement with Entity A (or their associates or connected entities).

·        The Entity and Entity A are not associates.

·        The Entity has not previously been involved in property development or property subdivisions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision

In this reasoning,

·        unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·        all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Taxable supply

You make a taxable supply if you meet the requirements of section 9-5 which 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 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.

Based on the facts of the proposed arrangement to subdivide and sell the Property, and in light of the relevant indicia considered by the courts in relation to this matter, we consider that the Entity will not be making a taxable supply when it sells the subdivided lots.

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