Edited version of private advice

Authorisation Number: 1051548925576

Date of advice: 24 July 2019

Ruling

Subject: GST and property subdivision

Question 1

Does the sale of a number of vacant lots constitute a taxable supply under A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the sale of a number of vacant lots will be taxable supplies under the GST Act.

Question 2

If the sale of the lots will be a taxable supply, can the margin scheme be applied to determine the amount of GST payable?

Answer 2

Yes.

This ruling applies for the following period:

01 July 2018 to 30 June 2020

Relevant facts and circumstances

You purchased a property for $x with settlement after 1 July 2000. The sale to you was input taxed as the sale of residential premises.

Improvements on the property included a residential dwelling, a studio and a carport.

You purchased the property with the intention of leasing it for short term holiday rental and using it as a "weekender" for yourselves, family and friends when not occupied as a rental. You continue to use the property for this purpose.

You engage a real estate agent to manage the property on your behalf.

The property is advertised on various web and social media sites. The advertising indicates that the whole property is available to the prospective guests.

Rental income is being reported in your income tax returns.

You have decided to subdivide the property into a number of lots, one lot with the existing residential premises and the remainder to be vacant lots. The purpose was to sell the vacant lots to partially realise the asset (the property) to assist with the funding of your retirement.

Development approval for the subdivision was granted. The development approval was conditional on certain modifications to the entire property.

Your accountant advised you to register for GST in regard to the subdivision. You have been registered for GST as a partnership since xx/xx/xxxx. You have lodged your activity statements and claimed GST credits for acquisitions related to the subdivision.

The subdivision was registered by the relevant authority.

The current residential premises will continue to be used for the purposes of leasing as a short term holiday rental and for private use. You have engaged a real estate agent to sell the vacant lots.

You do not intend to erect any improvements on the vacant lots.

You have not conducted any previous subdivision or development activities.

Reasons for decision

Question 1

Does the sale of a number of lots of vacant land constitute a taxable supply under A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Detailed reasoning

You are in the process of selling vacant lots of land.

A sale of vacant land will be a taxable supply under section 9-5 of the GST Act if;

·  the sale is for consideration

·  the sale is made in the course or furtherance of an enterprise you carry on

·  the vacant land is connected with the indirect tax zone, and

·  you are registered or required to be registered for GST.

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

On the information provided, the sale of the vacant lots will not be GST-free or input taxed.

The sale of the vacant lots will be for consideration. The vacant lots are located in Australia and therefore connected with the indirect tax zone. You are currently registered for GST.

The property that the vacant lots were subdivided from is used by you for leasing as a short term holiday rental. Rental income is being reported in the individual tax returns. The property is also advertised for rental on a number of web and social media sites.

You therefore are carrying on an enterprise of leasing on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act).

The property is used by you to earn income through leasing. Although you also use the property for personal use when it is not being leased, it is considered to be an asset of your leasing enterprise. Advertising on web and social media sites indicates that the whole property is available to the prospective guests. This includes what are now the vacant lots.

The sale, transfer or disposal of a capital asset of an enterprise is a supply in the course or furtherance of the enterprise. You are selling vacant lots of land that have been subdivided from the property that is used in your leasing enterprise. The vacant lots are part of the assets of your leasing enterprise. Therefore, the sale of the vacant lots are a supply in the course or furtherance of your enterprise.

As the requirements of section 9-5 of the GST Act will be satisfied when you sell the vacant lots, there sale will be a taxable supply.

Given the above, it is not necessary to consider whether the activities of subdividing and selling the vacant lots constitute carrying on an enterprise of subdivision of real property.

Question 2

If the sale of the lots will be a taxable supply, can the margin scheme be applied to determine the amount of GST payable?

Detailed reasoning

The margin scheme enables the GST on certain sales of real property to be calculated on a concessional basis.

Under subsection 75-5(1) of the GST Act, the margin scheme may apply in working out the amount of GST on a taxable supply of real property, such as a freehold interest in land, if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However, an entity will not be able to apply the margin scheme if it is selling real property that it acquired through a supply that was ineligible for the margin scheme.

Under subsection 75-5(3) of the GST Act, a supply is ineligible for the margin scheme if:

·  it is a taxable supply on which the GST was worked out without applying the margin scheme;

·  it is a supply of real property you inherited and the deceased person acquired all of the real property through a supply that was ineligible for the margin scheme;

·  it is a supply of real property and all of the following apply:

-  you acquired the real property from a fellow group member when you were a member of a GST group;

-  the fellow group member had acquired it from an entity that was not a member of the GST group; and

-  this earlier supply was not eligible for the margin scheme because of the operation of subsection 75-5(2); or

·  it is a supply of real property and both of the following apply:

-  you acquired the real property from the joint venture operator of a GST joint venture at the time when you were a participant of a joint venture; and

-  the joint venture operator had acquired the real property through a supply that was ineligible for the margin scheme.

You advised that you acquired the property after 1 July 2000 and the sale was input taxed as a sale of residential property. Based on the information available, you will be able to apply the margin scheme to work out the GST payable on the sale of the vacant lots.

Under the margin scheme, the amount of GST payable on the supply is 1/11 of the difference between the consideration paid for the acquisition of what is sold and the consideration received for the sale. The consideration paid for the acquisition does not include costs that you incur that were associated with the purchase of the property such as legal fees and stamp duty. It also does not include costs incurred in developing the property before or after its acquisition (section 75-14 of the GST Act).

As you are selling vacant lots subdivided from the original property that was acquired for $x, you will need to apportion the purchase price to the subdivided lots. Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 at paragraphs 58-68 provides guidance on apportionment methods.

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