Edited version of private advice

Authorisation Number: 1051811934181

Date of advice: 19 April 2021

Ruling

Subject: GST on residential property

Question 1

Are you required to be registered for GST under section 23-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes. You are required to be registered for GST in accordance with section 23-5 of the GST Act as you are carrying on an enterprise of property development. The sale of subdivided lots will be a taxable supply.

Based on the information received, the proceeds from the disposal of the subdivided lots are a taxable supply as you are considered to be carrying on an enterprise of development of land and are required to be 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 meets the registration turnover threshold.

You are required to be registered where both the above requirements are met.

Whether the sale of the proposed subdivided vacant lots will be in the course or furtherance of an enterprise that you carry on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, an activity or series of activities done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade...

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) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an Australian business number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

The principles outlined in these rulings have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 states:

An activity or series of activities

10. Essentially, this is any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

As the acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

Paragraph 11 and 12 of GSTD 2006/6 explains activities done in a form of business and states:

In the form of a business

11. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

12. The definition of 'business' in section 195-1 is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'.

The term business ordinarily would encompass a trade that an entity is 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 transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

While historically you may not have operated a business in property development, the current activities you have undertaken are extensive and include entering into deeds and agreements for the subdivision, development and sale of xxxx lots on the Land across xxxx stages. Also, you entered into various agreements with other parties to incorporate another parcel of land to the development activities.

Therefore, it is necessary to determine whether the activities undertaken are of a commercial nature that goes beyond the mere realisation of an investment asset or private asset.

At Paragraphs 13 and 14 of GSTD 2006/6 it explains 'in the form of an adventure or concern in the nature of trade'. It states:

13. 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

From the above, isolated transactions with a commercial flavour are included as in the form of adventure or concern in the nature of trade'. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. At paragraph 263 of MT 2006/1 it states:

263. The issue to be decided is whether the activities 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions...

In Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose or object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income.

In Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham's case) the appellants were the trustees of the deceased who had acquired a farm to raise his family there and engage in farming. There was never any intention of selling for a profit. The deceased's health deteriorated and he had various employment transfers and it was decided to subdivide and sell the land. It was held that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise for a number of reasons including:

•         the owners were at first content to sell the land as one parcel, but were unable to do so

•         no moneys were borrowed by them, although a guarantee was provided to the relevant council by way of bank guarantee

•         only very limited clearing and earthworks were involved

•         the owners relied upon the council to carry out road works, kerbing, electricity and sewerage works which were required to be done

•         apart from the council's activities, the owners did not engage any contractors, although they did obtain some professional advice

•         the owners did not erect buildings on the land

•         they had no business organisation, no manager, no office, no secretary, and no letterhead.

We consider that the facts of your case can be distinguished from those in Statham and Casimaty discussed above. Our reasons are outlined below.

Consistent with the above cases it is not in dispute that a taxpayer can embark on a venture in the nature of a business or in the nature of trade, where the property is applied for a different purpose, after the property was first acquired.

The relevant intention or purpose of the taxpayer is not the subjective intention or purpose of the taxpayer but rather it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 265 of MT 2006/1 lists factors which provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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. Applying these factors to your circumstance, we consider that:

•         There is a change of purpose for which the land was used, from carrying on a farming activity, to conducting a development enterprise.

•         The parcel of land is brought into account as a business asset that was used in conducting the farming activities and subsequently is a business asset upon the commencement of your development activities.

•         There is a coherent plan for the subdivision of the land including an agreement with a Developer to carry out the subdivision of the Land on your behalf and appointment of a Project Manager to perform the development management services for the project.

•         You borrowed funds from the Developer, who is also the financier.

•         There is a level of development of the land beyond that necessary to secure council approval for the subdivision.

•         The development of the land is of a substantial size and scale which includes an activity centre and areas for the construction of schools.

On balance, we consider that the size and scale of the subdivision and its organised nature point towards an enterprise in the form of an adventure or trade, as opposed to the mere realisation of a capital asset. Further, the relevant agreements that you have entered evidence that your activities go beyond a passive involvement. As such, we do not agree with your submission that you had limited and/or passive involvement in the development.

As you satisfy the first requirement in the form of an adventure or trade, it is therefore necessary to consider the second requirement.

We need to determine whether your GST turnover meets the registration turnover threshold. The registration turnover threshold for an entity (other than a non-profit entity) is $75,000.

Subsection 188-10(1) of the GST Act provides that your GST turnover will meet a particular turnover threshold if:

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

(b) your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Whether the sale of the subdivided lots will be a transfer of a capital asset

Section 188-25 of the GST Act provides that in working out your projected GST turnover you should disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours, and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of capital assets is not defined in the GST Act. Goods and Services Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) considers the meaning of 'capital asset'.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7 it states:

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. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

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. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

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.

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

In your case, the sale of the subdivided lots is inherent in carrying on an enterprise in the form of an adventure in the nature of trade. Therefore, the sale of these lots will not be a transfer/sale of a capital asset. Accordingly, the sale of the subdivided lots will not be disregarded under section 188-25 of the GST Act when calculating your projected GST turnover.

As you will be selling around xxxx lots, it is reasonable to expect that your projected GST turnover will meet the registration turnover threshold of $75,000. At that point in time, the requirement of paragraph 23-5(b) of the GST Act will be satisfied.

As both requirements of section 23-5 of the GST Act will be satisfied you will be required to be registered for GST.

Relevant facts and circumstances

You are the registered proprietor of the land in question (the Land).

Your family has owned and farmed land in that particular town for generations.

You acquired a parcel of the Land around xxxx and the second parcel of the Land around xxxx.

•         The properties that constitute the Land were zoned as Rural.

The Land has solely been used for primary production activities from the time of ownership until the commencement of development activities in xxxx. Part of the Land is still being used to carry on primary production activities.

In relation to those primary production activities, you were registered for GST from xxxx to xxxx. You cancelled your GST registration with effect from xxxx because your turnover was less than the GST registration threshold.

In late xxxx, the government identified the Land as a 'future residential' area of that particular town.

Upon advice from your consultants, you together with the owners of adjoining or nearby parcels of land made a joint application to have the properties rezoned.

In xxxx, the Land was successfully rezoned to Urban Growth Zone.

In xxxx, you engaged a real estate agent, to assist you in selling the Land and find interested buyers. However, around that time, there was significant negative publicity concerning drainage requirements in relation to the Land. As a result, no offer was forthcoming within the potential price range indicated to you by the real estate agent. You ended your dealings with the real estate agent.

Due to your age, financial constraints, living arrangements, retirement from the work force and low price offers, you wanted to sell the land but only at a realistic price.

In xxxx, your solicitor advised that a subdivision and sale would achieve the best value but a development of the Land in that manner was outside your capabilities and skill set. They recommended that the only way to realise the Land was to engage a professional developer with the necessary skills and experience.

In October xxxx, you entered into a Development Services Deed (Agreement) with a developer (Developer) in relation to the Land. You have provided other relevant documents and agreements with your private ruling application.

You engaged the Developer to develop the land and appoint a Project Manager. The Developer appointed a Project Manager in xxxx. The Developer is a wholly owned subsidiary of the Project Manager.

You own a xx interest in an adjoining parcel of land. A company purchased the remaining xx interest in the land.

The development is to include an activity centre and areas for the construction of schools.

Initially, the development was for around xxx lots across xx stages. However, due to the incorporation of the adjoining land (of which you hold a xx interest) into the development, the development increased to around xxxx lots across xx stages.

You advise that from late xxxx and continuing you via an attorney entered into sales contracts with respect to residential lots forming part of the Land with those sale contracts likely to settle in xxxx.

Relevant legislative provisions

Section 23-5 of A New Tax System (Goods and Services Tax) Act 1999

Subsection 9-20(1) of A New Tax System (Goods and Services Tax) Act 1999

Subsection 188-10(1) of A New Tax System (Goods and Services Tax) Act 1999

Section 188-25 of A New Tax System (Goods and Services Tax) Act 1999

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