Edited version of private advice

Authorisation Number: 1051815286695

Date of advice: 11 March 2021

Ruling

Subject: GST and sale of vacant land

Question 1

Are you carrying on an enterprise when selling the five subdivided lots that were done from the Australian residential property under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, you are not carrying on an enterprise under section 9-20 of the GST Act when selling the five subdivided lots that were done from the Australian residential property.

Question 2

Are you required to register for GST under 23-5 of the GST Act when selling the five subdivided lots?

Answer

No. As advised in question 1 you will not be carrying on an enterprise when selling the five subdivided lots and therefore, you are not required to register for GST under section 23-5 of the GST Act.

Other information

Since the sale of the lots will be outside the scope of GST, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the subdivided lot to the Australian Taxation Office (ATO) when purchasing the property. This can be included in the sale contract or in a separate document prior to settlement.

Relevant facts

You work for as an employee for an Australian company and you are not registered for GST.

You purchased a residential property in 20xx. Your husband has no interest in the property.

You purchased the property primarily for investment and for use as a house weekend family getaways and school holidays. You envisaged spending time at the property with your husband when retired.

The property was rented out for a period of X years and you derived rental income during that period.

X years later after the purchase, you decided to subdivide the property into X lots and gift one lot to each of your five children.

The subdivision commenced with initial investigations and applications were made in June 20xx. The lots were not formally subdivided until July 20xx.

The subdivision was completed by a third party. The work undertaken for the subdivision was bare minimum that is just enough to subdivide in order to meet council approvals and regulations.

You paid for all costs of the subdivision with private funds.

Lately your husband was advised to finish work within the next year due to ongoing health issues. Based on the advice received from the doctor and the fact that your children are now adults and all of them are not living in the same region, you decided to sell the X lots in order to provide financial stability for you and your husband.

You appointed a Real Estate to market the X lots. Lot 2 is currently under contract.

You have not been involved in a subdivision of property before. Your husband subdivided part of his principal place of resident, placed a relocated house on the property and is now renting that property.

Neither you nor your husband have ever been registered for GST either as a partnership or individually. Your husband works for an Australian business.

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

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Questions 1 and 2

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a)  you make the supply for *consideration; and

(b)  you make the supply in the course or furtherance of an

*enterprise that you *carry on; and

(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.

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

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as:

•         you will sell the lots for consideration; and

•         the sale of the lots will be connected with Australia as the vacant land is in Australia.

Therefore, what remains to be determined is whether your sale of the lots will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST as you are not currently registered for GST.

Whether the sale will be made in the course or furtherance of an enterprise that you carry on

In accordance with section 9-20 of the GST Act, an enterprise includes, amongst other things:

•         an activity or series of activities done in the form of a business

•         an adventure or concern in the nature of trade

•         leasing out property on a regular or continuous basis.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for the purpose of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for the purposes of determining whether an entity carries on an enterprise for GST purposes.

You purchased the property for investment and for personal use. You have derived rental income from that property for four years until you decided to subdivide the property into 5 lots. In that rental period, you were carrying on a leasing enterprise and the property was a capital asset. Further when you use the property for personal use the property is a capital asset.

The leasing enterprise ceased when you decide to subdivide the property into 5 lots. The purpose of the subdivision was to gift a lot to each of your five children. In this instance the subdivision of the property into 5 lots was not made for trading purposes and would be capital assets that you would hold before gifting them to your children.

However, your circumstances changed when your husband was asked to retire earlier due to health issue. Based on the advice of the doctor and also due to the fact that your children are now adults and all of them are not living in the same region, you have decided to sell the X lots instead of gifting them to your children in order to procure financial stability for yourself and your husband.

According to Miscellaneous Tax Ruling MT 2006/1, assets can change their character from a capital/investment asset or a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

In this instance we need to determine if the sale of the lots will be made in the course of an enterprise that you carry on.

In the form of a business

Paragraphs170 to 232 discuss the factors to consider when determining whether an activity or series of activities are done in the form of a business.

Paragraph 178 of MT 2006/1, with refence to Taxation Ruling TR 97/11 Income tax am I carrying on a business of primary production? Lists the following as indicators of carrying on a business:

•         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 business in the same or similar trade;

•         activity is systematic, organised and carried out in a business-like way 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 and skill.

Based on the facts provided, we do not consider that your actions of subdividing the property and selling the lots constitute activities done in the form of a business.

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

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions.

•         The subject matter of the realisation;

•         Length of period of ownership;

•         Frequency or number of similar transactions

•         Supplementary work on or in connection with the property realised

•         Circumstances that were responsible for the realisation

•         Motive.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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 your case:

•         you originally purchased the property for investment purposes and for personal use as well. You have derived rental income from that property for X years;

•         your activities of ceasing the leasing enterprise and subdivide the property into X lots were motivated by your desire to gift each lot to your five children.

•         You are not in the business of property development;

•         With your husband having to retire earlier due to health issue and none of your five adult children are living in the same region, you have decided to sell the X lots instead of gifting them in order to provide financial stability to you and your husband.

In this case, after weighing up all the facts we consider that your sale of the lots will be the sale of a capital asset rather than a sale of a trading asset of a business or an adventure or concern in the nature of trade.

Conclusion

Accordingly, your sale of the lots will not be a supply made in the course of furtherance of an enterprise that you carry on. Since you are not carrying on an enterprise you will not be required to register for GST. The sale will be outside the scope of the GST law

Therefore, the sale of the 5 lots will not be a taxable supply under section 9-5 of the GST Act as paragraphs 9-5(b) and 9-5(d) of the GST Act would not be satisfied. No GST is payable on the sale.

Other information

GST at settlement

From 1 July 2018, purchasers of residential properties may be required to withhold an amount from the contract price and pay it directly to the ATO. The remainder of the sale price is paid to the property supplier. This potentially applies to:

•         New residential premises

•         Land that could be used to build residential buildings.

Suppliers must notify purchasers in writing as to whether they have a withholding obligation or not when they sell (subject to certain exceptions).

Suppliers must determine if they are running an enterprise. Even a one-off property sale could mean they have a GST obligation.

More information on GST at settlement is available at ato.gov.au

As we have determined that you will have no GST liability when you sell the lots, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the vacant land to the ATO. This can be included in the sale contract or in a separate document prior to settlement.

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