Edited version of private advice

Authorisation Number: 1051825333387

Date of advice: 16 April 2021

Ruling

Subject: GST and sale of real property

Question

Will the sales of the subdivided lots by the entity be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following the specified period.

Relevant facts and circumstances

The entity has an ABN and is currently not registered for the goods and services tax (GST).

The entity purchased the identified property as an investment due to its location and its potential for growth.

The property is situated in Australia and comprised land and an old house and shed.

The entity decided to subdivide the property as allowed by zoning, in order to increase investment value.

Within twelve months, the entity demolished the existing dwelling.

The entity applied to the relevant authority and received approval for subdivision of the land into multiple lots.

The entity engaged contractors for the project.

The subdivision is near completion.

The entity has no intention to build.

The entity will be selling the subdivided lots as vacant land to residential buyers.

The entity has estimated the market value for each lot, to average more than $75,000.

The entity has appointed an agent for selling the subdivided lots.

The entity has not carried out any activities on the property except for this subdivision.

Except for this subdivision project, the entity has not previously been involved in any property development.

The entity has also been renting residential property.

The entity is not involved in any other enterprise or business activities, apart from renting the apartment property, and this current subdivision and sales of land.

The entity does not intend to apply the margin scheme to its sale of the subdivided lots to the purchasers.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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 25-1

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Taxable supply

The requirements of a taxable supply are set out in section 9-5 of the GST Act, 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.

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

On the facts of this case, there are no provisions in the GST Act to make the sale of the property, GST-free or input taxed.

The sale of the subdivided lots will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale will be a supply made for consideration and the property is situated in Australia.

We need to establish whether the sale is made in the course or furtherance of an enterprise that the entity carries on. Moreover, the entity is currently not registered for GST. Therefore, we also need to determine whether the entity would be required to be registered for GST at the time of settlement of the sale of the subdivided lots.

GST registration

Section 25-1 of the GST Act provides that you must make your application to be registered for GST within 21 days after becoming required to be registered.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

a.    the entity is carrying on an enterprise, and

b.    the entity's GST turnover meets the registration turnover threshold.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity or series of activities done:

•         in the form of a business

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

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise, but that activity taken into account with other activities may form an enterprise.

The entity has carried out a series of activities that lead to the sale of the vacant lots of land. All of its activities need to be considered. These include:

•         Purchasing the property as an investment

•         Demolishing the existing house

•         Applying for permit to subdivide the land

•         Engaging contractors to undertake the works in respect of the subdivision project

•         Arranging for the sale of the subdivided lots of land

•         Selling the subdivided lots as vacant land.

The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise.

An enterprise can be conducted in a small way. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

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.

Paragraph 178 of MT 2006/1 lists a number of indicators to be considered when determining whether an activity or series of activities amount to a business.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one-off transaction may fall into the category of 'an adventure or concern in the nature of trade' where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

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.

Paragraphs 264 to 266 of MT 2006/1 discuss judicial decisions that have established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case.

It is also relevant to consider the length of time the property had been held and to what purpose it had been put to in that time.

Application of the above indicators to the activities undertaken by the entity

In this case, the entity purchased a property as an investment, due to its location and its potential for growth. Within twelve months, the entity demolished the existing dwelling and soon after applied for subdivision into multiple lots.

We acknowledge that the entity may not have relevant knowledge or skill in property development activities. Because the entity does not have the necessary expertise, it has engaged relevant professionals to ensure the whole project is undertaken in a businesslike manner.

We consider that the entity's activities involving the acquisition of the property, demolition of the existing dwelling, subdivision into multiple lots and selling of newly subdivided vacant lots of land constitute activities done in the form of an adventure or concern in the nature of trade and thus amounts to 'carrying on an enterprise' of property development for GST purposes.

Turnover

The applicable registration turnover threshold in this case is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

Goods and Services Tax Ruling GSTR 2001/7 explains the meaning of GST turnover and the effect of section 188-25 of the GST Act on the calculation of projected GST turnover. GSTR 2001/7 is available on our website at www.ato.gov.au

In calculating your GST turnover under Division 188 of the GST Act, certain supplies are excluded.

Section 188-25 of the GST Act requires you to disregard the following when calculating your projected annual turnover:

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.

Capital assets

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.

Paragraph 35 of GSTR 2001/7 states the following regarding capital and revenue assets.

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.

For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

Application to this case

On the facts provided, at the time of settlement, the lots have been subdivided from the property which has never actually been used by the entity to generate income in an enterprise.

Also, as the entity is deriving income from the sale of the asset itself, rather than deriving income from the leasing or other use of the asset, the asset will be of a revenue nature and connected to the enterprise of the property development. Therefore, when calculating the projected turnover, the sale is not disregarded under paragraph 188-25(a) of the GST Act.

Paragraph 188-25(b) of the GST Act

'Solely as a consequence'

The GST Act does not define the term 'solely as a consequence of'. For the purposes of section 188-25 of the GST Act, a supply is made, or is likely to be made, 'solely as a consequence' where the supply is made only as a result of the ceasing of an enterprise, or the substantial and permanent reduction in size or scale of an enterprise.

'substantially and permanently'

The GST Act does not define the term 'substantially and permanently' as used in subparagraph 188-25(b)(ii). The word 'substantial' will vary according to context.

'ceasing of an enterprise'

Paragraphs 46-47 of GSTR 2001/7 discusses 'ceasing of an enterprise' in the context of isolated transactions.

An enterprise may consist of an isolated transaction resulting in the creation of or dealing with a single asset. The disposal of that asset at the completion of that isolated transaction is not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances, the enterprise ceases as a consequence of the disposal of the asset rather than the asset being disposed of in consequence of the ceasing to carry on the enterprise.

Application to this case

We consider that the sale of the subdivided lots is not made only as a result of the ceasing of an enterprise or the substantial and permanent reduction in size or scale of an enterprise. Rather, the development enterprise ceases as a result of the sale of the subdivided lots.

Therefore, when calculating the projected turnover, the sale is also not disregarded under paragraph 188-25(b) of the GST Act.

Your 'current GST turnover' is the sum of your turnover for the current month and the previous 11 months. Your 'projected GST turnover' is the sum of your turnover for the current month and the next 11 months. However, turnover from making input taxed supplies are not included when calculating your current and projected GST turnovers.

The sale of vacant land is not an input taxed supply. Therefore, the proceeds from the sales of the subdivided lots are included when calculating whether the entity's turnover meets the GST registration turnover threshold.

As the proceeds from the sale of the subdivided lots exceed $75,000, the entity's turnover will meet the GST registration turnover threshold. The entity will be required to be registered for GST at the time of supply of the vacant lots of land at settlement.

The sale of land is not GST-free in the given circumstances. Therefore, all of the requirements of a taxable supply under section 9-5 of the GST Act will be met at the time of settlement, and the sale will be a taxable supply. Consequently, GST is payable on the sale of the subdivided lots and the entity will be liable to remit the GST payable on that sale.

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