Edited version of private advice

Authorisation Number: 1051836647725

Date of advice: 11 May 2021

Ruling

Subject: GST and sale of underdeveloped parcels of land

Question

Will GST be payable on the sale of the parcels of undeveloped land?

Answer

No.GST will not be payable on the sale of the parcels of undeveloped land.

Relevant facts and circumstances

Decades ago the taxpayers purchased numerous hectares of land.

The land was originally purchased with the intention to build a residence for the taxpayers to live in with their family as their main residence. The taxpayers moved to the land in xxxx and commenced construction of a house on the land.

In xxxx the council rezoned the area to allow for land to be subdivided to xha parcels. Prior to this xha were the smallest land parcels permitted by council.

The taxpayers are planning to subdivide the land into equal sized lots and sell some parcels of undeveloped land.

The taxpayers have not engaged in the subdivision and sale of real property in the past and nor will they be engaged in selling real property in the future.

The parcels of land will be sold as bare land and there will be no development on the land.

Reasons for decision

GST is payable on taxable supplies.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply you make.

Section 9-5 of the GST Act provides that you make a taxable supply if the supply is made for consideration; in the course or furtherance of an enterprise that you carry on; the supply is connected with the indirect tax zone (Australia) and 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.

All the requirements under section 9-5 of the GST Act need to be satisfied for a supply to be taxable.

In this case the supply of the land will be made for consideration and is connected with Australia.

Further, the supply is neither GST-free nor input taxed.

Therefore, in this case, what needs to be determined is:

•         whether the sale of the subdivided land will be in the course or furtherance of an enterprise carried on by the taxpayers; and

•         whether the taxpayers are registered or required to be registered.

Are the taxpayers carrying on an enterprise of land subdivision?

Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition includes an activity or series of activities done in the form of a business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

In this case the land was originally purchased with the intention to build a residence for the taxpayers to live in with their family as their main residence. The property has been used by the family as a holiday house but has never been used for an assessable purpose.

As such, in relation to the land we consider that the taxpayers have not been carrying on an activity or series of activities in the form of a business.

In this case, we also need to consider whether the taxpayers activities of land subdivision constitute an enterprise.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

There are several other points raised by MT 2006/1 which are of relevance to your circumstances:

•         Assets can be categorised as either trading assets or investment/capital assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes (paragraph 258).

•         Examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere realisation of investment/capital assets does not amount to trade (paragraph 259).

•         The mere realisation of a capital/investment asset is not a business or an adventure or concern in the nature of trade (paragraph 263).

In this case, the property has been used by the taxpayers as a holiday house but has never been used for an assessable purpose.

We agree that the taxpayers land can be categorised as a private asset/capital asset.

The following example has been extracted from MT 2006/1:

Example 33

291. Ursula and Gerald live on a 2.5-hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Based on the facts provided, we are satisfied that the taxpayers are disposing of a capital asset when they sell the parcels of undeveloped land. As stated in paragraph 259 of MT 2006/1 the disposal of a capita/private assets does not amount to trade. Paragraph 263 of MT 2006/1 also provides that the sale of a capital asset is not a business or an adventure or concern in the nature of trade despite the size of the assets.

As stated above for a supply to be a taxable supply all the elements of section 9-5 of the GST Act need to be satisfied. In this case as the taxpayers are neither conducting a business nor an enterprise section 9-5 of the GST Act cannot be satisfied. As such there is no need to consider whether the taxpayers are registered or required to be registered for GST.

Therefore, the sale of the undeveloped parcels of land are not subject to the GST.

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