Edited version of private advice

Authorisation Number: 1051837766869

Date of advice: 11 May 2021

Ruling

Subject: GST and land subdivision

Question

Are you considered to be carrying on an enterprise under section 9-20(1) of the GST Act when you subdivide land?

Answer

No, you are not carrying on an enterprise.

Relevant facts and circumstances

You are the owner of the Land.

You are not currently registered for GST.

You are in the process of subdiving your residential premises into two residential lots. You do not carry on an enterprise or business.

The land and residence were purchased in 19XXs, and you have resided at the residence since.

All the land has been unproductive, and no improvements have been made. Due to your advancing age you have decided to undertake this subdivision.

You do not have previous experience in subdividing and developing

You have made your own enquiries regarding electricity and Council requirements for the subdivision. This will be your one and only subdivision.

The property has never been used to produce income nor has it been held by you as a business asset.

The whole property has been subdivided into the two lots and residence.

The subdivision is funded by a line of credit.

Development work includes water and electricity connection in addition to the driveway, fencing and surveying work. You are undertaking the subdivision on your own. You will not engage a real estate agent to market and sell the two lots.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

9-5

9-20(1)

9-40

Reasons for decision

All legislation, unless specifically mentioned, in this ruling refer to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that 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 Australia; 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. For the supply of your subdivided land to be a taxable supply, all of the requirements listed in section 9-5 must be satisfied.

In this case, you will be selling subdivided vacant land lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) are satisfied. Further, the supply of the lots in your situation will neither be GST-free nor input taxed.

Accordingly, we must determine whether your sale of the lots are in the course or furtherance of an enterprise that you carry on (9-5(b)) and whether you are required to be registered for GST (9-5(d)).

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among other things, 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. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise (MT 2006/1) for the purposes of entitlement to an Australian Business Number provides guidance on what activities will amount to an enterprise.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. In particular:

(a)  a business encompasses trade engaged in on a regular or continuous basis.

(b)  an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

MT 2006/1, paragraphs 233 to 257 explains that an entity is carrying on an enterprise where activities are being done 'in the form of an adventure or concern in the nature of trade'. This is not a defined term. However, MT 2006/1 points out in para 241 that this expression was used in the definition of enterprise as a result of a lengthy history of case law setting out the taxation of isolated transactions.

MT 2006/1 at paragraph 262 mentions that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Further where the activities involve subdivision and sale of real property, MT 2006/1 lists a number of factors drawn from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) to determine whether the activities are an adventure 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.

These factors are set out at paragraph 265 of MT 2006/1:

•         there is a change of purpose for which the land is held;

•         additional land is acquired to be added to the original parcel of land;

•         the parcel of land is brought into account as a business asset;

•         there is a coherent plan for the subdivision of the land;

•         there is a business organisation - for example a manager, office and letterhead;

•         borrowed funds financed the acquisition or subdivision;

•         interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•         there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•         buildings have been erected on the land.

While holding an asset for a considerable period of time may indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition, including any subsequent change in intention or use of the asset is an important consideration.

Paragraph 266 of MT 2006/1 provides that 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. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Of relevance are Examples 33 & 34 of 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.

Example 34

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

On the facts provided, we are of the view that your situation is akin to the examples provided in paragraphs 33 & 34 of MT 2006/1 and consider that your subdivision of the land is a mere realisation of a capital asset.

Consequently, we consider that your activities of land development are not 'an adventure or concern in the nature of trade'. Therefore, as set out above we consider that you are not carrying on an enterprise of property development and merely realising a capital asset. Your supplies of the lots Lots 1 and 2 are not in the course or furtherance of an enterprise that you carry on and you do not satisfy section 9-5(b).

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