Edited version of private advice

Authorisation Number: 1051848300786

Date of advice: 8 June 2021

Ruling

Subject: Goods and services tax - property subdivisions

Question 1

Will your supply of the subdivided Lots, be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

Are you required to give a written notice to the purchasers of your subdivided Lots, under section 14-250 of Schedule1 of the Tax Administration Act 1953 (TAA 1953?

Answer

Yes

Relevant facts and circumstances

On ddmmyyyy you bought a residential property (the Property) for $X with the intention to renovate and live in it. The Property was located in Australia (the Property). The Property was zoned residential on purchase and there were no changes to zoning following your purchase.

You are not registered for GST individually however you are registered for GST as a partnership.

Over the last x years you have bought and sold a number of residential properties and undertaken one previous subdivision of one of these properties.

The subject property (the Property) of this ruling was purchased in ddmmyyy and the subdivided lots from this property are or have been sold.

In YYYY you sold your previous residence and moved into your child's house while you began the process of planning for the renovation of the current Property. You funded the purchase of the Property from the sale proceeds of your previous principle place of residence.

In mmyyyy you began preparations for the renovation and extension of the Property and applied to the local council for a copy of house plans. You were advised that there were no plans available for the Property. You took manual measurements of the house and started working on plans for the renovation and extension design.

On ddmmyyy you consulted with a building specialist who advised that, the condition of the house and lack of original house plans, made the renovation/extension uneconomical.

You had spent around $X in planning the renovations up to this point.

You then decided that you would build your own house on the site and on ddmmyyyy sought a quote for the demolition of the house. To get funds to build your principle place of residence on the property you initially decided to subdivide the property into X lots and keep one and sell the balance, to enable you to build your principle place of residence on the remaining lot. You incurred approximately $X in demolition and subdivision costs.

You planned to build a new house for yourself on Lot X and sell the other Lots. None of the lots will be sold to family members or associates. Lot X was the largest lot and the others were smaller.

Once the subdivision was completed, you listed Lot Y hoping that it would sell quickly, so you could commence preparations for building the house on Lot X for your residence. There wasn't any interest in the sale of Lot Y, however, there were considerable enquiries about Lot X.

On ddmmyyy you listed Lot X for sale and successfully sold it on ddmmyyyy for $X.

You decided not to continue with your plans to build your principle place of residence on the remaining lots as they weren't large enough to accommodate you and began the sale process for the remaining lots.

Reasons for decision

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 to the indirect tax zone (Australia); and

(d) you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case, the sale of the lots will be made for consideration and are located in Australia. As such we will consider whether the sale of the Property is made in the course or furtherance of an enterprise that you carry on. Where the sale is in the course of an enterprise then it will be a taxable supply as you are already registered for GST as a partnership.

In the course or furtherance of an 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.

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) provides the Tax Office view on the meaning of 'enterprise' for the purposes of 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 the A New Tax System (Goods and Services Tax) Act 1999? 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.

In the form of a business

Paragraphs 170 to 232 of MT 2006/1 discuss 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 lists indicators of when an entity might be carrying on a business. It provides:

•                    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 businesses in the same or similar trade;

•                    activity is systematic, organised and carried on in a businesslike manner 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 or skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Application to your situation

In this case, we do not consider your activities in regard to the purchase of the land, and subdivision have been done in the form of a business.

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

Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, 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.

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

In addition, it is also relevant to re-examine paragraph 178 of MT 2006/1 which lists indicators of carrying on a business because the definition of enterprise includes the words in the form of 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 businesses in the same or similar trade;

•                    activity is systematic, organised and carried on in a businesslike manner 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 or skill.

Application to your situation

Paragraph 247 of MT 2006/1 discusses that where property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

As discussed, you initially acquired the Property for private purposes however, you did not pursue this for various reasons and instead subdivided the property into X lots and have sold X lots and will sell the remaining lots.

You initially held an intention to engage in a private undertaking of renovating a premises for your residence which is not an enterprise. However, you could not proceed with this and decided to subdivide the Property and sell the resulting lots. Factors that we considered include;

•                    You acquired the Property for private purposes

•                    You actively pursued the private purpose until it became untenable

•                    You had only undertaken this type of activity once before

•                    You did not occupy the premise after you acquired it nor carried out your intentions of building your private residence

•                    You did not have a systematic plan from the beginning

•                    You held the Property for a relatively short period of time

•                    The amount and value of the work you undertook to prepare the property for sale

•                    Although your property was initially acquired for private purposes you later decided to sell the whole site of at a profit

•                    Although you did not have the relevant knowledge of the development you engaged others with the requisite knowledge and

•                    You did not intend to make a profit on the undertaking

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion that these activities are not activities in the form of an enterprise.

Conclusion

As such we consider your activities of demolition of the existing premises and subdividing the Property into X lots amounts is not an enterprise and therefore you did not make a taxable supply of Lots sold and will not make taxable supplies of other Lots and therefore there is no GST applicable to the sale of the Property.

We note that where you undertake a similar activity in the future the GST outcome may be different.

Question 2

Guidelines on GST withholding at settlement is available in Law Companion Ruling LCR 2018/4Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4). The explanations in LCR 2018/4 include:

58. A vendor of residential premises or potential residential land must give a written notice to the purchaser before making the supply.[25] The notice must state whether the purchaser is required to make a payment under section 14-250 in relation to the supply.

59. This requirement applies to all vendors of residential premises and potential residential land, not only those who are registered or required to be registered for GST. If the vendor is not registered or required to be registered for GST, they simply state that the purchaser is not required to make a payment.

60. This notice is not required for:

(a) a supply of commercial residential premises

(b) a supply of potential residential land where the purchaser is registered for GST and is acquiring the property for a creditable purpose to any extent.[26]

61. This means that a vendor of potential residential land will need to know whether the purchaser is registered for GST and acquiring the land for a creditable purpose. The vendor can check whether the purchaser is registered for GST by searching the Australian Business Register (abr.business.gov.au/) and can rely on a copy of the search on the day of the supply, or up to seven days before the day of the supply, as evidence that the purchaser was registered. The vendor can rely either on written correspondence from the purchaser or a statement in the relevant contract regarding whether the purchaser is acquiring the land for a creditable purpose.

62. If the purchaser is required to make a payment, the vendor's notice must also state:

•         the vendor's name and ABN

•         the dollar amount to be paid by the purchaser under section 14-250

•         when the amount must be paid by the purchaser (for example, when the consideration is first provided at settlement)

•         the GST-inclusive market value of any non-monetary consideration

•         any other matters specified in the regulations.[27]

63. The vendor may give the notice as part of the contract for sale. When this is done, the notice must be easy to identify as a notice for the purpose of section 14-255. Alternatively it may be given as a separate document.

64. The vendor may need to determine certain things when giving the notice, for example, whether the land will be 'new residential premises' or 'potential residential land' at the time of settlement.

In this case, in relation to each of the Lots:

•         the buyer is the recipient of a non taxable supply.

•         the sales are of potential residential land as defined.

Accordingly, in relation to each of the subdivided Lots, you will be required to notify the buyer that they are not required to make a withholding payment as set out in paragraph 18 of LCR 2018/4.

The reason for this notice is that you are not operating in the course or furtherance of a GST enterprise.

Note as per paragraph 60 this notice is not required where the purchaser is registered for GST and is acquiring the property for a creditable purpose to any extent.

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