Edited version of private advice

Authorisation number: 1052254052765

Date of advice: 22 May 2024

Ruling

Subject: GST - sale of subdivided lots

Question

Is the sale of two subdivided lots to your grandchildren a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and are you required to be registered for GST pursuant to section 23-5 of the GST Act?

Answer

No. You are not making taxable supplies in accordance with section 9-5 of the GST Act. Your activities are not an *enterprise in the form of a business, nor an adventure or concern in the nature of trade as provided by subsection 9-20(1) of the GST Act and, therefore, you are not required to be registered for GST.

This ruling applies for the following period:

DDMMYYYY to DDMMYYYY

The scheme commences on:

DDMMYYYY.

Relevant facts and circumstances

You are not registered for GST.

You and your partner jointly acquired the property prior to XX Month 19XX.

You have treated the property as your primary place of residence for the whole period of ownership and continue to live there to date.

During the last year, the land has been subdivided into three portions.

The grandchildren who are acquiring the properties have paid for all of the subdivision and legal costs associated with this.

The first portion contains your main residence, and you do not intend to sell this.

The remaining two portions are vacant unimproved land, and you wish to sell these two subdivisions to your grandchildren at less than market value.

The sale price for each of the subdivisions will be about $XXX,XXX, whereas the market value is approximately $XXX,XXX each.

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

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

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

Reasons for decision

In this explanation,unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

All legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

All reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question

Is the sale of two subdivided lots to your grandchildren a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and are you required to be registered for GST pursuant to section 23-5 of the GST Act?

Answer

No. You are not making taxable supplies in accordance with section 9-5 of the GST Act. Your activities are not an *enterprise in the form of a business, nor an adventure or concern in the nature of trade as provided by subsection 9-20(1) of the GST Act and, therefore, you are not required to be registered for GST.

Detailed reasoning

Taxable supply

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 states 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 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.

For the sale of the properties to be a taxable supply, all the requirements in section 9-5 must be satisfied.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively.

In your case, there are no provisions in the GST Act under which your sale of the subdivided lots would be a GST-free or input taxed supply.

You will be supplying the subdivided lots for consideration. The supply will be connected with the indirect tax zone as the land is located in Australia. However, you are not registered for GST.

The primary issue to be resolved is whether the supply of the subdivided lotswill be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b)). If so, a further issue to be considered is whether you are required to be registered for GST.

Enterprise

Subsection 9-20(1) provides, amongst other things, that an enterprise is an activity, or series of activities, done:

(a)          in the form of a business; or

(b)          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 guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of 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 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.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•        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.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

Given the facts of this case, we consider that the activities resulting in the sale of the subdivided lotsto your grandchildren at less than market value do not reflect the indicators of a 'business' as listed above.

We now consider whether your activities will be in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

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

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or a capital/investment asset held for either investment or personal enjoyment. 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.

The Commissioner's view on the badges of trade in MT 2006/1 includes:

The subject matter of realisation

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

The length of period of ownership

249. A trading asset is generally dealt with or traded within a short time after acquisition. ...

The frequency or number of similar transactions

251. The greater the frequency of similar transactions the greater the likelihood of trade.

Supplementary work on or in connection with the property realised

252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

The circumstances that were responsible for the realisation

253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

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.

Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty).

Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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 as follows:

•        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 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.

In addition to the above, paragraphs 266 and 267 of MT 2006/1 provide that there may be other relevant factors outside this list that need to be weighed up in reaching an overall conclusion and that no individual factor is determinative to the question of whether an enterprise is present:

266. 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. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

Paragraphs 271 to 287 of MT 2006/1 set out examples of subdivisions that are enterprises whilst paragraphs 288 to 302 set out examples of subdivisions that are not enterprises.

Application to your case

You purchased the property prior to XX Month 19XX and have treated the property as your primary place of residence for the whole period of ownership.

Last year the property was subdivided into three portions, where legal and subdivision costs were paid solely by your grandchildren. The first portion of the subdivision which contains your main residence will continue to be your main residence.

The two vacant subdivided lots will be sold to your grandchildren at half the estimated market value. The sale of these lots will therefore not be made with the primary intention of making a profit.

You have not improved the property beyond preparing an asset for sale. There has been no action to bring the vacant subdivided lots into a more marketable condition to gain a better price as the dominant purpose of the activity is to sell the lots at half the market value to your grandchildren.

There does appear to be a coherent plan for the subdivision of the property, however the plan is in absence of a commercial imperative and reward. Your personal involvement in the development has been limited to facilitate the provision of the vacant subdivided lots to your grandchildren and you have demonstrated no financial commitment towards the activity.

In this case, the activities undertaken to subdivide the property are only at a level required to secure council approval for the subdivision. You did not purchase additional land to add to the original parcel, and you have not, nor do you intend to, construct any buildings on the subdivided lots before selling them to your grandchildren.

On balance, having considered the facts of the case against the badges of trade, referenced from MT 2006/1, and other factors listed above, we consider the activities you have undertaken in subdividing the property and the subsequent sale of the vacant subdivided lotsto your grandchildren, does not amount to an enterprise for GST purposes pursuant to subsection 9-20(1).

GST Registration

Section 23-5 of the GST Act states that you are required to be registered for GST if:

(a)          you are *carrying on an *enterprise; and

(b)          your *GST turnover meets the *registration turnover threshold (in your case the threshold is $XX,XXX).

As determined above, the activities you have undertaken and propose to undertake in the subdivision of the property and the subsequent sale of the vacant subdivided lotsto your grandchildren, does not amount to an enterprise for GST purposes under section 9-20. As you are not carrying on an enterprise you are not required to be registered for GST pursuant to section 23-5.

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