Edited version of private advice

Authorisation Number: 1052374162768

Date of advice: 19 March 2025

Ruling

Subject: GST - subdivision

Question 1

Is the entity making taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it sells the two subdivided properties?

Answer 1

No. The sales of the properties are not taxable supplies.

This ruling applies for the following periods:

Tax periods ending on or after 20XX

The scheme commenced on:

20XX

Relevant facts and circumstances

The property was advertised for sale as 'a corner allotment comprising of X separate titles'. The other title was the adjoining property. The sale was to be completed under X separate but interdependent contracts.

An entity entered into a contract to one property. At the same time, the entity entered into a contract to purchase the adjoining property.

The contract for the purchase of the adjoining property was amended to change the purchaser to a related entity.

The entity is not registered for GST.

The first property was purchased for the purpose of generating rental income and has been leased as residential accommodation. As the conditions of purchase required the purchase of the adjoining property, it was intended to be held as a long-term development investment. That is, the property was purchased with the intention of subdividing the property and building X residential premises which would be rented out.

However, increased building and development costs as a consequence of the Covid-19 pandemic in addition to increasing holding costs (such as interest rates) resulted in the realisation that the entity could not afford to develop the property. The entity subsequently decided to subdivide and sell one of the newly created lots.

A development application was lodged to subdivide the X properties into X separate titles. A boundary between the X properties was adjusted but otherwise the X property remained largely unchanged. The adjoining property was divided into X separate properties. A shed that was on the properties was demolished.

Due to a change in circumstances, the entity subsequently decided to sell the lots.

The entity hasn't undertaken property development activities previously.

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 188-25

Reasons for decision

Generally, an entity makes a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when:

•                     it makes a supply of consideration (payment); and

•                     the supply is made in the course or furtherance of an enterprise that the supplier carries on; and

•                     the supply is connected the indirect tax zone (Australia); and

•                     the supplier is registered, or required to be registered for GST; and

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

When the entity sells the lots the sales will be for consideration as the entity will receive payment for the sales. The sales will be connected with the indirect tax zone as the properties are located within Australia. There are no provisions within the GST Act which would result in the sales being GST-free or input taxed.

A supply must be made in the course or furtherance of an enterprise for it to be a taxable supply. Enterprise is defined widely for GST purposes and includes activities done in the form of a business as well as in the form of an adventure or concern in the nature of trade. As explained from paragraph 233 of the 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, 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.

Specifically in relation to isolated transactions and sales of real property, MT 2006/1 states:

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 profitmaking 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 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.

The entity purchased the property with the intention of building X residential premises which would be held to generate rental income. However, due to a number of changes in factors that were beyond the control of the entity, including significant building cost increases due to the Covid-19 pandemic, the entity decided to subdivide and sell the properties. Other than demolishing a shed, the minimum works as required by the local council are being undertaken on the new properties prior to their sale. The shed was removed to allow for alignment of the boundary between the X original properties.

Although a loan was obtained to purchase the property, the entity has not carried on a business and the interest on the loan has not been claimed as a business deduction. Furthermore, the subdivision and subsequent sales of the properties will repay those loans.

On balance, the facts suggest that the sale of the X lots are the mere realisation of capital assets of the entity.

In order for supplies of capital assets to be taxable supplies under section 9-5 of the GST Act, the supplier must be registered or required to be registered for GST. Generally, an entity is required to be registered if it has a projected GST turnover of more than $75,000 (amongst other conditions). Relevantly, section 188-25 of the GST Act specifically excludes the sale of capital assets from the calculation of an entity's projected GST turnover. This means that an entity which is not registered for GST is not required to be registered as a consequence of selling capital assets, even though the sales amount to more than $75,000.

The entity is not registered for GST and doesn't make any other supplies. As the sales are of capital assets, the projected GST turnover of the entity is nil and the entity is not required to be registered for GST.

Consequently, as the entity is not registered or required to be registered for GST, its sales of the X properties at are not taxable supplies under section 9-5 of the GST Act.

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