EDITED VERSION OF GST PRIVATE RULING

Authorisation Number: 34340

SUBJECT:

GST and sale of subdivided land

QUESTIONS AT ISSUE:

1. Is the sale of the subdivided property a taxable supply?

2. If the sale is taxable, can I choose to apply the margin scheme to the sale of the subdivided property?

3. If I can choose to apply the margin scheme how do I work out the margin when the subdivided property is sold?

4. Will the sale of subdivided blocks to your relatives be GST-free?

FACTS:

· You and your former spouse owned a property.

· This property was purchased in your spouse's name more than 20 years ago and consisted of several acres.

· You and your former spouse lived in a residential premises located on the property as your family home until your separation.

· The property was used for limited commercial purposes.

· Prior to the above activity and about 20 years ago, live stock was kept on the land and a farming business was carried on for a continuous period of more than 5 years.

· After 1 July 2000, the Family Court ordered that the property be divided into two sections and two new lots were created.

· Under the Family Law Act 1975 (FLA) court orders, you were given title to one lot consisting of nearly half the acreage which contained the previous marital residence.

· The application to subdivide the property into two lots was jointly adopted by the appropriate Council body in 2001.

· You decided to retain the residential premises and subdivide the remainder of the land you received through court settlement to several blocks for residential housing.

· Thus the land was subdivided into several blocks and an appropriate application was made.

· You decided to subdivide the land and sell because an appraisal of the land suggested that the land was worth substantially more subdivided than without subdivision.

· The relevant state body approved the subdivision plan in 2001.

· Under the relevant guidelines, you were required to provide roads, electricity and telephone access and storm water drainage to the subdivided land. However, you were not required to provide water, sewerage and general guttering.

· You appointed an independent project manager for the developmental works including road works, power supply connections and telephone access.

· You financed the developmental works through borrowings.

· You are selling some of the blocks to your relatives for less than their GST-inclusive market values and retaining one block for yourself.

· You appointed a real estate agent to market the blocks. The real estate agent has found buyers for the remaining blocks.

· You estimate the proceeds from these sales will exceed $50,000 in the 12 month period commencing from the month in which the first sale of the blocks.

DECISION:

1. Yes, the sale of the subdivided property is taxable.

2. As the supply of the land was made to you for no consideration and the supply took place after 1 July 2000, the margin for the supply you make would be the same as the sale price. Thus, applying the margin scheme would make no material difference to the amount of your goods and services tax (GST) liability.

3. See item (2) above. The question does not arise.

4. The sale of subdivided farm land to your relatives may be GST-free provided you can satisfy the provisions of section 38-475 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

REASONS FOR DECISION:

Preliminary Comments:

Goods and Services Tax Ruling GSTR 2003/6 discusses the GST consequences of enterprise assets to a spouse as a result of a matrimonial property distribution (MPD) under the FLA. We note that the property satisfies the meaning of an 'enterprise asset' for the purposes of GSTR 2003/6 as it is property used or intended to be used in an enterprise of the entity that is 'registered or required to be registered.

In your case, under the FLA, the court has made an order altering the interests of the spouses in the matrimonial property. The Tax Office view as expressed in GSTR 2003/6 is that 'when an enterprise asset is transferred to a spouse under an MPD there is a supply'.

The Tax Office's view in relation to when the acquisition is made can also be deduced from the ruling's discussion of the 'GST consequences for the recipient'. The ruling states under paragraph 83 that 'the recipient spouse will be unable to claim any input tax credits in respect of the acquisition made under an MPD' [emphasis added]. This implies that the acquisition made under the redistribution orders occurs at the time that the redistribution takes place, that is, generally at the time of the court order.

The fact that the courts may make an order in respect of property whether or not it has declared the title or rights of a party in respect of the property, does not preclude transfer of ownership interest at the time that the order is made. Consequently, the interest in the property came into your possession (that is, your acquired the interest) at that time. The date of acquisition in your case, therefore, is a date after 1 July 2000 when the GST legislation came into effect.

The property came into your possession without any consideration being made by you to the supplier. The fact that you acquired the property for 'nil' consideration is supported by the Tax Office's view in GSTR 2003/6. Paragraph 28 of the ruling states that:

…Generally, under an MPD there is no payment, and even where money is included as part of an MPD the payment is not made in connection with, or for the inducement of a supply. This is because the purpose of an MPD is not an exchange or barter of assets, but a redistribution of assets in accordance with the spouses' FLA entitlements…

Furthermore, the ruling summarises the Tax Office view in relation to consideration in the following paragraphs:

31....where an asset is received under an MPD resulting from a court order (following contested proceedings) there is no consideration in the nature of forbearance or discontinuance as it is the decision of the court rather than agreement between the parties that 'settles' the dispute.

…

36. We take the view that there is no consideration with a sufficient nexus to the assets supplied by way of a property distribution. Therefore, under a property distribution resulting from a breakdown of a marriage or other relationship the supply is made for no consideration for paragraph 9-5(a) purposes

(1) Supply of the property

GST is payable on any taxable supplies that you make. Section 9-5 of the GST Act sets out what constitutes a taxable supply. A GST registered entity (or an entity required to be registered for GST) makes taxable supplies where the supply is for consideration, it is made in the course or furtherance of an enterprise the entity carries on, and the supply is connected with Australia. Supplies that are input taxed or GST-free, however, are not subject to GST.

Whether or not the supply of subdivided land is a taxable supply depends on whether you meet all the requirements of section 9-5 of the GST Act.

You are making a supply of subdivided land in Australia in return for consideration. These are established from the facts you presented to us. In order to determine whether you meet the other requirements of a taxable supply we need to consider the following:

· whether the supply is made in the course or furtherance of an enterprise that you carry on; and

· whether you are required to be registered for GST.

In the course or furtherance of an enterprise

Section 9-20 of the GST Act defines an enterprise in terms of an activity or series of activities that includes the following:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or grant of an interest in property….

In the form of a business

The definition of 'business' in the GST Act is the same as that used for the Income Tax Assessment Act 1936 (ITAA 1936). Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 provides the main indicators of carrying on a business. These indicators include:

· a significant commercial activity;

· the purpose and intention of the taxpayer in engaging in the activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· repetition and regularity of activity; and

· the activity is organised and carried on in a businesslike manner.

The determination of whether a business is being carried on is generally the result of a process of weighing all the relevant indicators.

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

The GST legislation does not define the term 'an adventure or concern in the nature of trade'. However, Goods and Services Tax Determination GSTD 2000/8 which addresses the issue of the meaning of the term 'enterprise' states at paragraph 8 that:

An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business. Isolated transactions with commercial characteristics fall into this category. However, it does not extend to the mere realisation of investment or private assets such as the family home or private cars.

On a regular or continuous basis, in the form of a lease, licence or other grant of interest in property

Miscellaneous Taxation Ruling MT 2000/1 states at paragraph 84 that the definition of an 'enterprise' includes an activity, or a series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of interest in property.

Where you subdivide land with the intention of selling as separate blocks you intend carrying on an enterprise in the nature of a 'grant of an interest in property'.

Paragraph 67 of MT 2000/1 states that a business includes a trade that is engaged in on a regular or continuous basis while, an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business.

Paragraph 8 of the Goods and Services Tax Determination GSTD 2000/8 further states that 'an adventure or concern in the nature of trade' includes a commercial activity that does not amount to a business. Isolated transactions with commercial characteristics fall into this category. However, it does not extend to the mere realisation of investment or private assets such as family homes and private cars.

Therefore, the scope of 'enterprise' for GST purposes is given a broad scope of interpretation than the scope of 'business' for income tax purposes.

In your case, even though the activity of subdividing and selling subdivided blocks to the general public is an isolated transaction, it is nevertheless a commercial activity that is in the form of an adventure or concern in the nature of trade.

This isolated transaction has a commercial flavour as evident by the activities carried out in connection with the subdivision and sale of land:

· you applied to the relevant body for approval of the subdivision plan

· you engaged a project manager to carry out development work required by the appropriate council body, that is, to provide roads, electricity and telephone access and storm water drainage

· you also hired real estate agent to market and introduce buyers for the blocks of land, and

· you borrowed money to undertake the development of the land.

Paragraph 70 of MT 2000/1 states that investment assets may be used by entities in carrying on enterprises. To determine whether or not the use of these assets constitutes an enterprise, reference needs to be made to the enterprise definition and factors such as the indicators of a business and the meaning of 'in the form of a business'.

The character of an asset can change from trade to investment or from investment to trade (paragraph 71 MT 2000/1).

The extent of the activities undertaken by you is sufficient to change the character of the land from investment to a trade asset. New blocks of land have been created through subdivision. Basic infrastructure has been put in by a project manager in an organised and professional manner. The blocks of land have been marketed professionally to maximise profit.

Therefore, in the context of carrying on an enterprise that is in the form of an adventure or concern in the nature of trade, the sale of subdivided land is not the mere realisation of investment asset or private asset. The activities are in the form of an adventure or concern in the nature of trade and satisfy the definition of enterprise under paragraph 9-20(1)(b) of the GST Act. Accordingly, you are carrying on an enterprise of subdividing and selling land under paragraph 23-5(a) of the GST Act.

Requirement to register for GST

Under section 23-5 of the GST Act, you are required to register for GST if you:

· are carrying on an enterprise; and

· your annual turnover meets the registration turnover threshold.

You may choose to register for GST if you are carrying on an enterprise.

Registration turnover threshold

You are required to registered for GST if your current or projected annual turnover is (or exceeds) $50,000.

Your current annual turnover at any time, is the sum of the value of the supplies (excluding input taxed supplies) that you have made or are likely to make in the current month, and those you have made in the preceding 11 months (and for projected annual turnover include those you are likely to make in the succeeding 11 months).

Section 188-25 of the GST Act excludes certain supplies from being included in the calculation of projected annual turnover. Section 188-25 requires that:

In working out your *projected annual turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.'

(*These terms are defined in section 195-1 of the GST Act).

Goods and Services Tax Ruling GSTR 2001/7 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act. Paragraph 33 of GSTR 2001/7 states that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a 'capital asset' for the purposes of paragraph 188-25(a) of the GST Act.

GSTR 2001/7 which details the Tax Office view on the effect of section 188-25 of the GST Act on projected annual turnover discusses the meaning of capital assets.

Paragraphs 34, 35 and 36 of GSTR 2001/7 further states that a 'revenue asset' is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if such a disposal is an occasional or one-off transaction. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

Your activities involved in subdividing and selling of the blocks of land constitutes the carrying on an enterprise under paragraph 9-20(1)(b) of the GST Act. At the time of supply of subdivided blocks of land to your clients, the nature of your asset has changed from a capital to a revenue asset. The disposal of this asset is not a transfer of a capital asset. You are deriving income from the disposal of a revenue asset even if this disposal is a one-off transaction.

Therefore, the supplies of subdivided land is not transfer of capital assets and is not excluded from the calculation of your projected turnover.

At the time of the subdivision, the supplies you make, or likely to make during that month and the next eleven months, will exceed $50,000. Therefore, your projected annual turnover is at or above the registration turnover threshold of $50,000 under paragraph 188-10(1)(b) of the GST Act.

As you are carrying on an enterprise and your projected annual turnover meets the registration turnover threshold, you are required to be registered for GST under section 23-5 of the GST Act when you subdivide the land for the purpose of sale to the general public.

The supply of subdivided land satisfies all of the other positive limbs of section 9-5 of the GST Act. Furthermore, as the supply is neither GST-free nor input taxed, it is not excluded by the negative limb of section 9-5 of the GST Act. Therefore, you are making a taxable supply under section 9-5 of the GST Act when you supply subdivided land.

(2) and (3) Margin Scheme

Subsection 75-10(2) of the GST Act defines the margin for a supply under the margin scheme as the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest in question.

Subsection 75-10(3) of the GST Act specifies, where the circumstances apply, the date on which the valuation of the property is to be made for the purpose of calculating the margin. In your case, the acquisition date is the date on which the court made the MPD order. This date is after 1 July 2000. Consequently, you cannot apply a valuation for your property. You must use the acquisition price of the property to determine the margin. As the acquisition price is nil, your margin, even if you choose to use the margin scheme, would be the same as the price you will sell the property at. Therefore, applying the margin scheme would make no difference to your GST liability.

(4) Subdivided farm land

Section 38-475 of the GST Act states that:

(1) The supply of a freehold interest in, or the lease by an *Australian government agency of or the *long term lease of, *potential residential land is GST-free if:

(a) the land is subdivided from land on which a *farming business has been *carried on for at least 5 years; and

(b) the supply is made to an *associate of the supplier of the land without consideration or for *consideration that is less than the *GST inclusive market value of the supply.

Subsection 38-475(2) of the GST Act provides that a farming business is a business of:

(a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

(b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or

(c) manufacturing dairy produce from raw material that the entity produced; or

(d) planting or tending trees in a plantation or forest that is intended to be felled

You have advised us that the subdivided farm land that you are going to sell to your children can used for residential purposes but does not contain any buildings which are residential premises.

Under paragraph 38-475(1)(a) of the GST Act, the subdivided land must have had a farming business carried out on it for at least five years. Subsection 38-475(2) defines what is a farming business. Under paragraph 38-475(2)(b) of the GST Act, an entity carries on a farming business if it carries on a business of maintaining animals for the purposes of selling them or their bodily produce.

You have advised us that a business of sheep grazing was carried out on the subdivided land for a period of at least five years. Based on the facts provided by yourself, it appears that the business of sheep grazing carried out on the subdivided land satisfies the definition of a farming business under subsection 38-475(2) of the GST Act.

Furthermore, you have advised us that the farming business was carried out for a period of at least five years. Accordingly, the provisions of paragraph 38-475(1) (a) of the GST Act appear to be met.

To satisfy paragraph 38-475(1)(b) of the GST Act, the subdivided land must be sold to an associate of yours, without consideration, or for consideration that is less than the GST-inclusive market value of the supply.

You are supplying lots of subdivided land to your relatives. You have advised us that the sale of the lots to your children will be for less than their GST-inclusive market values.

An associate is defined in section 195-1 of the GST Act to take the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA). Under paragraph 318(1)(a) of the ITAA, an associate includes any of your relatives which is defined in section 995-1 of the Income Tax Assessment Act 1997 as meaning your spouse, parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child or spouse of the aforementioned persons.

Your relatives are considered to be associates for the purposes of the GST Act. As mentioned above, the consideration that you will receive for the sale of the lots of subdivided land to your children will be at less than the GST-inclusive market value of the land. As such, you will satisfy paragraph 38-475(1)(b) of the GST Act.

Consequently, the sale of the lots of subdivided farm land to your children will be GST-free under section 38-475 of the GST Act.

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