Edited version of private ruling

Authorisation Number: 1011482953683

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Ruling

Subject: GST and sale of subdivided land

Question 1:

1. Will your sales of vacant land lots from the proposed subdivided land be subject to Goods and Services Tax (GST)?

Answer

No, the sales of vacant land lots from the proposed subdivided land will not be subject to GST

Question 2:

2. Will your sale of a lot of land upon which is erected an existing residential dwelling from the proposed subdivided land be subject to GST?

Answer:

No, the sale of a lot of land upon which is erected an existing residential dwelling from the proposed subdivided land will not be subject to GST.

Relevant facts and circumstances

You are an individual that is registered for GST and are carrying on an enterprise.

You inherited two adjoining properties under a will.

There are two existing residential cottages erected, one on each property. Their dates of construction is not known but have been occupied for residential use for decades. The deceased occupied one of the residential cottages as a principal place of residence for a long time. This residential cottage is currently rented out by you. The other residential cottage had been rented out for many years by the deceased and is still currently rented out by you.

Due to the size of the land, you obtained a subdivision approval to subdivide the land. The subdivision involves only the two parcels of land. You have not bought any additional land from the surrounding land to add to the original two parcels of land. You have provided a copy of the plan of subdivision.

It has not been necessary to construct a road as a right of carriageway is sufficient to service the lots created by the subdivision.

Minimal development work is to be undertaken to meet the requirements of council to complete the subdivision. The estimated costs are minimal.

The subdivision works once it commences will take only a few months to complete.

There is no coherent plan for the subdivision of the land nor any business organisation involved. You will manage the subdivision works. You will not borrow any funds from a bank or other financial institution to fund the subdivision. The subdivision costs will be funded solely by you from your own funds.

You will not claim any GST input tax credits or business expenses in relation to the subdivision.

No buildings will be erected on the land other than the existing residential cottages which will not be demolished.

The current zoning is residential.

You are not in the business of purchasing, developing/subdividing or selling property.

You intend to offer the vacant land lots for private sale.

The reason for selling the land is to merely realise the excess land and convert it to funds.

You intend to retain one lot in the proposed plan of subdivision which has an existing residential cottage that is rented out and will continue to be rented out by you.

Another lot in the proposed plan of subdivision which has an existing residential cottage that is currently leased by you will be offered for sale to the tenant. There have been no improvements made to the existing residential cottage and will be sold as is. If the tenant does not buy it then you intend to retain it and receive rental income from it.

Reasons for decisions

Question 1 - Sales of subdivided vacant land lots

Taxable supply

GST is payable on taxable supplies. The sales of your vacant lots of land will be a taxable supply if the supply satisfies all the elements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act states:

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.

(*denotes a term defined in the GST Act)

In this case, the supply by way of sales of your vacant lots of land will be for consideration, the supply will be connected with Australia as the land is in Australia, and you are registered for GST. As such, the requirements in paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act will be satisfied. Furthermore, in your case there are no provisions in the GST Act which would make the sales of the vacant lots of land GST-free or input taxed.

Therefore, what is left to determine is whether you are making the sale in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act).

Whether the sales of the vacant land lots will be made in the course or furtherance of an enterprise that you carry on

The term 'carrying on' is defined in section 195-1 of the GST Act which states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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.

An enterprise can therefore, incorporate a single undertaking such as the subdivision and sale of real property.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number. This is accessible from our website at www.ato.gov.au. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 (also accessible from our website at www.ato.gov.au) 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.

Whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, it also considers that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

You have advised that you are not in the business of purchasing, developing or selling property. Based on the information provided, your activity of subdividing your land and selling the subdivided vacant lots will be a one-off activity, and is not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities. Therefore, we shall consider whether the sales of your vacant lots are an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 244 of MT 2006/1 provides further guidance on adventures and concerns in the nature of trade. It states:

244. 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. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

The issue to be decided is whether the activities 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.

The cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 and Casimaty v. FC of T 97 ATC 5135 provide some guidance on when activities to subdivide land amount to a business or profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases, the courts held that the sales were a mere realisation of a capital asset.

Paragraphs 265 to 266 of MT 2006/1 state:

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 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.

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.

In your case you acquired the land by way of inheritance not for the purpose of resale for commercial gain. Whilst there is a change of purpose for which the land is held, no other factors above are present.

You advised that you are not in the business of subdividing land. This subdivision is a one off transaction which has come about solely due to the size of the land inherited which made it suitable for subdivision. The vacant land lots created from the subdivision will be sold in order to convert the vacant land to funds. The two existing residential cottages will not be demolished and will remain on the lots in the plan of subdivision.

Only the work required to meet council requirements, to secure its approval for the subdivision, will be undertaken. There is no business plan and no business organisation involved. You will manage the subdivision yourself.

No additional land was bought and no borrowings were undertaken to finance the cost of the subdivision works.

No buildings were built on the subdivided vacant blocks of land which are proposed to be sold. You intend to offer the lots for private sale.

You have never been in the business of sub-dividing or dealing in land.

Therefore, we consider that the land is a mere realisation of a private asset which does not amount to the carrying of an enterprise as defined under section 9-20 of the GST Act. The sale does not have a commercial nature and is not an adventure or concern in the nature of trade.

Accordingly, you will not be carrying on an enterprise when you subdivide and sell your vacant lots of land.

You are currently carrying on an enterprise as well as a leasing enterprise as you are letting out residential properties. However, the subdivision and sales of the vacant land lots are unrelated and not in the course or furtherance of your enterprise or leasing enterprise.

Conclusion

As you are not carrying on an enterprise in relation to the subdivision and sales of the vacant lots of land, paragraph 9-5(b) of the GST Act is not satisfied. Therefore, the sales of your vacant lots of land will not be a taxable supply and will not be subject to GST.

Question 2 - Sale of lot of land with existing residential dwelling

The sale of a lot of land upon with an existing residential dwelling will be a taxable supply if the supply satisfies all the requirements of section 9-5 of the GST Act. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the information provided, the supply by way of sale to the current tenant of a lot of land with an existing residential dwelling will be for consideration and the supply will be connected with Australia as the land is in Australia. Furthermore, the supply will be made in the course or furtherance of your leasing enterprise as you are currently letting out the existing residential dwelling on the lot and the sale will be a disposal of a capital asset used in your leasing enterprise. You are registered for GST. Therefore, paragraphs 9-5(a) to 9-5(d) of the GST Act will be satisfied.

However, the supply is not a taxable supply to the extent that it is input taxed.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, under subsection 40-65(2) of the GST Act the sale is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises (other than those used for residential accommodation before 2 December 1998).

Residential premises is defined in section 195-1 of the GST Act to mean land or a building that:

· is occupied as a residence or for residential accommodation, or

· is intended to be occupied, and is capable of being occupied, as a residence or forresidential accommodation

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Paragraph 25 of Goods and Services Tax Ruling GSTR 2000/20 (also accessible from our website at www.ato.gov.au) states that this definition requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence or for residential accommodation.

In this case, the supply of your lot of land with an existing residential dwelling which will be sold in its unimproved state to the tenant who is currently leasing it as residential accommodation is an input taxed supply of residential premises under section 40-65 of the GST Act. As such, the sale of this lot will not be a taxable supply and will not be subject to GST.