Edited version of private ruling

Authorisation Number: 1011527711385

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Ruling

Subject: GST and sale of property

Question

Will the supply of your property the purchaser or its nominated entity be a taxable supply?

Answer: Yes.

The supply of your property the purchaser or its nominated entity will be a taxable supply.

However, you may choose to apply the margin scheme, if eligible.

Relevant facts

You acquired a property post 1 July 2000.

The property comprises vacant land.

Your intention in purchasing the land was to derive passive, rental income.

You leased the property to a single lessee for primary production purposes.

You were registered for GST for six years.

You acquired the land in question while you were registered for GST.

You subsequently cancelled your GST registration, and backdated the cancellation to 1 July 2000 and refunded all the GST credits claimed, back to the ATO.

Your GST turnover for the previous 12 months was below $75,000 and you had also received interest income.

The interest was derived from the sale of an adjoining parcel of land under vendor's terms.

You have recently entered into a contract to sell the vacant land in question. A deposit is payable on the 'day of sale' (this is not defined) and the balance of payable at settlement which according to the contract for sale will be in the future.

The sole director of the purchaser's company is the son of your directors.

The special conditions to the Contract for sale include:

The contract is subject to the purchaser obtaining a GST ruling from the ATO no later than 16 weeks after the day of sale;

The vendor is to allow the purchaser to seek development approvals and to give consent for development including subdivision approval etc;

After the purchaser has paid the deposit in full, the vendor cannot carry out any works on the land;

Once relevant milestones have been reached (such as the purchaser obtaining the GST private ruling and rezoning, development application) and the deposit has been paid in full, the vendor grants a licence to the purchaser for $1.00 to allow the purchaser and the purchaser's employees, contractors and agents to enter the land to commence works;

Entry to the land is not to be treated as giving or taking possession under this contract.

If the contract is terminated as a result of a breach by the purchaser then they must remove all works attached to the land and reinstate it to its prior condition.

The vendor is to allow the purchaser to erect signage and notices marketing the property.

Clause 4 of the special conditions in the contract states that:

· the vendor warrants that it is not registered or required to be registered for GST;

· in the event the supply is taxable, the purchase price is inclusive of any GST for which the vendor is liable;

· the vendor warrants that it can use the margin scheme and the parties agree to do so, if the supply is taxable.

Clause 8 of the agreement states:

Partial Discharge of Title

The Purchaser may at any time and from time to time require the Vendor to partially discharge the Vendor's Title in whole or in part so long as the Purchaser simultaneously allows all sale proceeds, save selling costs, to the Vendor, until such time that the accumulative total value of sale proceeds meets the Vendors Selling Price.

The land will be sold on a piecemeal basis, after subdivision and improvements are carried out by the purchaser. You will remain the owner of the remaining property until each lot is sold.

The copy of the agreement provided to the ATO is not signed or dated by the parties. You have confirmed that the copy is a sample of the final signed agreement.

Your balance sheet provided refers to two properties, one of which was sold previously and the other is the subject of this ruling.

Your tax agent (via the tax agent portal) submitted your application for cancellation.

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 Division 23.

A New Tax System (Goods and Services Tax) Act 1999 Section 75-5.

A New Tax System (Goods and Services Tax) Act 1999 Division 188.

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

A New Tax System (GST) Regulations 1999 23-15.01.

Reasons for decision

GST is payable on taxable supplies. According to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

· you make a supply for consideration

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

· the supply is connected with Australia, and

· you are registered or required to be registered for GST.

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

All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply.

In your case, you will be providing the vacant land for consideration and the property is in Australia. However, you are not registered for GST.

There are no provisions in the GST Act or any other Act, under which the sale of your vacant land could be GST-free or input taxed.

Therefore, we need to determine whether your 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.

Enterprise

Section 9-20 of the GST Act defines the term enterprise to include:

· an activity, or series of activities, done in the form of a business;

· an adventure or concern in the nature of trade; or

· provision of a lease, licence or other grant of an interest in property on a regular or continuous basis.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

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.

In your situation, you carry on a leasing enterprise and the property in question is held as part of your leasing enterprise. We acknowledge that the property was held as a capital asset for the purposes of that leasing enterprise.

However, the relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of the activities associated with the subdivision and sale of the property.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

· Assets can be categorised as either trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

· Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

However, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

MT 2006/1 explains that 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.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T ( Casimaty] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

In Statham, a property owner did not erect any buildings on land before or after undertaking the subdivision of the land.

In Casimaty, a property owner constructed a homestead on farmland many years before undertaking a subdivision of the land, but no other buildings.

From the Stratham and Cassimaty 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. These factors are:

· 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.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this 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 applying the above factors to this case, we find that.

You have had a previous dealing in selling land.

You acquired the land in question when you were the owner of the adjoining land and you were registered for GST.

You then cancelled your registration and sold the adjoining property under vendor's terms.

The subject land was held as an asset of your leasing enterprise.

You will now be supplying the land to another entity whose sole director is the son of your directors. However, final settlement of the property will take place in seven years time.

Although, the purchaser will carry out the subdivision works, you will be giving access to the purchaser to carry out the development. The purchaser will subdivide and develop the land, and you will co-operate to assist with all relevant consents to ensure that the purchaser can achieve the necessary approvals for the development.

You will remain the owner of the land until the titles to the land are created and transferred to the purchaser on a piecemeal basis. This process will be carried out on a regular basis until all the land is developed and subdivided. You will be paid for each lot when the land and improvements are sold to a third party in stages, until the total sale price is paid out to you at a future date.

The level of development of the land goes beyond what is necessary for council approval as the purchaser will be building houses on the land and you will only transfer the land once a prospective purchaser is found for each subdivided and developed lot.

You will be supplying the land on a piecemeal basis until the full consideration for the land is paid on or before a specified date in the future.

Having given consideration to the above factors, it is our view that there is a change of purpose for which the land is held, and the manner in which the activities of subdivision and sale of your property have been undertaken go beyond merely realising a capital asset. Rather, the facts support that the activities carried out have a commercial flavour and that the nature of the asset has changed.

We consider that there is regularity in the supply of the subdivided land as the title to each subdivided lot is transferred on a piecemeal basis over a period of time. Further, the improvements to the land have caused the value of the land to increase and that is why you are able to sell the land an increased value. You are also providing the land to the purchaser for a deposit with the expectation of receiving regular and continuous payment as each subdivided lot is developed and sold. Therefore, your activity does amount to the carrying on of an enterprise (of subdivision and sale of property) as defined under section 9-20 of the GST Act.

In this regard, we consider that your activities and the sale of your land on a piecemeal basis will be in the course or furtherance of an enterprise that you carry on, and the condition at paragraph 9-5(b) of the GST Act will be satisfied.

Required to be registered for GST

As provided in section 23-5 of the GST Act, you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000).

In your situation, you were carrying on a leasing enterprise and now a property development enterprise.

Therefore, the issue that needs to be determined is whether your GST turnover meets the registration turnover threshold.

Under section 23-15 of the GST Act, the applicable GST registration turnover threshold in your case is $75,000.

Division 188 of the GST Act provides the meaning of GST turnover. Section 188-10 of the GST Act provides that your GST turnover meets the turnover threshold if:

· your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

· your projected GST turnover is at or above the turnover threshold.

In your situation, your current GST turnover from your leasing enterprise is below the turnover threshold. Therefore, we will consider your projected turnover.

Section 188-20 of the GST Act defines projected GST turnover as the value of all the supplies that you have made, or are likely to make, during that month and the next 11 months. Supplies that are input taxed and supplies that are not made in connection with an enterprise you carry on, are excluded in calculating your projected GST turnover. Further, in working out your projected GST turnover, supplies made by way of transfer of ownership of a capital asset are also disregarded.

We have determined above that the sale of your property is not input taxed and will be made in the course of your enterprise. We have also determined that the asset is no longer a capital asset. This means that the sale of the property on a piecemeal basis will be included in the calculation of your projected GST turnover.

When your projected GST turnover is at or above $75,000, you will be required to be registered for GST, as you will satisfy all the requirements of section 23-5 of the GST Act. Hence, you will satisfy the condition at paragraph 9-5(d) of the GST Act.

Conclusion

As you will satisfy all the requirements of section 9-5 of the GST Act, your sale of the property will be a taxable supply and you will have to remit 1/11^th of the sale price to the ATO in relation to the sale of the property (as you supply each subdivided lot to the purchaser on a piecemeal basis).

Additional information

Please note that you may be eligible to use the margin scheme where the requirements of Division 75 of the GST Act are satisfied. Further information regarding the margin scheme is available from our website.

You may also be entitled to input tax credits for acquisitions you make in connection with the property development (see Goods and Services Tax Ruling GSTR 2006/4 on the ATO website).