Edited version of private ruling

Authorisation Number: 1011660696678

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Ruling

Subject: GST and sale of real property

Question

Is GST payable on the sales of the subdivided lots?

Answer

Yes, GST is payable on the sales of the subdivided lots.

Relevant facts

You are the co-owners of land which was purchased a number of years ago.

You commenced building a house there and begun living there. You have lived there ever since.

You also purchased adjacent land. You used this land for cattle grazing. Except for a small parcel of land that was subdivided and sold a number of years later, the balance of this land continues to be used for cattle grazing.

At the time you purchased the land, you intended to use it only to build your home and graze cattle.

You are in a partnership that carries on a cattle grazing business on the property.

Later, the council identified part of your land in its residential development strategy.

The council adopted a local environment study, in which part of your land was zoned rural/residential.

The council approved a number of lots of subdivision in part of your property. You delegated the organisation of the subdivision work to a contractor who attended to plans and approvals through council, called for tenders from sub-contractors and conducted inspections of roads, water and power. The subdivision was completed. All lots were sold over a two year period. This subdivision was treated as the mere realisation of a capital asset.

Later, you decided to subdivide the property due to your advancing age and the land was too large and time consuming to maintain.

You lodged a new development application for the subdivision of the property to provide a number of rural residential lots, a new public road and an open space lot to be dedicated to the council.

You have appointed the contractor to oversee the subdivision.

The council approved the DA subject to conditions. The DA for the current subdivision requires the applicants to complete road works, as well as provide underground electricity and water. The subdivision would be developed in four stages.

A modification to the DA was approved for five years.

Later, you commenced work on the culvert and drainage pipeline to keep the DA from lapsing.

The contractor will liaise with the council and call for tenders for road works and oversee the construction.

No clearing or earthmoving works were conducted for the current subdivision.

You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the DA.

You have no formal business plan or timeline for completing the subdivision works and setting the subdivided lots.

You have no business organisation for the subdivision. There is no office, no secretary and no letterhead in relation to the subdivision activities.

You intend to advertise the land for sale through local real estate agents.

You did not borrow any money for the current subdivision. Family funds will be used to finance the subdivision.

The partnership has been registered for GST since 1 July 2000.

The property is listed as an asset in the partnership books. The partnership have not claimed any deductions or input tax credits in relation to the subdivision, only in relation to the cattle grazing. The partnership will continue to carry on the cattle grazing activities on the remaining land after subdivision.

You received private rulings for income tax purposes stating that the sales of the subdivided lots would be the mere realisation of a capital asset.

Reasons for decision

Summary

GST is payable on the sales of the subdivided lots.

Detailed reasoning

GST is payable on any taxable supply that you make.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you make a taxable supply if:

(a) you make a supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with Australia, and

(d) 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.

Accordingly, the sales of the subdivided lots are taxable supplies if all the requirements of section 9-5 of the GST Act are met.

In your case, firstly we need to determine whether you are making the sales in the course or furtherance of an enterprise that you carry on.

Section 9-20 of the GST Act provides that enterprise includes, among 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.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the Tax Office on the meaning of enterprise for the purposes of entitlement to an Australian business number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term enterprise as used in the GST Act and can be relied on for GST purposes.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 262 to 265 of MT 2006/1 provide guidance to determine whether isolated property subdivision activities are an adventure or concern in the nature of trade. They state:

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

263. 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 an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work 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.

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.

The property was acquired a number of years ago have been used as your primary residence and for cattle grazing. In deciding to subdivide the land the purpose will change to that of selling rural residential lots with road access and services. We note that after the subdivision, the cattle grazing activities will continue on the remaining land.

No additional land has been acquired.

The property has been brought into account as a business asset of the partnership. Income tax deductions and input tax credits for expenses in relation to the use of the property for cattle grazing activities have been claimed. No costs relating to the subdivision have been claimed.

You pursued development approval from the council and engaged the contractor to liaise with the council and call for tenders for road works and oversee the construction. Furthermore, the subdivision of the property is a staged development.

You have no formal business plan or timeline for completing the subdivision works and setting the subdivided lots.

You have no business organisation for the subdivision. There is no office, no secretary and no letterhead in relation to the subdivision activities.

There is no marketing plan in place. The subdivided lots will be open listed when put on the market.

You did not borrow any money for the current subdivision. Family funds will be used to finance the subdivision.

The activities undertaken are necessary to meet council requirements to secure council approval for the subdivision. However, the land is not merely divided into several allotments and sold. The development involves the construction of roads, provision of services such as electricity and water and creating an open space to be dedicated to council.

While the activities are a one-off transaction, they include factors listed in paragraph 265 of MT 2006/1 which on balance indicates that a business or an adventure or concern in the nature of trade is being carried on in relation to subdividing, improving and selling the subdivided lots. These activities go beyond the mere realisation of a capital asset.

As the property is an asset of the partnership, the sales of the subdivided lots are made by the partnership (you).

Based on the information provided, the sales of the subdivided lots are made in the course or furtherance of an enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Furthermore, the sales of the subdivided lots satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. That is, you make the supply for consideration and the supply is connected with Australia as the subdivided lots are located in Australia and you are registered for GST.

The sales of the subdivided lots, in the circumstances described, are neither GST-free nor input taxed. As all the requirements of section 9-5 of the GST Act are satisfied, the sales of the subdivided lots are taxable supplies under section 9-5 of the GST Act.

As you will be making a taxable supply of real property, the GST payable under the basic rule is 1/11^th of the price. However, you may apply the margin scheme if you and the recipient agree in writing that the margin scheme will apply.

Goods and Services Tax Ruling GSTR 2006/7 provides further information on how the margin scheme applies to supplies of real property acquired or held before 1 July 2000.

You should note that you may be entitled to input tax credits on the subdivision and selling costs relating the lots that are held as business asset of the partnership. For further information refer to the fact sheet Input tax credits for business.

Additional information

Question 15.4.18 of The Property and Construction Issues Register deals with the issue of a business, company or trust that holds land as an investment or an asset which is used for their enterprise and they are registered for GST and it provides:

The sale of the land by a business, trading company or trust is made in the course or furtherance of an enterprise that the business, trading company or trust is carrying on. The sale of the land will be a taxable supply and subject to GST.

The supply of real property will be subject to GST if it constitutes a taxable supply.

Further, the response in question 15.4.18 under the heading 'Is the sale of the land 'in the course or furtherance' of an enterprise?' states:

A transaction is a supply 'in the course or furtherance' of an enterprise that is carried where the supplies can be considered to be connected to the entity's enterprise.

The term in the course or furtherance is not defined in, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.

As the business, trading company or trust owns the land, and it was held as part of the business structure, the sale is in the course or furtherance of it's enterprise and will be a taxable supply unless it is an input taxed supply.

All publications referred to above are available on the ATO website.