Edited version of private ruling

Authorisation Number: 1011674094595

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Subdivision of property

Question 1

Is the sale of the lots, resulting from the subdivision of the property subject to goods and services tax (GST)?

Answer

No.

Relevant facts and circumstances

You purchased an X acre block of land many years ago.

The property is zoned park residential by the relevant local Council.

You have lived on the property since just after purchase and carried on an enterprise of primary production until 200X.

Some years after purchase you acquired from the Australian Taxation Office (ATO) a sales tax exemption number as you carried on a business as a primary producer.

From 1 July 2000 to 1 July 2001 you were registered for GST.

You plan to subdivide the property into a number of lots, retain the family home situated on one of the lots and sell the remaining lots. This will help fund your retirement and financially assist your children and grandchildren.|

The project will include the construction of a sealed road with kerbing although no buildings will be erected. Water and underground power will be connected to each lot.

You will undertake earthworks in order to install underground services and undertake only those works that are required to meet council approval requirements.

The cost of the project and expected sale price of the lots was provided.

In a recent year the Council considered that the layout of your proposed subdivision was acceptable subject to a formal application being lodged.

You engaged the services of an engineer to plan, arrange and oversee the works and to undertake all the engineering work. Currently they are working on the plans to be submitted to Council. If approved, tenders will be called for and work is then expected to commence.

The engineer will check work as it is completed and you will approve payments to subcontractors as required.

The project will be funded by a loan from a financial institution and/or a lump sum from your superannuation retirement fund

The property has not been brought into account in your records as a business asset either in your previous primary production enterprise or in relation to the subdivision.

You will not claim any income tax deductions for the interest and other costs in connection with the property's subdivision unless the ATO rules that an enterprise for GST purposes is being carried on.

You have not claimed any input tax credits for GST included in your acquisitions in connection with the property's subdivision.

The property's subdivision will be a one-off development. You have not engaged in any property trading activities in the past and you have no intention of doing so in the future (ignoring the development in question and the proposed sales of the vacant subdivided lots).

You intend to engage a real estate agent to sell the subdivided lots.

Reasons for decision

Summary

The subdivision of the property and the eventual sale of the lots resulting from the subdivision are not considered to be an enterprise for the purposes of the GST Act.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supplies that you make. 

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make the supply for consideration;

(b) you make the supply 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 the supply is GST-free or input taxed.

All of the conditions set out in section 9-5 of the GST Act must be satisfied in order for a supply to be taxable. 

In your case, the sales of the subdivided lots will be for consideration and are connected with Australia as they are located in Australia. Therefore, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act will be satisfied.

It is now necessary to consider whether the sales of the subdivided lots will be made in the course or furtherance of an enterprise that you carry on and whether you will be required to be registered for GST as a consequence. 

Please note that there are no provisions in the GST Act or any other Act that would allow your supply of the lots for residential purposes to be GST-free or input taxed. 

Enterprise 

The term 'enterprise' is defined in section 9-20 of the GST Act 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.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 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 therefore be relied upon for GST purposes.

In the form of a business

The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. One of the indicators provided in this ruling is that the activity is recurrent or regular in nature.

In your case, your subdivision is a 'one-off' transaction, hence we consider that it is not a business as provided by TR 97/11.

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

Paragraph 234 of MT 2006/1 considers that the term 'in the form of an adventure or concern in the nature of trade' captures one-off transactions. This paragraph states:

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 transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 13 of GSTD 2006/6 discusses further 'in the form of an adventure or concern in the nature of trade' and states:

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. However the sale of the family home, a private car or other private asset is not, without other factors being present, an adventure or concern in the nature of trade.

Paragraphs 264 and 265 of MT 2006/1 264 also provide guidance as to what constitutes a commercial activity done in the form of an adventure or concern in the nature of trade. These paragraphs states:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ ( Statham ) and Casimaty v. FC of T ¹⁰⁶ ( 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.

Considering each of those factors in turn as they apply to your circumstances:

There is a change of purpose for which the land is held;

Originally the property was used as your private residence. Later it was also used for primary production which ceased in 200X. In deciding to subdivide the property, the purpose of holding it does not change as you will continue to live on one of the lots.

It is noted that the property has been used for residential purposes since 200X and you want to dispose of excess residential land no longer being used. This will help fund your retirement and provide financial assistance for your immediate family.

Additional land is acquired to be added to the original parcel of land

In your circumstances, no additional land has been added to the original property to assist or to increase the profitability of the subdivision.

The parcel of land is brought into account as a business asset

You have advised that the property was not brought into account as a business asset for your:

· proposed subdivision; or

· the earlier farming enterprise that was being carried on

There is a coherent plan for the subdivision of the land

By pursuing development approval from Council with the intended subdivision work to be completed under contract and that the subdivisional sales are to be advertised and made through commission sales agent, you will adopt a set plan with a view to securing from the ultimate sale of the land a much greater net return than otherwise could be expected. You were not motivated to enquire about subdividing your land by the desire to alleviate any debt burden or due to ill health as was the case in Casimaty. You have not advised whether you were content to sell the land as one parcel but were unable to do so as was the case in Statham. In accordance with your advice, the time frame from the initial preparation of the proposed plans for subdivision in the recent year, preparation of plans for submission to Council in the subsequent year, until minimum construction will be undertaken and the final marketing of the subdivided lots, indicates that the subdivision of the property is not conducted through any planned strategy in accordance with the expected norms of a property development enterprise.

There is a business organisation - for example a manager, office and letterhead

There is no evidence of an office or of letterhead as would be expected in a large subdivision project. The engineer has been engaged as a contractor to design and oversee the construction of works rather than an employee. As such this is not indicative of a management structure/business organisation being in place.

Borrowed funds financed the acquisition or subdivision

You have advised that you may borrow or in the alternative access monies from your superannuation fund to cover the costs of completing the subdivision. Regardless of the source, you have chosen to go down a path of risk and profit rather than the mere realisation of the asset as it was. You are not merely providing a bond to Council so that it can undertake a simple subdivision of land as was the case in Statham.

Interest on money borrowed to defray subdivisional costs was claimed as a business expense

You have advised that you are not claiming an income tax deduction for any of the costs associated with the property's subdivision. These costs would include any interest on money borrowed to finance the development.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision

You have stated that your activities amount to the minimum necessary to meet Council requirements to secure their approval for the subdivision. The provision of a sealed road and the provision of services such as electricity and water were mandated by Council. Thus it is reasonable to conclude that the level of development is limited to the minimum that is necessary.

Buildings have been erected on the land

On the facts provided no buildings or site office will be erected on the lots.

Paragraphs 297-298 of MT 2006/1 provide an example of a subdivision that is not considered to be an enterprise for GST purposes. Those paragraphs state:

297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell.

298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property.

We consider that your case is similar to the example provided by the Ruling. You advised that your advancing years made it very difficult to continue the farming venture. The subdivision is a means of selling the excess land and funding your retirement.

Your activities are a one-off transaction on land that you have held since purchase many years ago as your place of residence. While some of the indicators as to whether your activity of subdivision and sale of the resulting lots is in the form of an adventure or concern in the nature of trade, the majority are not. As such after weighing all the factors we find that the process of subdivision and the eventual sales are not considered to be an enterprise for GST purposes and are the mere realisation of your long held capital asset.

GST registration

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act.

Section 23-5 of the GST Act provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise and

(b) your GST turnover meets the registration turnover threshold.

As you are not carrying on an enterprise, you do not meet the requirements to be registered for GST. Given that subsection 9-5(d) of the GST Act will not be satisfied, the eventual supply of the lots will not be subject to GST.