Edited version of private ruling

Authorisation Number: 1011701735158

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Ruling

Subject: GST and requirement to register

Question

Will you be required to register for GST?

Answer

No.

Relevant facts and circumstances

You acquired vacant land with the intention of building a home. However, this never eventuated and you remained in your existing residence and merely retained the land in its original state, with a view to possibly build in the future.

You are the registered owners of the vacant land which you have held for an extended number of years. During the period of ownership, you have not utilised the land for any income producing purpose.

The property is small and is zoned rural residential. Prior to any subdivision and development the property would need to be rezoned.

Most of the area surrounding your property has now changed from semi rural to high density development with various subdivisions having been completed. This encroachment was not envisaged years ago when your property was purchased.

Whilst it was not your initial intention, you have been prompted to subdivide the land and sell by an approach from a neighbour who owns adjacent properties and who is planning to subdivide and sell. Together with that neighbour, you are entering into a joint venture agreement to subdivide the properties. The total holdings of the neighbour are considerably larger than your own.

Your neighbour would be responsible for the day to day management of the project. The joint venture will agree upon a set budget and plan.

Specialist subcontractors will be engaged for the consulting (approvals and engineers), physical work (road building etcetera) and selling, although the neighbour may have some involvement with contractors and potential purchasers. You will not personally have involvement in the day to day operation of the joint venture in seeking approvals, carrying out work or the subsequent sale of properties. There will be regular reports and meetings; however the neighbour will be responsible for implementation of all decisions agreed upon.

The work carried out will be no more than what is required by council regulations and to enhance the individual lots for sale. The subdivision would be completed in stages over several years, depending on the speed of land sales, until all allotments are sold.

The proceeds from sales would be paid directly to whoever previously owned that parcel of land. There will be no site office or equivalent building.

The subdivision of your land will result in a number of lots. The individual lots will be sold as vacant land only.

You will be responsible for the funding of expenses relating to your share of the subdivision. This development will be funded by your own funds and borrowings.

The development of the land could not start until the land had been rezoned and subdivided. Approval for rezoning and subdivision was passed only recently. Delays in the approval process were due to complaints regarding the loss of vegetation on the vacant land, in particular native blue gums.

Your current income earning activities do not involve property development. Current income has been derived from alternative sources.

You have not been previously involved in subdividing land or any property development and you do not plan to continue to develop land in the future.

You are not registered for GST.

Reasons for decision

Detailed reasoning

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Therefore, in your case, we need to consider firstly whether your activities of land subdivision and sale constitute an enterprise.

Are you carrying on an enterprise?

Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition includes 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; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

The definition of 'business' in section 195-1 is the same as that in section 995-1 of the Income Tax Assessment Act 1997. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. Some of those indicators are:

§ a significant commercial activity

§ a purpose and intention of the taxpayer to engage in commercial activity

§ an intention to make a profit from the activity

§ the activity is or will be profitable

§ the recurrent or regular nature of the activity

§ the activity is carried on in a similar manner to that of other businesses in the same or similar trade

§ activity is systematic, organised and carried on in a businesslike manner and records are kept

§ the activities are of a reasonable size and scale

§ a business plan exists

§ commercial sales of product, and

§ the entity has relevant knowledge or skill.

There is no single test that determines whether a business is being carried on. In order to be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business.

In your case, there is clearly an intention to make a profit. It is likely that the subdivision will be profitable. However, you have held the property for many years. You have not developed land prior to this subdivision. Therefore, based on the facts provided, after weighing all the relevant indicators, we are satisfied that your activities do not amount to a business of land development.

However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions, that do not amount to a business, but which have the characteristics of a business deal.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes.

Paragraph 265 of MT2006/1 details a list of factors that provide assistance in determining whether activities are an adventure or concern in the nature of trade. If several of the following factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on. The 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

§ buildings have been erected on the land.

In addition, paragraph 266 of MT 2006/1 states:

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 your entire interest in the vacant land many years ago, with the intention of building a home. However, this never eventuated and you remained in your existing residence and merely retained the land in its original state, with a view to possibly build in the future.

You have been approached by a neighbour who owns adjacent properties and is planning to subdivide. Although, your original purpose of purchasing the land was not for resale, you are now entering into a joint venture agreement with your neighbour, to subdivide your land and sell the subdivided lots. Your neighbour would be responsible for the day to day management of the project.

Specialist sub contractors would be engaged to carry out most of the subdivision work. Although your neighbour may have some involvement with the contractors and potential purchasers, you will personally have no involvement in the day to day operation of the joint venture.

The scale of the activities undertaken suggests that the subdivision and development of the property has a commercial character. However, the activities carried out do not go beyond what is required by council's regulations. The fact that you have not been involved in any other land subdivision or property development activities in the past is also a relevant factor. You have further advised that you do not plan to continue to develop land in the future.

We acknowledge that the sale of the subdivided lots is more profitable than the sale of the property as one large block. However, this fact alone is not detrimental to the conclusion that the sale may still be a mere realisation of a private asset. We refer to paragraph 244 of MT 2006/1 which 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. 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.

Having applied the principles listed above to your circumstances, we conclude that the subdivision and development of your land does not amount to an enterprise for GST purposes. The development of the property and the subsequent sale of the subdivided land as vacant lots are regarded as a mere realisation of a private asset.

GST registration

We have concluded above that, in subdividing the land and selling the vacant subdivided lots, you are not carrying on an enterprise. Therefore, you do not satisfy the first essential condition that could eventually lead to you being required to be registered for GST in relation to your activities in connection with that land. As such, you will not be required to register for GST.

Please note that the findings of this ruling do not apply to subsequent ventures of such a nature.