Edited version of private ruling

Authorisation Number: 1011703810501

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Ruling

Subject: GST and sale of lots from farm land

Questions

(1) Does your activity or series of activities, with respect of the acquisition and proposed sales of lots of land constitute an enterprise for purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

(2) Will the supply of the lots by you constitute a taxable supply?

Decision

Yes; your activity, or series of activities, constitutes an enterprise for purposes of the GST Act and the supplies of land are taxable supplies.

Relevant facts and circumstances

You, an individual, applied for a private ruling seeking confirmation that you are not required to register for GST in respect of the proposed sales of lots of land.

You are a member of a farming partnership which is registered for GST.

The farming partnership carries on a business activity on land owned by you.

You recently acquired farmland (in separate titles) which has subsequently been used for farming by the farming partnership.

You intend selling lots of land which have been developed from the acquired farmland.

Each lot has been fenced with a wire fence and had power connected.

The farm land was acquired pursuant to a contract of sale of real estate.

The land was acquired as GST-free farmland under Subdivision 38-O of the GST Act.

The partners provided guarantees for the financing of the acquisition.

The partnership met the minimal subdivision expenses.

The partnership paid rent to you on an arms length basis for the use of the land.

Reasons for decision

An enterprise is relevantly defined under section 9-20(1) of the GST Act as:

(1) An enterprise is an activity or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or ...

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of an entity carrying on an enterprise for the purposes of an entitlement to an Australian business number (ABN) and it has equal application to the GST Act. It considers the meaning of certain key words such as entity and enterprise. The ruling provides, at paragraph 235, as follows:

In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

The Courts have considered the meaning of the terms 'business' and 'adventure or concern in the nature of trade' on many occasions. A large number of cases have discussed the things that might be relevant to the task of assessing whether one is dealing with a business such as the decision of Bowen CJ and Franki J in Ferguson v Commissioner of Taxation [1979] FCA 29; (1979) 37 FLR 310 at 314.

The Courts have consistently held that, where a taxpayer acquires ownership of property for the purpose of selling it at a profit, the profit is income of the taxpayer and the transaction is an adventure in the nature of trade. This was the view of the Privy Council in McClelland v. Federal Commissioner of Taxation (1970) 120 CLR 487; [1970] 1 All ER 969.

The High Court of Australia in Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 18 ATR 693 held that a receipt may constitute income if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction. This decision confirmed earlier decisions in Californian Copper Syndicate v. Harris (1904) 5 TC 159; 163 CLR 210 where the syndicate acquired property for resale but never intended to work the property with a view to deriving income from mining. Also in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 where the taxpayers acquired machinery for sale and had no intention of using the machinery as an Income-producing asset.

MT2006/1 at paragraph 270 states:

In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

It is our view that, in acquiring the land, it was your intention that three lots would be sold as either excess to your requirements and/or to assist in financing the remainder of the land you intended to retain. The supply of the land by you will complete the adventure in the nature of trade and is therefore made by you in the course or furtherance of an enterprise that you carried on.

Division 23 of the GST Act specifies who is required to be registered and who may be registered for GST.

You are required to be registered under section 23-5 of the GST Act if:

(a) you are carrying on an enterprise; and

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

We have determined that in acquiring and selling the subdivided land you are carrying on an enterprise.

The current GST registration turnover threshold for your enterprise is $75,000.

Goods and Services Tax Ruling GSTR 2001/7 provides guidance on the meaning of GST turnover, including the effect of section 188-25 of the GST Act on projected GST turnover, and explains how your GST turnover affects the way the GST Act applies to you.

Your projected GST turnover will include the consideration received in a particular month and the consideration likely to be received in the following eleven months (see section 188-20 of the GST Act).

Paragraph 29 of GSTR 2001/7 states that section 188-25 modifies the effect of section
188-20 by excluding certain supplies made when working out your projected GST turnover.

Under section 188-25 of the GST Act, in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset.

Because you acquired the subdivided lots of land with the intention of sale, the lots are trading stock of your enterprise and are not capital assets. The remaining land acquired for farming purposes is capital.

Provided the consideration received for the lots of land in any month and the following eleven months is $75,000 or more, you will be required to be registered for GST under section 23-5 of the GST Act.

Section 9-5 of the GST Act provides:

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.

(Note: terms marked with an * are defined within the Dictionary at section 195-1 of the GST Act.)

A supply is defined under paragraph 9-10(2)(d) of the GST Act as any form of supply whatsoever and includes a grant, assignment or surrender of real property. The sale of the land by way of transfer of freehold title will constitute a supply for purposes of the GST Act.

Consideration under subsection 9-15(1) includes any payment, or any act or forbearance, in connection with a supply of anything. You intend to sell the lots of land for an acceptable payment. We conclude that you satisfy paragraph 9-5(a) of the GST Act by making the supplies of the lots of land for consideration.

Supplies are connected with Australia if the supply satisfies section 9-25 of the GST Act. Subsection 9-25(4) provides that a supply of real property is connected with Australia if the real property, or the land to which the real property relates, is in Australia.

Because the land is situated in Australia, the supply is connected with Australia.

We have determined above that, provided the consideration received for the lots of land is $75,000 or more, you will be required to be registered

We confirm that the proposed sales of the subdivided lots by you satisfied the conditions of section 9-5 of the GST Act and will be taxable supplies on which GST is payable.

There is nothing in the GST Act which would make the supplies of the lots either GST-free under Division 38 of the GST Act or input taxed under Division 40 of the GST Act.

You may choose to agree with a purchaser to apply the margin scheme under Division 75 of the GST Act in working out the amount of GST payable on the taxable supplies.