Edited version of private ruling

Authorisation Number: 1011733088299

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Ruling

Subject: GST and the subdivision of land

Question 1

Will the sale of the subdivided blocks of land be taxable supplies?

Answer

No.

Relevant facts and circumstances

You have previously obtained a GST private ruling for similar circumstances to this request. You wish to subdivide land; the subdivision will result in a maximum outcome of 14 to 15 blocks. The land was purchased by you and your ex-wife prior to the introduction of capital gains tax (CGT). The land was originally purchased for recreation and lifestyle by providing space around the existing dwelling. You acquired your ex-wife's interest after the introduction of CGT.

You operate a small business in partnership and the land in question is not part of the enterprise. While you have subdivided land before, you do not consider yourself to carry on a property development enterprise. You are not registered for GST.

You have engaged a project manager who will arrange for the subdivision and sale and engage surveyors and engineers. You will not take part in the subdivision activity yourself. The land is held on your capital account and the proceeds will be used to fund your retirement. The land currently has an industrial zoning that allows for dwellings such as a caretaker's residence. The proposed subdivision will be an industrial subdivision.

Summary

The supplies of the proposed subdivided blocks do not meet all the requirements of section 9-5 of the GST Act, therefore the sales will be outside the scope of GST.

Detailed reasoning

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

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. This section states:

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.

(* denotes a term defined in section 195-1 of the GST Act)

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

Therefore, what needs to be determined is whether the sales of the subdivided blocks will be in the course or furtherance of an enterprise that you carry on, whether you are registered or required to be registered for GST and whether the sales are input taxed or GST-free.

Whether the sales of the proposed subdivided blocks are in the course or furtherance of an enterprise that you carry on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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 considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an 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 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property.

Paragraph 244 of MT 2006/1 states:

244. 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.

You intend to subdivide the property which you have been using as your private residence since its acquisition into a specified number of blocks for the purposes of sale. You advised that you have previously carried out a land development activity in an earlier subdivision on the land. You sought a GST private ruling on that subdivision at the time some years ago, it was also intended to fund your retirement.

We consider that you are not carrying on a property development business as you are not engaged in developing properties on a regular or continuous basis. However, it remains to be considered whether your property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transactions and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether the activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

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.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

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.

However, it is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

You contend that your activities are a mere realisation of a capital asset to fund your retirement and consider Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 (Casimaty) relevant for consideration.

In Casimaty the taxpayer acquired a farming property on which he erected a homestead and conducted a primary production business. Because of growing debt and ill health, the taxpayer had to subdivide and sell off a large part of the property. In all, there were a total of eight separate subdivisions. The proceeds from the subdivisions and sales were held not to be assessable as there was no change of purpose for which the land was held. The taxpayer acquired and continued to hold the property for use as a residence and the conduct of the business of primary production. A related consideration was the fact that the land was developed and subdivided on a piecemeal basis in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the subdivision of the whole property, even in stages, to maximise the return from the aggregate for the individual lots. Accordingly, the subdivisions were considered to have occurred as part of the mere realisation of a capital asset.

In Statham the appellants were the trustees of the deceased who had acquired a farm to raise his family there and engage in farming. There was never any intention of selling for a profit. The deceased's health deteriorated and he had various employment transfers and it was decided to subdivide and sell the land. It was court held that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise for a number of reasons including:

§ the owners were at first content to sell the land as one parcel, but were unable to do so

§ no moneys were borrowed by them, although a guarantee was provided to the relevant council by way of bank guarantee

§ only very limited clearing and earthworks were involved

§ the owners relied upon the council to carry out roadworks, kerbing, electricity and sewerage works which were required to be done

§ apart from the council's activities, the owners did not engage any contractors, although they did obtain some professional advice

§ the owners did not erect buildings on the land

§ they had no business organisation, no manager, no office, no secretary, and no letterhead.

We consider that the facts of your case can be distinguished from those in Statham and Casimaty as outlined below.

There is not yet a finalised plan for the subdivision, however you have engaged a consultant to determine if the subdivision is viable. If the project is viable the consultant will be engaged to do all things necessary to carry out the subdivision.

You are uncertain whether you will need to borrow funds to finance the subdivision, but will do so if need be. Given that you are attempting to fund your retirement it follows that the activities will be carried on with a reasonable expectation of making a profit or gain.

It is also prudent to consider Stevenson v FC of T ATC 4476 (1991) 29 FCR 282, where it was found in the abovementioned case that the taxpayer's activities extended beyond what can be accepted as being directed to and constituting the mere realisation of a capital asset, albeit with its value enhanced, due to their extent. It was considered as significant the degree of his personal involvement in the planning, in the negotiations with the Shire Council and the State Rivers and Water Supply Commission, in obtaining finance, in the employment of contractors, in the marketing of the blocks and in their actual sale. The taxpayer not only obtained finance but he risked it.

However the subdivision and development in the abovementioned case was substantial. The land had been subdivided into over 180 small blocks. The development turned farmland which had been unserviced by water or sewerage and without a made road into fully serviced residential blocks with a sealed road and drainage.

An examination of the reasoning in Stevenson's Case confirms that whether the subdivisional activity is sufficiently extensive and systematic to amount to the conduct of a business is a question of fact.

In the dissenting judgement of Dean J in Whitfords Beach 79 ATC 4648; (1979) 44 FLR 312 which was approved on appeal by the Full High Court (82 ATC 4031) it is stated that:

The determination of the question whether the proceeds of sale of an asset should properly be seen as representing profits made in the ordinary course of what is in truth a business will not infrequently require precise definition both of the relevant business and of those activities which are comprehended within its ordinary course. The borderline case will commonly be a case which involves a mixture of facts and events both within and outside the ordinary course of the particular business. In such a case, the question whether any part of the proceeds of the particular sale should properly be seen as representing profits made within the ordinary course of the particular business will involve an evaluation of competing factual considerations for which no rigid guidelines can be laid down…

…Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds.

With reference to Stevenson's Case, it is considered that your level of involvement could extend beyond what can be accepted as being directed to and constituting the mere realisation of a capital asset however the scale of your development is significantly smaller at 14 or 15 blocks.

In addition, you have stated that:

§ the property in question has been held as a principal place of residence and your primary abode and wasn't acquired with a view to commercial profit, only for residential recreation and lifestyle.

§ the proposed subdivision is intended to fund your retirement.

It was found in FC of T v. St Hubert's Island Pty Ltd (in liq) 78 ATC 4108 (1978) CLR 210 that where a realisation of property is motivated by factors other than those normally to be expected in a business context, the court will be less ready to find that the realisation had the nature of a business transaction.

After taking into account all factors from the information provided, we accept that the sale of the property is not part of an enterprise of selling land, but is the realisation of a capital asset.

Therefore, the subdivision and sales of the subdivided blocks are in not the course or furtherance of an enterprise that you carry on. Consequently, the requirement of paragraph 9-5(b) of the GST Act will not be met.

Whether you are registered or required to be registered for GST

In order to be required to be registered for GST or in order to register for GST voluntarily, an entity is required to be carrying on an enterprise. As explained above, we do not consider that you are carrying on an enterprise in regard to the proposed subdivision.

While your small business conducted in partnership would entitle you to GST registration, you are not registered nor required to be registered. Consequently the requirement of paragraph 9-5(d) of the GST Act is not met.

Whether the sales of the proposed subdivided blocks are input taxed or GST-free supplies

The sales of the proposed subdivided blocks are not input taxed or GST-free supplies under any provisions of the GST Act or any other Act.

Conclusion

As the supplies of the proposed subdivided blocks do not meet all the requirements of section 9-5 of the GST Act, the sales are outside the scope of GST.