Edited version of private ruling

Authorisation Number: 1011824063420

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Ruling

Subject: GST and sale of real property

Question

Is the supply of the subdivided land a taxable supply?

Answer

No, the supply of the subdivided land is not a taxable supply.

Facts

The Trustee for the Deceased Estate (you) is in the process of selling subdivided land.

The executors of the estate are also the beneficiaries.

At the time of their death X was the registered proprietor of the Land. The Land had been owned by the deceased for over 50 years.

The Land had comprised a market garden and X's family home however the deceased had been retired for some years at the time of their death.

Spouse X wished to remain living on the Land but their house, the former X family home, was in a dilapidated state and the Land was too large an area for their requirements.

You initially considered selling the Land as a whole but were reluctant to displace Spouse X. You also realised that by subdividing the Land at the same time, you would enhance its value for the beneficiaries of the estate.

You decided to subdivide the Land and construct a new home for Spouse X on a smaller block.

A building company was appointed as project manager.

A Joint Venture Indenture (the indenture) was entered into between the executors and the building company (the joint venturers). The indenture provides for the following:

· The joint venture is for the development of the deceased's estate or interest in the Land.

· The first stage of the development is to design, create and construct a number of residential allotments which will be sold to generate the working capital to complete the subsequent stages of the development of the Land.

· The subsequent stage of the development is the design, creation and construction on a further number of residential allotments. One residential allotment will be allocated to Spouse X as part of their entitlement as a beneficiary of the Will of the deceased. A new home will be built for Spouse X on this lot. The remaining residential allotments will be allocated to each of the executors as part of their entitlement as a beneficiary under the Will of the deceased.

· Part of the Land as developed will be sold in order to realise a profit for the joint venturers.

The development approval was granted subject to you complying with certain requirements including the following:

· construction of a road including road pavements, water tables, kerbs, footpaths, culverts and drains

· construction of driveway inverts for each allotment

· provision of stormwater and drainage easements with appropriate pipes and sumps

· provision of electrical and telecommunication mains and service connections including street lighting services and

· installation of appropriate street name plates at each end of the proposed road.

A contract for the Land subdivision was entered into with a construction company. The scope of works includes as follows:

· site earthworks

· construction of road pavement including kerb and watertable

· construction of common service trench

· construction of sewer services

· construction of mains water supply service

· construction of stormwater drainage, detention tank and gross pollutant trap

· signage and line marking

The subdivision of the Land was carried out in two stages. Stage 1 has been completed and created a number of residential allotments which were sold. Stage 2 has also been completed and created a number of residential allotments from which:

· One lot was sold

· One lot was provided for Spouse X's new residence.

· One lot has been transferred to one of the beneficiaries as part of their share of the estate.

· A number of lots are available for sale. The marketing is being handled by a real estate company.

· The remainder have been put on hold pending an improvement in market conditions.

The initial stage was financed by a loan to the estate from a related entity. Stage 2 is financed from the proceeds of stage 1. The loan was repaid from proceeds of the sale of the lots.

You are not registered for GST.

Reasons for decision

The sale of the subdivided land is a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 9-5 of the GST Act 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 the GST Act)

Taxation Ruling IT 2622 explains that upon the death of a person, the property of the deceased passes to their estate, the legal control over which is exercised by an executor or administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs. This view doe not only apply for income tax purposes, but equally applies for GST purposes.

Therefore, the sale of the subdivided land is a taxable supply if the sale by the deceased in the same circumstances would have been a taxable supply.

Based on the information that you have provided, the supply of the subdivided land is for consideration and is connected with Australia as the property is located in Australia. Therefore, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

It remains to be determined whether the sale of the subdivided land is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act, whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act, and whether the sale is GST-free or input taxed.

Enterprise

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 ATO 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.

In this case, the Land comprised the home of the deceased for over 50 years. The Land may have been used as a market garden however the deceased had been retired for some years at the time of their death. You decided to subdivide the Land in order to provide for a smaller block on which a new home is to be built for Spouse X and to enhance the Land's value for the beneficiaries of the estate.

Only the work required to meet council requirements, to secure its approval for the subdivision, was undertaken. You did not acquire the land for a profit making scheme or arrangement but acquired the land by inheritance as the result of the deceased's Will.

Therefore, considering all the facts and circumstances in your case, the sale of the subdivided land does not have the characteristics of a business deal and does not result in the activity being commercial in flavour. The sale is the mere realization of a private asset of the deceased. In accordance with paragraph 263 of MT 2006/1, the sale is not a business or an adventure or concern in the nature of trade.

Therefore, the sale of the subdivided land is not made in the course or furtherance of an enterprise that you carry on. Hence, the condition at paragraph 9-5(b) of the GST Act is not satisfied.

As you do not satisfy all the requirements of section 9-5 of the GST Act, the sale of the subdivided land is not a taxable supply.

Please note that in this case, it is not necessary to consider whether you satisfy the condition at paragraph 9-5(d) of the GST Act, or whether the sale of the subdivided land is GST-free or input taxed.