Edited version of private ruling

Authorisation Number: 1011851703900

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Ruling

Subject: GST and sale of subdivided lots

Question

Will the sale of the subdivided lots by you be a taxable supply?

Answer

Yes. The sale of the subdivided lots by you will be a taxable supply.

Relevant facts

You are an individual and are not registered for goods and service tax (GST).

You purchased the properties a few years ago. You have resided on the properties after the purchase.

A farming business was carried on by your related entity (A) on the properties. A did not pay any rent or outgoings to you. The properties were not recorded or held as assets in A's accounts.

A had been registered for GST. It ceased its farming business sometime after the subdivision had been approved and cancelled its GST registration.

Some time after the purchase of the properties, you decided to change the use of the properties and intended to subdivide them into a number of lots. This matter was pursued from that time. You applied to the council for the subdivision and change of use of land from rural and rural residential to a residential low density for the properties.

The development application (DA) involved subdivision of the properties into a number of lots. All of the land would be subdivided. You intend to retain the lot containing your current residence and continue to live there, another lot (yet to be chosen), in case you want to build a new house for your main residence in the future. You also intend to retain some other lots (yet to be chosen) to present as gifts to your children.

The council approved your DA. As a condition in allowing the subdivision, the council requires an access road to be constructed. As a result, the farm business ceased trading.

You advised that as regards the subdivision of the properties, you:

· will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the DA

· have no formal business plan

· hope to be able to sell the subdivided lots from the middle of next year

· have no business organisation for the subdivision and has no office, secretary or letterhead in relation to the subdivision activities

· intend to use consultants and contractors to perform the subdivision activities and will take a passive role

· engaged surveyors and engineers to survey the land and prepare the DA application and to provide consulting and project management services

· will need to borrow funds to finance the subdivision activities

· intend to market the land for sale through local real estate agents

· have not claimed expenses in relation to the current subdivision as deductions for income tax purposes, and

· have not claimed any input tax credits in relation to the subdivision for GST purposes.

The works for the subdivision projected have not been completed. You acquired the services of a local real estate agent to advertise and invite prospective buyers for expressions of interest. The development is described as an estate in the advertisement.

You subdivided another property before 2000 that included your main residence. You subdivided into two parcels. You sold one parcel and retained the other as your main residence.

You want to retire from the farming business. You intend that the proceeds from the subdivision and sale of the lots will help fund your retirement.

Reasons for decision

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.

Taxable supply

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 section 195-1 of the GST Act)

For the sale of the subdivided lots to be a taxable supply, all of the requirements listed in section

9-5 of the GST Act must be satisfied.

Based on the information provided, you have satisfied the requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act as

· you will receive consideration for the sale of the lots

· the supply is connected with Australia as the lots are located in Australia.

There are no provisions in the GST Act or any other Act for the sale of the vacant lots by you to be input taxed or GST-free. Therefore, what remains to be considered are whether the sale of the subdivided lots will be in the course or furtherance of an enterprise that you carry on (paragraph

9-5(b) of the GST Act) and whether you are required to be registered (paragraph 9-5(d) of the GST Act).

Enterprise

An enterprise is defined under subsection 9-20(1) of the GST Act and includes (amongst other things), an activity or series of activities, done:

· in the form of a business;

· in the form of an adventure or concern in the nature of trade; or

· on a regular or continuous basis, in the form of lease, licence or other grant of an interest in property;

The scope of 'enterprise' for GST purposes is wider than the scope of 'business' for income tax purposes. An enterprise can include activities that may not constitute a business but have the character of a business transaction.

You grant the use of the properties to A for no consideration. It is considered as an activity in the nature of a lease, licence or other grant of an interest in property. As it is done on a regular or continuous basis, the activity has met the definition of enterprise despite the fact the lease being for no consideration.

However, subsection 9-20(2) of the GST Act contains some exclusion to the definition of enterprise. Paragraph 9-20(2)(c) of the GST Act provides that an activity or activities done by an individual or a partnership whose members are individuals without a reasonable expectation of profit or gain are not enterprises.

You are an individual receiving no consideration for granting the use of your properties to A. As such, a reasonable expectation of profit or gain is unlikely. Therefore, it is considered that there is no leasing enterprise being undertaken by you for the granting of use of the properties to A.

The issue left to determine is whether the subdivision activities leading up to the sale of lots by you are done in the form of a business or in the form of an adventure or concern in the nature of trade.

In the form of a business

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 be relied upon for GST purposes

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. It states:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis…

You do not engage the subdivision and sale of land on a regular or continuous basis. Therefore, these occasional activities undertaken by you are not in the form of a business.

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

Paragraph 234 of MT 2006/1 provides that an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 provides further guidance on the meaning of adventure or concern in the nature of trade. It 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.

Accordingly, an adventure or concern in the nature of trade does not extend to the mere realisation of investment or private assets. In your case, it is necessary to consider whether the activities of subdivision and sale of the subdivided lots are transactions with a commercial flavour that goes beyond the mere realisation of an investment asset.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/ revenue assets and investment/capital assets. They provide the following:

· assets can be categorised as trading/revenue assets or capital/ investment assets. 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.

· examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. MT 2006/1 explains that while an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Where 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 (property) changes to one of trade.

It is considered that the relevant issue in your case is whether the nature of the asset, that is, the properties have changed as a consequence of the activities associated with their sales.

Paragraphs 271 to 287 of MT 2006/1 provide a number of examples of an adventure or concern in the nature of trade. The principle to be derived from these examples is that more than a mere realisation of an investment asset or private asset is required. The activities are planned, carried out in a businesslike manner and there is a reasonable expectation of profit or gain. Therefore, it is necessary to consider the character of the activities as a whole to determine if they have the element of trade.

In paragraphs 277 to 283 of MT 2006/1, the entity in Example 30 decides to subdivide the property that he bought. To obtain council approval, he must:

· make new sealed roads with kerbing and channelling within the subdivision;

· provide water, electricity and telephone services to the new lots;

· provide culverts and other storm water drainage works; and

· transfer certain areas of land to the shire council for parks, environmental and other public purposes.

Throughout the subdivision, the entity also engages the services of a town planner, a surveyor, his accountant and legal advisers, a project manager and other contractors. He obtains a substantial loan to cover the costs of the subdivision. Also, he advertises the sale of the subdivided lots using a promotional estate name.

The subdivision in the above example is an enterprise and is more than a mere realisation of a capital asset because:

· there is a change of purpose for which the whole property is held;

· there is a comprehensive plan for the development of the property;

· the subdivision is developed in a businesslike manner for example, there is a project manager, significant development costs, a comprehensive marketing campaign including an estate name for the land; and

· a substantial loan has been taken out to finance the development.

In your case, the properties were purchased by you and were used by your related entity in carrying on a farming business and as your own residence. You then decided to subdivide the properties into a number of lots for the purpose of sale apart from retaining some of the lots for private use.

We consider that the subdivision of your properties involves activities that are similar to those described in paragraphs 277 to 283 of MT 2006/1. The subdivision requires comprehensive development plans to satisfy the conditions set out by the council which include recommendations and/or requirements from other Advice Agencies. The engagement of a surveyor, an engineering consultant/s and a project manager/s indicates that the subdivision is done in a businesslike manner. You will borrow funds for the subdivision. You have engaged the services of a real estate agent to invite expressions of interest in the subdivided lots. The real estate agent advertised the land with an estate name.

While your properties may have been held as an investment asset, the activities associated with the subdivision are carried out on in a similar manner to property trading activities. As such, the nature of the properties has changed from an investment asset to that of a trade asset. Therefore, our view is that the sale of the subdivided lots will not be the mere realisation of an investment asset.

The sale of the subdivided lots will be made in the course or furtherance of a property development enterprise that you carry on. Accordingly, the requirement in paragraph 9-5(b) of the GST Act will be satisfied.

The lots that will be given to your children as gifts

The subdivided lots that you will transfer to your children as gifts will not have a commercial flavour and will be part of a private or domestic arrangement. Therefore there are no GST implications when you transfer of the two lots to your children.

However, if you change your plan and decide to sell these lots instead, the sale of the lots will be in the course of the enterprise that you carry on.

GST registration

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

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

The current registration turnover threshold is $75,000 and $150,000 for non-profit entity. As you are carrying on an enterprise of property development, you will be required to be registered for GST if your GST turnover meets the registration turnover threshold of $75,000.

Under section 188-10 of the GST Act, your GST turnover meets the registration turnover threshold if:

· your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or

· your projected GST turnover is at or above the registration turnover threshold.

Current GST turnover at any time during a particular month is the sum of the values of all the supplies that the entity made, or is likely to make, during the 12 months ending at the end of the month.

Projected GST turnover at any time during a particular month is the sum of the values of all the supplies that the entity made, or is likely to make, during that month and the next 11 months.

Further, section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you:

· by way of transfer of ownership of a capital asset, or

· solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

As discussed, the subdivided lots are your trading assets and the sale of the lots will not be the transfer of a capital asset.

The sale of the subdivided lots will be inherent in carrying on your enterprise. Therefore, the sales will not be made solely as a consequence of ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of your enterprise. As such, the sale of each of the lots will not be disregarded when calculating your projected GST turnover.

The selling price for each of the subdivided lot will be in excess of $75,000. If in a particular month you estimate that the sale of a lot will occur over the next 11 months, your projected GST turnover will exceed the registration turnover threshold. At that point in time, you will be required to be registered for GST. Therefore, the requirement in paragraph 9-5(d) of the GST Act is met.

Under section 25-1 of the GST Act you are required to apply for GST registration within 21 days after becoming required to be registered.

Accordingly, you will meet all the requirements in section 9-5 of the GST Act and the sale of the subdivided lots will be a taxable supply. .

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