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Ruling

Subject: GST and subdivision of land

Question 1

Is the sale of the vacant lots subject to GST?

Answer 1

No, the sale of the vacant lots is not subject to GST.

Question 2

If yes, can the margin scheme be used to calculate the GST payable on the sale of the land lots?

Answer 2

See Reasons for decision

Relevant facts and circumstances

You are the joint owners of property. The property is land with a residential house and a large proportion of bushland.

The land was acquired by you for investment purposes. The residential house has been rented out and managed by a real estate agent. This is your only jointly owned investment property. Other investment properties are owned individually.

Rental income derived from the property was reported under a partnership Australian business number (ABN). You also carried on business using this partnership's ABN.

Your partnership's ABN and GST registration was cancelled. You are not currently registered for GST.

Rental income derived from the property was reported separately in your individual tax returns.

Your property has been subdivided into lots. The subdivision has been approved by council but has yet to be registered.

You intend to sell vacant lots through a real estate agent. You will retain a vacant lot and the lot on which the residential house is situated.

Property development consultants were engaged by you to undertake the following civil works:

· Service allotments

· Water drainage

· Separate sewerage

· Road works

· Water articulation

· Electrical reticulation, and

· Preparation for Development Application of the land.

Most of the funding for the subdivision came from your savings. The level of development of the land was not beyond that necessary to secure council approval for the subdivision.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 sections 188-15

A New Tax System (Goods and Services Tax) Act 1999 sections 188-20

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1

Summary

The sale of the vacant lots will not constitute a taxable supply as not all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. As the sale is not a taxable supply, you will not be liable for GST on the sale of each vacant lot.

Detailed reasoning

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

Section 9-5 of the GST Act provides that you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

In respect of your sale of the vacant lots there is clearly a supply, being a supply of real property. Consideration is also present as the vacant lots will be sold for an amount of money and the supply is connected with Australia because the vacant lots are located in Australia.

Therefore, the issues to be considered in this case are:

· whether the sale of the vacant lots is being made in the course or furtherance of an enterprise that you carry on

· as you are not currently registered for GST, whether you are required to be registered for GST, and

· if the first two are satisfied, whether the sale of the vacant lots is either GST-free or input taxed.

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among 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 a lease, licence or other grant of an interest in property.

As you are currently leasing the property on a regular or continuous basis, you are carrying on an enterprise for GST purposes.

However, the requirement in section 9-5 of the GST Act is that the supply is made in the course or furtherance of an enterprise that is being carried on. The term 'in the course or furtherance of' is not defined in the GST Act, but is broad enough to cover most supplies made in connection with an enterprise. This means that once an enterprise is being carried on, most activities in relation to that enterprise will be considered to be in the course or furtherance of that enterprise unless the GST legislation specifically states otherwise. As well, anything done in the course of commencing or terminating a business or enterprise will also be caught.

Therefore, the sale of the vacant lots which is a part of the asset of the leasing enterprise would be a supply in the course of furtherance of the leasing enterprise that you are carrying on.

As you are not currently registered for GST, it is necessary to determine whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. Effective from 1 July 2007, the registration turnover threshold for entities other than non-profit bodies is $75,000.

Under subsection 188-10(1) of the GST Act, your GST turnover meets the registration turnover threshold if:

· your current GST turnover is at or above the turnover threshold, unless the Commissioner is satisfied that your projected GST turnover is below the turnover threshold, or

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

In general terms, your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the past 11 months. Projected GST turnover is calculated as the value of all the supplies made or likely to be made during the current month and the next 11 months.

However, under sections 188-15 and 188-20 of the GST Act supplies that are input taxed (for example, residential rent) are excluded from the calculation of both current and projected GST turnover. This means that, as your only income is from the renting of residential property, your current GST turnover is below $75,000.

In addition, section 188-25 of the GST Act specifically excludes from the calculation of projected GST turnover:

· the supply of a capital asset by way of transfer of its ownership, and

· any supply made as a consequence of substantially and permanently reducing the size or scale of an enterprise.

The Commissioner's view on the application of section 188-25 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2001/7. Paragraph 31 of this ruling provides that a capital asset is generally the profit-yielding subject of an enterprise. This can be contrasted with a revenue asset, which is described in paragraph 34 of this ruling as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business'.

Also of relevance is paragraph 32 of GSTR 2001/7 which states, in part:

'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income ...

Following on from this, paragraph 35 of GSTR 2001/7 states, in part:

If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction…

Our view is that the sale of part of the property in this case is the sale of a capital asset. That is, you have been using the property as a rental property. As such, you are now selling a part of your investment asset.

Furthermore, the sale of the vacant lots may constitute a supply made as a consequence of substantially and permanently reducing the size or scale of an enterprise.

In the context of section 188-25 of the GST Act, we consider that the term 'substantially' refers to a reduction in size which is greater than merely nominal and does not necessarily require a reduction which is proportionately large.

The concept of 'permanently' requires that the reduction in size and scale of an enterprise is enduring or is reasonably expected to be enduring.

In this case, you subdivided the property into lots and you will retain lots including the lot on which the residential rental house is situated. You are continuing your leasing enterprise and the subdivision of the property and the selling of the lots is simply reducing the size of your investment property and the scale of your leasing enterprise.

As such, the proceeds from the sale of the vacant lots are disregarded in working out your projected GST turnover. This means that, from the information provided, your projected GST turnover is below the registration turnover threshold of $75,000 and therefore, you are not required to be registered for GST.

As all of the requirements of section 9-5 of the GST Act are not satisfied, the sale of the vacant lots will not constitute a taxable supply. As such, the sale of the vacant lots is not subject to GST.

Question 2

Detailed reasoning

In view of the decision in Question 1, there is no GST payable, and as such, it is not necessary to consider the application of the margin scheme.