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Ruling

Subject: GST and the supply of vacant real property

Question

Is the sale of the property a taxable supply on which goods and services tax (GST) is payable pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the property is not a taxable supply on which GST is payable pursuant to section 9-5 of the GST Act. The sale of the property is not a supply made by you in the course or furtherance of an enterprise that you carry on.

Relevant facts and circumstances

You purchased a parcel of land (the property) with the intention of constructing a residence on the land for your private enjoyment.

At all times during your ownership of the property the land remained vacant and unused. There were no buildings or other improvements constructed on the land.

At the time of purchasing the property you occupied a residence elsewhere.

At a later date you started operating a business which involved the retail sale of goods (the retail business). You registered a partnership for GST in respect of operating that business. You account for GST on a cash basis in quarterly tax periods.

The retail business is situated in an adjoining suburb to where your residence is located. With your residence located near your business and your children going to school near where you reside, it became unattractive for you to move to the property.

You decided to sell the property.

A prospective purchaser has made enquiries about buying the property. The purchaser has indicated they wish to undertake a development project with the land. No contract of sale has yet been entered into with the prospective purchaser.

You have not used the property in any enterprise you carry on nor have you derived any income from the use of the property. Your activities in relation to the property are limited to cutting the grass.

You have not sought any re zoning applications or development or building applications with the local authority.

The property has never been listed as a partnership/business asset in the partnership's accounts. No input tax credits or expenses in relation to the purchase, upkeep or sale of the property have been claimed by the partnership operating the retail business.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(d)

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(2)(c)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Summary

GST is payable on taxable supplies. An essential requirement for making a taxable supply is that you make the supply in the course of or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act). On the facts provided, the nature of your activities in selling the property will not, without more, amount to an enterprise nor are they incidental to some other enterprise carried on by you either in the form of a business or in the form of an adventure or concern in the nature of trade.

It follows that since the sale of the property will not be made in the course or furtherance of an enterprise the sale of the property will not be a taxable supply. This means that no GST is payable on your supply of the property to the purchaser.

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act provides that 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.

'Supply' is defined in section 9-10 of the GST Act as 'any from of supply whatsoever' and includes amongst other things, a grant, assignment or surrender of real property (paragraph 9-10(2)(d) of the GST Act).

'Real Property' is defined in section 195-1 of the GST Act as including:

· any interest in or right over land

· a personal right to call for or be granted any interest in or right over land

· a licence to occupy land or any other contractual right exercisable over or in relation to land.

The definition in section 9-5 of the GST Act expressly excludes from the definition of taxable supply a supply which is GST-free or input taxed.

The circumstances in which a supply is GST-free or input taxed are found in Division 38 and Division 40 of the GST Act respectively.

On the facts provided the property is neither a GST-free supply under Division 38 of the GST Act nor an input taxed supply under Division 40 of the GST Act. Furthermore, you are registered for GST, the sale of the property comes within the definition of a supply, the supply of the property is connected with Australia and the supply will be for consideration.

It follows that the question that arises under section 9-5 of the GST Act is whether the supply is 'made in the course or furtherance of an enterprise that you carry on' (paragraph 9-5(b) of the GST Act). The outcome in your case turns on the meaning of the word 'enterprise'.

Section 9-20 of the GST defines the term 'enterprise' to include, amongst other things, activities or a series of activities, done:

· in the form of a business (paragraph 9-20(1)(a) of the GST Act)

· in the form of a an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act), or

· on a regular and on a continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c) of the GST Act).

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby.

Further, paragraph 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity, or series of activities done by an individual or partnership without a reasonable expectation of profit or gain.

The meaning of the term 'enterprise' as defined in the A New Tax System (Australian Business Number) Act 1999 and is considered by the ATO in Miscellaneous Taxation Ruling MT 2006/1. The discussion in that ruling is considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 170 of MT 2006/1 explains that the phrase 'in the form of a business' is broad and has its foundation in the long standing concept of business. The definition clearly includes a business and the use of the phrase 'in the form of indicates a wider meaning than the word business on its own.

The GST definition of business in section 195-1 of the GST Act is identical to that in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The ITAA 1997 meaning of business is considered in Taxation Ruling 97/11 and although that ruling deals with the carrying on of a primary production business, the principles discussed in that ruling apply to any business.

In addition, a large number of court cases have discussed the factors that might be relevant in determining whether activities or a series of activities amount to a business (see paragraphs 117 and 179 of MT 2006/1). Paragraph 178 of MT 2006/1 lists the main indicators of a business which include:

· an intention to make a profit

· the recurrent and regular nature of the activity

· activity is systematic, organised and carried on in a businesslike manner and records are kept

Whether a business is being carried on is a question of fact for which there is no single test. Each case will turn on its own particular facts, with the determination of the question generally being the result of a process of weighing all the relevant indicators.

There is little doubt that the activities you undertake in operating the retail business come within the definition of an enterprise under section 9-20 of the GST Act. The question is whether the sale of the property will be in the course or furtherance of that enterprise or any other enterprise.

On the facts disclosed by you the sale of the property does not form part of your retail business. Your dealings with the property are separate from the rest of your retail business activities. The property is not listed in the partnership's assets nor have any expenses or input tax credits been claimed in the businesses records. On that basis the sale of the property will not be made in the course or furtherance of the retail business. Consideration therefore needs to be given as to whether the sale of the property is in the form of an adventure or concern in the nature of trade.

Consideration therefore needs to be given as to whether the sale of the property is made in the course or furtherance of some other enterprise.

The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business (paragraph 237 of the MT 2006/1).

The reference in paragraph 9-20(1)(b) of the GST Act to activities in the form of an adventure or concern in the nature of trade is intended to include isolated or one-off transactions that do not amount to a business but which have the characteristics of a business deal. However, it does not extend to the mere realisation of investments or private assets such as the family home and private cars.

At paragraph 270 of MT 2006/1, the Commissioner explains that he considers activities that involve isolated transactions, where land is sold with the intention of resale at a profit (which would be ordinary income) to amount to 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 intention to sell property at the time of acquiring it may be an indicator of the sale being an adventure or concern in the nature of trade. The question is necessarily one of fact and degree.

On the facts provided, your purpose in purchasing the property was to allow you to construct a residence for your own pleasure and enjoyment. You have held the property for some years and advise that your decision to sell the property is motivated by private family concerns rather than to make a profit. There is no evidence that you have dealt with the property in a business-like way. Your activities in purchasing and then selling the vacant property will not, in the absence of any other factors to the contrary, have the hallmark of an enterprise nor are they incidental to some other enterprise carried on by you. The sale of the vacant property is more consistent with a realisation of a private asset. The fact that the asset may be sold at a profit does not, of itself, result in the activity being commercial or business-like in nature.

Having given consideration to the facts in your circumstance and by applying the principles in MT 2006/1 to these facts, the nature of your activities in selling the property do not, without more, amount to an enterprise in the form of a business or in the form of an adventure or concern in the nature of trade.

Since you will not make the supply of the property in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), an essential requirement for making a taxable supply will not be satisfied.

It follows, that the sale of the property, by you to the purchaser is not a taxable supply on which GST is payable.