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Ruling

Subject: GST and subdivision of property

Questions

1. Would your proposed activities in connection with the subdivision of your family home and the sale of the subdivided lots amount to carrying on an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

2. If the answer to question 1 is yes, would the proceeds from the disposal of subdivided lots be regarded as proceeds from the 'transfer of ownership of a capital asset' and therefore, pursuant to section 188-25 of the GST Act, be disregarded in determining your projected GST turnover?

3. Are you required to be registered for GST?

4. If the answer to question 3 is no and you choose to voluntarily register for GST, would the proposed sale of subdivided lots continue to be regarded as the mere realisation of a capital asset for the purposes of the GST Act.

Answers

1. Yes, your proposed activities in connection with the subdivision of your family home and the sale of the subdivided lots would amount to carrying on an enterprise for the purposes of the GST Act.

2. No, the proceeds from the disposal of the subdivided lots would not be regarded as proceeds from the 'transfer of ownership of a capital asset' and therefore, would not be disregarded in determining your projected GST turnover.

3. Yes, you are required to be registered for GST.

4. Not applicable.

Relevant facts and circumstances

You acquired a property (the property) pre July 2000 for the purposes of constructing your family home.

The property has been used as your principal residence since its acquisition.

The property has not been used by you for the purposes of producing assessable income and was not purchased with the intention of profit making on sale. Improvements made to the property since acquisition includes the building of the family home, a swimming pool, tennis court and barn.

You are approaching retirement and are finding the broad acre lifestyle increasingly tiring because of the work required to maintain the gardens and grounds surrounding the family home. You also wish to ensure you have financial security for your retirement and are also able to assist your children financially.

The local council has recently rezoned the area from rural to residential.

At various times you have been approached to sell your property. However, no action has ever been taken. More recently, activity by your neighbours has been the catalyst for you to consider selling your property.

You engaged a consultant to advise you on how to sell your property and realise the increased value of your property and how a subdivision of the property could proceed.

You decided to subdivide the property in order to capitalise on the increased value brought about by the rezoning and by other sub-divisions in the area.

The proposed subdivision of the property will occur in stages. The reason for the staged development is that the lots with frontages to the road can be subdivided and sold as they have access to both the road and essential services.

To achieve the subsequent stage subdivision, you will be required to construct an access road and connect services to those lots. This will require co-operation from the owners of the adjacent properties.

You informed us that you do not intend to undertake any more work than the minimum required by council to register the subdivision. You will not construct or cause to be constructed houses on the sub-divided lots and will not be involved in the marketing and selling of the subdivided lots. Your interests are to sell the property.

You have no history as either property developers or property investors and do not intend to undertake speculative development activities in the future, because of your lack of experience in that industry and the risks associated with such ventures.

You have engaged a project manager to oversee the subdivision process; liaise with appropriate authorities and negotiate with contractors.

You will need to borrow funds to fund the subdivision.

External sales consultants and real estate agents will be engaged to market the lots,

You currently intend to preserve your existing family home within the boundary of one of the subdivided lots and continue to live in that house for some years.

Works required by the council for the subdivision include:

· Road upgrade to the extent of property frontage;

· Relocation of services affected by the road upgrade;

· Construction of a cycle way to the extent of the property boundary at frontage; and

· Upgrading services, including sewer, water, electrical and earthworks including the regrading of the lots to meet council requirements.

The notice of determination of a development application includes removal and retaining of certain trees, allocation of a street address to the subdivided lots, naming the streets, election of street name signs and posts, widening of road, construction of cycle way including access ramps at all intersections and preparation of the traffic control plan.

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 Section 9-20.

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

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

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

Reasons for decision

Question 1

GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 to Australia; and

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

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

A supply is a taxable supply, if among other things the supply is made in the course or furtherance of an enterprise that you carry on. A transaction is a supply in the course or furtherance of an enterprise that is carried on, where the supplies can be considered to be connected to your enterprise. The term in the course or furtherance is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Additionally, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is in the furtherance of an enterprise although it may not always be in the course of that enterprise.

Are you carrying on an enterprise?

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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.

There is no definition of the phrase 'in the form of an adventure or concern in the nature of a trade' in the GST Act. 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. Without other factors being present, such activities will not be considered as an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

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.

Generally whether an enterprise is carried on is determined on the basis of the overall impression gained after examining the activities as a whole and the intention of the taxpayer undertaking the activity. In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Section 195-1 of the GST Act defines carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

At paragraph 122, MT 2006/1 states:

122. Given this definition, it follows that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

Paragraph 123 of MT 2006/1 states:

… The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

(also refer to paragraphs 124 and 125)

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

In order to determine if an activity or series of activities amount to a business, the activity needs to be considered against the indicators of a business established by case law. In that regard, at paragraph 178 MT 2006/1 refers to the indicators discussed in Income Tax Ruling TR 97/11. Based on that discussion the indicators of a business include:

· a significant commercial activity

· a purpose and intention of the taxpayer to engage in commercial activity

· an intention to make a profit from the activity

· the activity is or will be profitable

· the recurrent or regular nature of the activity

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade

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

· the activities are of a reasonable size and scale

· a business plan exists

· commercial sales of product, and

· the entity has relevant knowledge or skill.

As explained in TR 97/11, MT 2006/1 and GSTD 2006/6, there is no single test which determines the existence of a business. Paragraph 12 of TR 97/11 states whilst each case might turn on its own facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. In particular, the nature of the activity, entity's intention and the method of operation helps determine whether a business being carried on.

The significant purpose or character indicator is closely linked to the other indicators. To determine whether there is a significant commercial purpose or character we need to consider if the entity has a business plan, an intention to make a profit, its size and scale, amount of capital investment and whether the activities are carried on in a similar manner to that of other businesses in the same or similar trade.

The intention of the entity in engaging in the activity is an important indicator. It is necessary to consider whether there is an intention to make a profit or whether the activity can be better described as a hobby or the pursuit of a recreation or sporting activity. Activities in commencing the business are to be considered as carrying on an enterprise.

In your case, the subdivision of the property is developed in a businesslike manner as you have engaged a project manager to oversee the subdivision process; liaise with appropriate authorities and negotiate with contractors. The project manager has employed an agent to undertake the sale of the subdivided lots.

Further, the notice of determination of a development application from the council provides that certain things be done. Those things indicate that more than minimum council requirements have to be met in relation to the subdivision. There is a comprehensive plan for the development of the property. You will borrow and risking a large amount for a considerable return. There is a change of purpose for which the whole land is held.

It follows that your activities in relation to the subdivision and sale of subdivided lots come within the definition of an enterprise for the purposes of GST under subsection 9-20(1) of the GST Act.

As such, your proposed activities in connection with the subdivision of your family home and the sale of the subdivided lots would amount to carrying on an enterprise for the purposes of the GST Act.

Questions 2 and 3

Are you required to be registered?

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 annual turnover meets the registration turnover threshold.

The applicable GST registration turnover threshold is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

In calculating your GST turnover under Division 188 of the GST Act certain supplies are excluded.

Goods and Services Tax Ruling GSTR 2001/7 considers the ATO view on the meaning of GST turnover and other related issues.

Paragraph 14 of GSTR 2001/7 summarises the types of supplies that are excluded from the calculation of current and project GST turnover:

· supplies that are input taxed;

· supplies that are not for consideration (and not taxable supplies under section 72-5);

· supplies not made in connection with an enterprise that you carry on;

· supplies that are not connected with Australia; and

· supplies made from one member of a GST group to another member of that GST group.

Further, section 188-25 excludes certain supplies made when working out your projected annual turnover. Paragraph 29 of GSTR 2001/7 states:

Section188-25 requires you to disregard the following when calculating your projected annual turnover.

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of capital assets is not defined in the GST Act. Capital assets are often referred to as structure assets and may be described as the business entity, structure or organisation set up or established for the earning of profits. It can include tangible assets such as your factory, shop or office, your land on which they stand.

It is to be distinguished from revenue assets which are assets whose realisations are inherent in or incidental to, the carrying on of a business.

The sale of subdivided lots will be made in the course or furtherance of an enterprise that you carry on and are considered as trading stock.

Where your annual turnover meets the registration turnover threshold you will be required to be registered for GST.

As stated above, the supply of the subdivided lots will be made in the course or furtherance of an enterprise that you carry on and, as your turnover will be greater than $75,000 you will be required to be registered for GST.

As all the requirements of section 9-5 of the GST Act will be satisfied, the supplies will be taxable supplies, on which GST is payable.

This means that under the general provisions of the GST Act, you will be required to remit GST of 1/11^th of the price of each supply.

Question 4

This is not applicable as you will be required to be registered for GST. See answer above.