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Ruling

Subject: GST and subdivision of land

Question

Will the sale of subdivided land attract the goods and services tax (GST)?

Answer

Yes, the sale of subdivided land will attract the GST.

Relevant facts and circumstances

You, an entity, purchased the land (property) pre July 2000.

You built a house on the property and lived in it since.

You have submitted a Development Application to subdivide the property into several lots. One of which consists of the existing house.

The project has been managed by a project manager.

You have not been personally involved in the subdivision except to review information prepared by the project manager.

The following works are needed to complete the subdivision:

· Seal kerb and gutter,

· Tree removal,

· Drainage,

· Extend services and

· Rights of way.

All subdivision activities will be carried out by subcontractors.

You will not carry out activities beyond what is required by council.

You will need to borrow the above subdivision costs plus contributions levied by the council.

All lots are to be sold at auction by a real estate agent as the sole agent.

The estimated net proceed from the subdivision is substantially higher than the current value of the property.

You have not nor have any related entities been involved in land development.

You have not nor have any related entities ever completed a subdivision.

You do not own any other properties and do not have any associates.

You have sold a house prior to buying the property.

You do not have any plans to subdivide any other properties.

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

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:

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 land is developed in a businesslike manner as you have engaged a project manager to oversee the sub-division process; liaise with appropriate authorities and negotiate with contractors. All lots are to be sold at auction by a real estate agent who has been nominated as the sole agent.

You will need to borrow funds for the subdivision costs and contribution levied by the council. Your estimated total net proceeds from the subdivision and retaining your existing home far exceed the current value of the property. As such, the activity will be profitable.

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.

Therefore, your proposed activities in connection with the subdivision of your family home and the sale of the sub-divided lots would amount to carrying on an enterprise for the purposes of the GST Act.

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 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.