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Ruling

Subject: GST and sale of subdivided land

Question

Are you required to be registered for GST?

Answer

No.

Facts

o You own land located in Australia (the property). Title to the property was transferred to you upon the death of your spouse (X).

o The land was originally acquired by X's relative a number of years ago and was transferred to X.

o The land was used for farming until X retired from farming.

o The land was rezoned and X resolved to sell the land in its existing titles in order to provide a capital base for retirement. Part of the land was sold.

X planned to create further saleable lots and council approval was received recently. The council approval was for a subdivision of a number of lots, which would be allowed several stages. However, at no stage had X decided to proceed with all stages. In particular, given the fact that in retirement there was no desire to take on new borrowings (and was still paying off a mortgage on the property) - a decision was made to only proceed with what was referred to in the approved plan as Stage 1 - which comprises a small number of lots, but only a few will be put up for sale, as the other lot contains the family residence.

You do not have commercial or business experience, especially in property matters. Your relative provided further assistance and was involved in appointing a contractor to conduct the civil works required to create the lots.

The improvements are limited to basic services required to gain approval from the relevant authorities such as power, telephone, roads, water, headworks and council costs.

Recently you appointed a real estate agent. However, no marketing has taken place as yet. The landscaping has not yet been completed and you are still waiting for the power supply works to be completely finished. Once these are done, marketing can begin.

No decision has been made with respect to the balance of the land, and while approval has been granted for further subdivision, you would consider any offer to acquire the balance of the land en globo. If there are no suitable offers to acquire the balance of the land in its current state, you will consider incurring the cost of further subdivision in the approved stages, but only if they can be self funding following sale of the existing lots. That is, it was always X's intention to only subdivide future stages if and when the proceeds from prior stages would be available as working capital.

The estimated cost of the civil works in creating these blocks (in addition to costs of consultants) is under $1M (plus GST).

All of the costs to date, and all future costs, have been and will be funded from you're your existing cash resources - with the exception of a small amount which has been drawn down from an existing mortgage and will be repaid from initial sales.

In relation to the blocks in Stage 1 the intentions are for the following:

o A number of lots will be transferred to family members

o You will retain the lot that contains the large workshop where machinery is kept and the lot that contains your residential house.

o The remainder of the lots will be sold.

You have no other business relating to property development and no other businesses of any type.

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 11-5.

A New Tax System (Goods and Services Tax) Act 1999 section 11-15.

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-10.

Reasons for decision

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if:

o you are carrying on an enterprise and

o your GST turnover meets the registration turnover threshold.

Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done:

o in the form of a business, or

o in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian business number. Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 262 to 265 of MT 2006/1 provide guidance to determine whether isolated property subdivision activities are an adventure or concern in the nature of trade. They state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

o there is a change of purpose for which the land is held;

o additional land is acquired to be added to the original parcel of land;

o the parcel of land is brought into account as a business asset;

o there is a coherent plan for the subdivision of the land;

o there is a business organisation - for example a manager, office and letterhead;

o borrowed funds financed the acquisition or subdivision;

o interest on money borrowed to defray subdivisional costs was claimed as a business expense;

o there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

o buildings have been erected on the land.

In your case, the subdivided land formed part of the land that was used as your principal residence for a number of years. X originally decided to subdivide the property to fund your retirement. You are just continuing what X has started. It is your intention that after the subdivision, you will retain the lot that contains the family home and transfer some lots to family members.

Furthermore, only the works required to obtain council approval are done and the cost of the subdivision is mainly funded from your existing resources. You will also not have any active involvement in the subdivision work.

Considering all the facts and circumstances in your case, the sale of the subdivided land is the mere realisation of a private asset. Hence, the subdivision of the property is neither an activity in the form of a business nor in the form of an adventure or concern in the nature of trade.

As you have no other business relating to property development and no other business of any type, you are not carrying on an enterprise. Therefore, you are not required to be registered for GST.

As the sale of the subdivided land is not in the course or furtherance of an enterprise and you are neither registered nor required to be registered for GST, the sale is not a taxable supply.

As acquisitions relating to the subdivision of the property are not for a creditable purpose and you are neither registered nor required to be registered for GST, you are not entitled to input tax credits for these acquisitions.

You should note that any future development work on the property may result in a different conclusion. If and when you proceed with any other development, you may wish to apply for a private ruling to clarify the GST implications at that point in time.