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Ruling

Subject: GST and subdivision of land

Question 1

Will the sale of the subdivided blocks be subject to goods and services tax (GST)?

Answer1

Yes, the sale of the subdivided blocks is a taxable supply subject to GST.

Question 2

Are you entitled to input tax credits on the development?

Answer 2

Yes, you are entitled to the input tax credits on your creditable acquisitions.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you

cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity is registered for GST

The entity acquired land in 19XX. It has leased the land back to the previous owner for use in their business for over X years.

During this time that the land has been leased, the back of the land was unsuitable for use due to water and peat consistency. The land was zoned as 'urban' and the business that leased the land operated under 'non-conforming rights'.

The council has supported rezoning of the land to allow for redevelopment, and invited the lessee to discuss the proposal as it could not approve the upgrade under the non conforming provisions. As a result of the negotiations the council has approved the rezoning of part of the land to commercial and the development of the other part of the land into residential lots. The council would not give approval for the upgrade of the leased part of the land without the whole of the two parts being dewatered, peat being removed and the land made suitable of residential use.

Due to the costs of the dewatering, peat removal and site monitoring and approval required by the Environmental Protection Agency, you could only afford to do this by developing and selling the residential blocks. This proposal was driven by the local council due to extreme shortage of residential blocks.

The dewatering and removal of the peat on the sites commenced with the awarding of the tender and planning approval was granted.

One part has been subdivided into residential blocks. You are now going to subdivide another part into residential lots and the balance will be leased to the business. Approvals are in process and the earthworks will commence once this has been granted. Once earthworks are complete the newly subdivided lots will be sold, but not the land leased to the business.

Roads and services will need to be completed in extension to the previous lot subdivision. Most of the earthworks and drainage have already been completed during the development of the first part.

The project is being managed by a project manager. You are only involved in the financing for the development. The residential services and earthworks will be approximately $X. The new business will be around $X. Total proceeds from the project will be approximately $X. You have obtained bridging finance from the a bank of approximately $X to fund the project.

It is not your intention to become involved in the day to day management of the project because this is outside your area of expertise. Consequently, you have instructed the planner to engage other professionals such as surveyors and engineers. A real estate agent will sell the blocks on your behalf.

You have only derived rental income from the land and a written lease has not been in existence for many years but the tenancy is operating on a monthly agreement which continues mainly due to uncertainty regarding the timing of the development.

Neither you nor any related entities, have been involved in any other development or subdivision projects prior to this subdivision. You do not have any plans to do any other development project in the future.

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 11-20

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 9-40

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

Reasons for decision

Under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you must pay the GST payable on any taxable supply that you make. For the sale of real property to be a taxable supply, it must satisfy all the requirements under section 9-5 of the GST Act.

Section 9-5 states that you make a taxable supply if:

(a) you make a 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.

(*denotes a term defined in section 195-1 of the GST Act)

Based on the facts provided, the sale of the subdivided land will be for consideration, the supply is connected with Australia and you are registered for GST. There is nothing in the GST Act that would make the supply GST-free or input taxed. Therefore, it is necessary to consider whether the subdivision and sale of the subdivided lots will be made in the course or furtherance of an enterprise that you carry on.

An enterprise is defined in subsection 9-20(1) of the GST Act, and includes an activity or series of activities, done:

(a) in the form of a business, or

(b) in the form of an adventure or concern in the nature of trade, or …

The Tax Office view on what constitutes an enterprise is contained in Miscellaneous Taxation Ruling MT 2006/1.

Goods and Services Tax Determination GSTD 2006/6 provides that the principles contained in MT 2006/1 apply equally to the terms entity and enterprise as used in the GST Act and can be relied on for GST purposes.

Paragraph 234 of MT 2006/1 considers the term business and states:

234. 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 transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 13 of GSTD 2006/6 states:

13. 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 deal. However the sale of the family home, a private car or other private asset is not, without other factors being present, an adventure or concern in the nature of trade.

It is appropriate in your case to determine whether the sale of the subdivided land is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 provides guidance on the subdivision of land and determining whether activities amount to a business or adventure in the nature of trade.

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.

Considering each of those factors in turn as they apply to your circumstances:

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

You purchased the land and have leased the land back to the previous owners for their business. There has been a change of purpose as you now plan to subdivide the land and sell residential lots.

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

In your circumstances, no additional land has been added to the original parcel of land.

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

Some of the land has been used in your enterprise of leasing the land to the business.

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

You have planned the subdivision for some time. Negotiations for the project commenced in over 10 years ago. You have a project manager. The subdivision entails changes to the land to make it suitable for residential use.

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

There is no evidence of an office or of letterhead. You have engaged the Project manager to manage the project. The blocks of land will be sold through a real estate agent.

      borrowed funds financed the acquisition or subdivision;

You have advised that bridging finance has been obtained for the project. Hence, you have chosen to go down a path of risk and profit rather than the mere realisation of the asset.

      there will be a level of development of the land beyond that necessary to secure council approval for the subdivision;

More is being done to the land than simply securing council approval for the subdivision. Environmental consultants have been engaged. There will be earthworks in order for the land to be suitable for residential use. There is peat removal and dewatering of the blocks. Also, services will be provided such as water, sewage, electricity, gas and telephone cable to the individual lots.

     buildings have been erected on the land.

There is no evidence of buildings being erected on the land.

We consider that an adventure or concern in the nature of trade is being carried on in relation to subdividing, improving and selling the lots.

It follows that your land development and sale of subdivided lots comes within the definition of an enterprise for the purposes of GST under subsection 9-20(1) of the GST Act.

As all the requirements of section 9-5 of the GST Act will be satisfied the supplies will be taxable and subject to GST. Also this means that under 9-5 of the GST Act, you will be required to remit GST of 1/11^th of the price of each subdivided lot you sell.

Section 11-20 of the GST Act provides that you are entitled to GST credits for the GST included in the price of your creditable acquisitions.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

You are registered for GST. Where you provide consideration for something that was a taxable supply to you and it is for a creditable purpose (development and subdivision of the lots) you are entitled to GST credits for those acquisitions.

Additional information

MT 2006/1 can be found on our website at www.ato.gov.au. It provides examples of subdivision of land that we consider are and are not enterprises.

You may be able to apply the margin scheme in working out the amount of GST payable on the supply, if the requirements of Division 75 of the GST Act are satisfied. (For further information on the margin scheme, you may refer to the fact sheet GST and the margin scheme and Goods and Services Tax Rulings GSTR 2000/21, and GSTR 2006/7 which are available on our website.