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Ruling

Subject: goods and services tax (GST) and sale of property

Question 1

Will GST be payable on your sale of a lot created by the subdivision?

Answer

GST will not be payable on your sale of a lot created by the subdivision if:

§ a farming business will be carried on, on the land that the subdivided lot comprises for the period of at least 5 years immediately preceding the time of sale; and

§ the purchaser intends that a farming business be carried on, on the lot after the time of sale of the lot to the purchaser.

Otherwise GST will be payable on your sale of a lot created by the subdivision.

(This advice applies only to the lots you currently plan to sell)

Question 2

Can the margin scheme be used to calculate GST on your sales of the lots created by the subdivision?

Answer

The margin scheme will only be relevant if GST is payable on your sales of the lots created by the subdivision.

If GST is payable on your sale of a lot created by the subdivision, you can use the margin scheme to calculate GST on your sale of the lot, provided that you and the purchaser agree in writing by the time of sale or within such further period as the Commissioner allows that the margin scheme will be used.

Question 3

How will you calculate the margin for your sale of a lot created by the subdivision?

Answer

The margin (if applicable) for your sale of a lot created by the subdivision will be equal to the price you sell the lot for or the difference between that price and an approved valuation of the interest as at the day a certain individual acquired it. You can choose either of these two methods.

Question 4

Will you be entitled to input tax credits for acquisitions you make in connection with the property subdivision?

Answer

You will be entitled to input tax credits for acquisitions you make in connection with the property subdivision where the relevant supplies made to you are taxable and you provide or are liable to provide consideration for these supplies

Otherwise you will not be entitled to input tax credits.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

You are registered for GST.

You own a property located in Australia.

You acquired the property from the deceased estate of a certain individual in a certain year.

Our records show that you were not a member of a GST group or a participant of a GST joint venture when you acquired the property.

A certain individual acquired the property from the deceased estate of a certain individual.

A certain individual acquired the property from the deceased estate of a certain individual in a certain year.

You have carried on farming business activities on the property since approximately a certain number of years ago.

You ceased livestock farming on the property in approximately a certain financial year. The livestock farming activity was a business.

You carry on a grape farming business on the property.

During the last so many years, a certain entity has been the exclusive purchaser of the grapes grown on the property. Your contract with a certain entity expires on a certain date. You may continue to carry on the grape farming business on the property after that date.

You will subdivide the property.

The proposed subdivision will comprise a certain number of lots.

You will sell some of the lots created by the subdivision. You do not have any timeframe within which you will sell the relevant lots. You anticipate that it may take a number of years to sell all of the relevant lots at a suitable price.

You do not intend to dispose of all the land. Instead you wish to retain as much of the vineyard land as possible and to only subdivide and sell those parts of the land which have been used primarily for livestock farming purposes.

You have recorded the property as a fixed asset in your balance sheet.

You will hire a manager to manage the property subdivision.

You will not borrow money to undertake the subdivision.

You intend to present the farm land lots for sale as basic rural blocks of land. In that respect, you intend to arrange for the farm land lots to be tidied up (that is, removal of debris) following recent storm damage and revegetation and rehabilitation to their original pastoral status to protect against future storm damage and erosion. In all other respects you intend to do only the bare minimum amount of works required to obtain council subdivision approval. The subdivision will require the construction of a road and the digging of amenities trenches.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 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 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2)

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-11

Reasons for decisions

Question 1

Summary

GST will not be payable on your sale of a lot created by the subdivision if the sale is a GST-free sale of farmland under section 38-480 of the GST Act.

If your sale of a lot created by the subdivision is not a GST-free sale of farmland under section 38-480 of the GST Act, GST will be payable on the sale as the requirements of section 9-5 of the GST Act will be satisfied.

Detailed reasoning

GST is payable by you where you make a taxable supply.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

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.

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

In your case, you will satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. That is, you will supply the relevant lots for consideration. The sales of the lots will be connected with Australia as the lots will be located in Australia. You are registered for GST.

There are no provisions in the GST Act under which your sale of the lots created by the subdivision will be input taxed.

Therefore, what remains to be determined is whether you will sell the lots created by the subdivision in the course or furtherance of an enterprise that you carry on and whether the sales will be GST-free.

Enterprise

Miscellaneous Taxation Ruling MT 2006/1 provides the Australian Taxation Office view on the meaning of enterprise for ABN purposes.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of enterprise for the purposes of the GST Act and can be relied on for GST purposes.

Paragraph 265 of MT 2006/1 sets out factors that we consider in determining whether a property subdivision activity is an enterprise in its own right. It states:

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:

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

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

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

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

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

· borrowed funds financed the acquisition or subdivision;

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

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

· buildings have been erected on the land.

There will be no change of purpose for which you hold the land after you conduct the subdivision. You will continue to carry on a grape farming business on remaining land.

You have recorded the land as a fixed asset in your balance sheet.

You do not have a coherent plan for the subdivision of all of the land.

You will have a manager to manage the subdivision.

You have not borrowed funds to finance your acquisition of the property or subdivision.

You intend to present the farm land lots for sale as basic rural blocks of land. In that respect, you intend to arrange for the farmland lots to be tidied up (that is, removal of debris) following recent storm damage and revegetation and rehabilitation to their original pastoral status to protect against future storm damage and erosion. In all other respects you intend to do only the bare minimum amount of works required to obtain council subdivision approval. The subdivision will require the construction of a road and the digging of amenities trenches.

You will not build buildings on the land as part of the subdivision project.

You did not acquire additional land to add to the original parcel of land.

Considering the factors in paragraph 265 of MT 2006/1, we consider that your subdivision activity will not be an enterprise in its own right,

However, your sale of the subdivided lots will be supplies you make in the course or furtherance of your farming enterprise, as you will have used the areas of these lots in your farming enterprise.

GST-free sales of farmland

Section 38-480 of the GST Act provides that a sale of land is GST-free if:

(a) the land is land on which a farming business has been carried on for at

least the period of 5 years preceding the supply; and

(b) the recipient of the supply intends that a farming business be carried on,

on the land.

There are no other provisions of the GST Act under which your sale of the lots created by the subdivision will be GST-free.

Paragraph 3 of Goods and Services Tax Determination GSTD 2011/2 states:

The definite article 'the' in the expression 'the period of five years' in paragraph 38-480(a) of the GST Act indicates that the period in which a farming business must be carried on, on the land, is a continuous period of five years immediately before the supply of the land. This is distinct from the expression 'a period of five years preceding the supply' which may refer to any period of five years before the supply of the land.

You will make a GST-free supply of a lot created by the subdivision under section 38-480 of the GST Act if:

§ you carry on a farming business on the area of land that a subdivided lot comprises for the period of at least 5 years immediately preceding the time of sale of the subdivided lot; and

§ the purchaser intends that a farming business be carried on, on a subdivided lot after you sell the lot (the entity that carries on this farming business need not be the purchaser).

Paragraphs 10 and 11 of GSTD 2011/2 provide an example that is similar to your situation. They state:

10. Sacha has been carrying on a farming business of maintaining animals for sale for more than five years. During that time, the farming business has been conducted on two large blocks of land. Sacha decides to downsize the business and to sell one of the blocks of land. Sacha ceases her routine farming activities on the block of land she is selling. Sacha then sells the land while she continues to carry on her farming business on the other block of land.

11. For the purposes of paragraph 38-480(a), Sacha continues to carry on a farming business on the land up until the sale of that land. The sale of the land may be GST-free under section 38-480 if the other requirements of the section are met.

We consider that you would have continued carrying on a farming business on the entire area of land you plan to sell (for the purposes of paragraph 38-480(a) of the GST Act) from the time you ceased using that area of land (or part thereof) to conduct routine farming activities to the time you sell the new lots created from that area provided that you continued carrying on a farming business, during that period, on the area of land you plan to retain.

Where your supplies of the lots created by the subdivision are GST-free under section 38-480 of the GST Act, you will not make taxable supplies of these lots and therefore, GST will not be payable on these sales.

Where your supplies of the lots created by the subdivision are not GST-free under section 38-480 of the GST Act, you will satisfy all of the requirements of section 9-5 of the GST Act, and therefore, under such circumstances, GST will be payable on these sales.

Question 2

Summary

The margin scheme will only be relevant if GST is payable on your sales of the lots created by the subdivision.

If GST is payable on your sale of a lot created by the subdivision, you can use the margin scheme to calculate GST on your sale of the lot, provided that you and the purchaser agree in writing by the time of sale or within such further period as the Commissioner allows that the margin scheme will be used, because:

§ you will be making a taxable supply of real property by selling a freehold interest in land; and

§ you did not acquire the freehold interest through a supply that was ineligible for the margin scheme.

Detailed reasoning

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by selling a freehold interest in land if you and the purchaser agree in writing that the margin scheme will apply.

Subsection 75-5(1A) of the GST Act provides that the written agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

However, subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme.

You may make a taxable supply. You will make a supply of real property by selling

a freehold interest in land when you sell the relevant lots created by the subdivision. You will not have acquired your interests in these lots through a supply that was ineligible for the margin scheme.

Therefore, if you make taxable supplies of the relevant lots created by the subdivision, you may use the margin scheme provided that you and the purchasers agree in writing that that the margin scheme is to apply on or before the making of your supplies of the lots or within such further period as the Commissioner allows.

Question 3

The margin for your sale of a lot will be calculated in accordance with subsection 75-11(4) of the GST Act, as:

§ you acquired the property by inheriting it; and

§ none of subsections 75-11(1) to 75-11(2B) of the GST Act apply; and

§ the entity from whom you inherited the property acquired it on or after 1 July 2000.

In accordance with subsection 75-11(4) of the GST Act, the margin (if applicable) for your sale of a lot created by the subdivision will be the amount by which the consideration exceeds:

(d) if you know what the consideration for the supply of the interest to a certain individual was and you choose to use that consideration to work out the margin for the supply - that consideration; or

(e) if paragraph (d) does not apply- an approved valuation of as at the day on which the certain individual acquired it. the interest

The property was supplied to a certain individual by the trustee of a deceased estate but the certain individual would not have provided consideration for this supply. Therefore, the consideration figure under paragraph 75-11(4)(d) of the GST Act would be zero.

You can utilise either paragraph 75-11(4)(d) or paragraph 75-11(4)(e) of the GST Act.

If you choose to utilise paragraph 75-11(4)(e) of the GST Act, the approved valuation would need to be apportioned between the lots for sale on a fair and reasonable basis.

Question 4

Summary

You are entitled to input tax credits for acquisitions you make in connection with the property subdivision activity where the supplies made to you are taxable and you provide or are liable to provide consideration for these supplies, as under such circumstances you satisfy all of the requirements of section 11-5 of the GST Act.

You are not entitled to input tax credits for acquisitions you make in connection with the property subdivision activity where the supplies made to you are not taxable and/or you do not provide and are not liable to provide consideration for these supplies, as you do not satisfy all of the requirements of section 11-5 of the GST Act under such circumstances.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the GST Act, which states:

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.

Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it

in carrying on your *enterprise.

Subsection 11-15(2) of the GST Act states:

However, you do not acquire the thing for a creditable purpose to the extent

that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

You will acquire things in connection with the subdivision activity in carrying on your farming enterprise. Your acquisitions of these things will not relate to making supplies that would be input taxed. These acquisitions will not be of a private or domestic nature. Hence, you will acquire these things for a creditable purpose and therefore, you will satisfy the requirement of paragraph 11-5(a) of the GST Act.

Where the things supplied to you are taxable supplies, you will satisfy the requirement of paragraph 11-5(b) of the GST Act.

Where you provide or are liable to provide consideration for the supplies made to you in connection with the subdivision, you will satisfy the requirement of paragraph 11-5(c) of the GST Act

You are registered for GST. Therefore, you satisfy the requirement of paragraph 11-5(d) of the GST Act.

Hence, you are entitled to input tax credits for acquisitions you make in connection with the property subdivision activity where the supplies made to you are taxable and you provide or are liable to provide consideration for these supplies.

You are not entitled to input tax credits for acquisitions you make in connection with the property subdivision activity where the supplies made to you are not taxable and/or you do not provide and are not liable to provide consideration for these supplies.