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Ruling

Subject: sale of subdivided land

Question

Is the sale of the subdivided land taxable?

Answer

Yes, the sale of subdivided land is taxable.

Relevant facts and circumstances

· You have an Australian Business Number (ABN), but you are not currently registered for the goods and services tax (GST).

· You were registered for GST from 1 July 2000, but cancelled your registration later.

· You own a parcel of land which you intend to subdivide and sell.

· A related entity owns another parcel of land adjoining your parcel of land.

· Both you and the related entity own the respective properties under separate titles.

· The related entity also wishes to sell their parcel of land.

· For ease of subdivision, the related party will transfer parts of their land to you.

· For the same reason, you will transfer part of your land to the related party.

· As the subdivided lots in the two properties may have some common development work, you intend to engage the same team of consultants and contractors to carry out subdivision work.

· However, you will be responsible for the subdivision of the land belonging to you and the related party for the land belonging to them.

· You will lend money to the related party to enable the related party to make payments to consultants and contractors for work carried out in their subdivision work.

· The transfer of the respective parcels of land between you and the related party will be for consideration and the appropriate stamp duty will be paid.

· The subdivision of the land is to be undertaken to realise a better sales outcome than selling the properties as they are.

· Both you and the related party attempted to sell the land as it is but could not find a buyer who was willing to buy at the price you wanted.

· You would develop the land only to the extent that is necessary to meet the council requirements. These include:

(a) removal of redundant drainage structures

(b) provision of easements for existing rural drains

(c) provision of underground electricity supply service

(d) construction of roads along with traffic management systems and drainage

(e) construction of street corners within the subdivision

(f) construction of bridle/dual use paths

(g) construction of battleaxe access ways and drains

(h) the land to be graded and stabilised

(i) construction of fencing along the boundaries of lots abutting a gully

(j) construction of a road bridge

(k) landscaping to the satisfaction of the local council

(l) preparation and implementation of an approved urban water management plan

(m) preparation and implementation of an acid sulphate soil management plan

· You will engage engineering consultants to undertake the subdivision work and they will engage contractors to execute the necessary construction. You will neither engage employees for this project nor have a separate project office.

· You will manage the payments to consultants and contractors and maintain the cash flow of the project

· You will engage real estate agents to market and sell the subdivided lots.

· The estimated cost of subdivision is significant.

· The estimated gross revenue from the sale of subdivided lots is several millions of dollars.

· After the subdivision plan is approved, subdivision work will be undertaken progressively and lots will be sold as they become available to fund the remaining development work.

· Consequently, your initial funding requirement is small.

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 188-10

A New Tax System (Goods and Services Tax) Act 1999 - Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 - Section 188-20

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 - 5

Reasons for decision

You make a taxable supply, for GST purposes, where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 that is defined in section 195-1 of the GST Act).

You are a company engaged in farming activities. The land you intend to subdivide and sell is an asset of the company. Thus, when you dispose the vacant subdivided land, it would be a realisation of a business asset.

In this situation, for GST purposes, you satisfy the conditions at paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you will make the supplies of vacant subdivided land for consideration and these supplies are connected with Australia as the land is located in Australia.

It remains, therefore, to determine whether the supplies you make meet the conditions set out in paragraphs 9-5 (b) and 9-5(d) of the GST Act. It is also necessary to determine whether the supplies are GST-free or input taxed.

The supply of vacant subdivided land is not GST-free because none of the provisions of Division 38 of the GST Act apply in this case. The supply is also not input taxed because the provisions of Division 40 do not apply to the supply of vacant land.

It remains, therefore, to determine whether or not the subdivision and the sale of vacant land you intend to undertake is done in the course or furtherance of an enterprise you carry on and whether or not you are required to be registered.

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act. The term covers an extremely broad range of activities. For instance, it includes activities that are more than what would constitute as a business.

Subsection 9-20(1) of the GST Act states:

An enterprise is 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

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property:

(d) ……

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

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.

Paragraph 180 of MT 2006/1 provides that the larger the scale of the activities the more likely it is that they constitute an enterprise.

Paragraph 234 of MT 2006/1 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.

Based on the information provided, your subdivision activity will be a one-off activity, and is not an activity or series of activities done in the form of a business or part of a series of property development and/or property trading activities. Therefore, we shall consider whether your subdivision activity is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 provides a list of factors for determining whether activities are a business or an adventure or concern 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. 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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative, rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In considering the facts of your case, it appears that:

(a) there is a change of purpose for which the land was held:

(b) there is a coherent plan for the subdivision of the land

(c) subdivided land is to be sold off to finance the on going subdivision work of the rest of the land

(d) additional land was acquired to be added to the original parcel of land and parts of the land sold off for ease of subdivision and hence improve its value

(e) the subdivision will be developed in a businesslike manner. For example you will engage engineers, consultants, a project manager etc. You will incur significant development costs. You will undertake a comprehensive marketing campaign.

In this regard it is pertinent to consider Example 30 given in MT 2006/1.

Example 30

277. Steven buys a 100 hectare property. He believes that the property may be suitable to be developed as a resort. After investigation he decides that it would be more profitable to subdivide and sell the property. He decides to subdivide the property into one hectare lots and sell these.

278. He engages a town planner and a surveyor to survey the 100 hectare property and to establish how many one hectare lots it can be subdivided into. Steven then approaches the local shire council and is advised that he may subdivide his property into 65 one hectare lots.

279. However, Steven must satisfy various shire council conditions if he wishes to obtain development approval. They are:

· the making of new sealed roads with kerbing and channelling within the subdivision ;

· the provision of water, electricity and telephone services to the new lots ;

· the provision of culverts and other storm water drainage works ; and

· the transfer of certain areas of land to the shire council for parks, environmental and other public purposes.

280. Steven consults his accountant and legal advisers. Together they prepare a comprehensive business plan for the project. They approach a commercial lender to arrange a substantial loan, secured by the property, to cover all development costs and related expenses.

281. After gaining development approval from the council, Steven then engages a project manager who arranges for all the survey and subdivisional works to be carried out. Contractors are engaged to put in the roads, complete all the necessary drainage works and install the water, electricity and telephone services.

282. Steven also investigates a marketing strategy that will provide the best return for his project. Sales agents are retained to carry out the marketing program which involves a comprehensive advertising campaign using a promotional estate name , ' Bush Turkey Hill'.

283. Steven is entitled to an ABN on the basis that the subdivision is an enterprise and it is more than a mere realisation of a capital asset. Significant factors that are relevant which lead to this conclusion are as follows:

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

· there is a comprehensive plan for the development of the property ;

· the subdivision is developed in a businesslike manner for example there is a project manager, significant development costs, a comprehensive marketing campaign including an estate name for the land ; and

· a substantial loan has been taken out to finance the development.

You state that you attempted to sell the land in its present state but failed to find a buyer prepared to pay the price you expected. Your decision to subdivide the land was to obtain a higher price than what you can obtain by selling the land as it is. Thus, there is a risk involved in this strategy and an expectation of profit by undertaking the subdivision work.

The facts of this case show an extensive list of work to be done. You informed us that the subdivision will create several lots of vacant land and it may cost a significant amount to complete. Therefore, we consider this as a significant development project and the costs involved in the subdivision are substantial. You also informed us that you intend to use your own funds for this purpose. You further informed us that the gross sales proceeds from the sale of the subdivided land would be several million dollars. Thus your investment in subdivision work constitutes a significant financial risk. You also informed us that you intend to undertake the subdivision progressively by selling the first lots of land that is subdivided to fund the development of the rest. There is, therefore, a high frequency of transactions, considerable business decisions to make and significant involvement in the project. Further, you intend to market and sell the properties by engaging an agent.

While the original property has been held as a capital asset and that the work involved in the subdivision development will not go beyond what the local council requires, we consider that it is a large, commercial scale development with a high level of activities involved. Thus, it changes the nature of the land from that of a capital asset to that of a trading asset, and that the subdivision development will be a one-off activity that has the characteristics of a commercial deal. Hence, your sales of the vacant subdivided lots will not be the mere realisation of a capital asset but needs to be treated as sales of trading assets.

Consequently, your subdivision development and sale of the resulting vacant subdivided lots are activities done in the form of an adventure or concern in the nature of trade and is therefore an enterprise of property subdivision for GST purposes. Hence, paragraph 9-5(b) of the GST Act will be satisfied.

GST registration

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act, which states:

You are required to be registered under this Act if:

(a)     you are *carrying on an *enterprise; and

(b)    your *annual turnover meets the *registration turnover threshold.

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

You are carrying on an enterprise of property subdivision. Hence, you satisfy the condition at paragraph 23-5(a) of the GST Act.

In accordance with paragraph 23-15(1)(a) of the GST Act, the registration turnover threshold in your case is $75,000.

Subsection 188-10(1) of the GST Act states that your annual turnover will meet the registration turnover threshold if:

your current annual turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected annual turnover is below the turnover threshold, or

your projected annual turnover is at or above the turnover threshold.

Your current annual turnover at a time during a particular month is the sum of the value of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month (subsection 188-15(1) of the GST Act).

Your projected annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months (subsection 188-20(1) of the GST Act).

Supplies in certain situations are excluded from projected annual turnover calculations, or both current annual turnover and projected annual turnover calculations.

Supplies not connected with an enterprise that you carry on are excluded from both current annual turnover and projected annual turnover calculations as per paragraph 188-15(1)(c) and paragraph 188-20(1)(c) of the GST Act respectively.

Paragraph 188-25(a) of the GST Act states that the projected annual turnover calculation excludes transfers of ownership of capital assets. As explained above, your sales of the vacant subdivided lots will be sales of trading assets, not capital assets. Hence, the exclusion at paragraph 188-25(a) of the GST Act does not apply in your case.

There are no other exclusions from the calculation of current annual turnover and/or projected annual turnover that are relevant to you, based on the information provided.

Hence, on the day of settlement of each vacant subdivided lot in your case (which is the time of supply of each lot), your current annual turnover and projected annual turnover will both be over $75,000, as you will sell each of these lots for over $75,000, and the supply of each of these lots will be connected with an enterprise that you carry on. Therefore, you will satisfy the condition at paragraph 23-5(b) of the GST Act when you sell each vacant subdivided lot, as your annual turnover will meet the registration turnover threshold.

As you will satisfy the requirements of section 23-5 of the GST Act, you will be required to be registered for GST when you sell each of these lots. Consequently, the condition at paragraph 9-5(d) of the GST Act will be satisfied.

As mentioned previously, there are no provisions in the GST Act under which your sale of the vacant subdivided lots will be GST-free or input taxed. Consequently, as you will satisfy all of the requirements of section 9-5 of the GST Act, your sale of the vacant subdivided lots will be subject to GST as taxable supplies.