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Ruling

Subject: GST and sale of subdivided property

Question

Will your sale of the subdivided lots be a taxable supply?

Answer

No, your sale of the subdivided lots will not be a taxable supply.

Relevant facts and circumstances

You are carrying an enterprise of leasing residential properties.

You are not registered for goods and services tax as all the supplies that you make through your enterprise are input taxed.

More than X years ago, you purchased a property that contained a house. You used the house as storage from the time of purchase until you moved out of the property a year later.

From the time you moved out, you leased the property to tenants who used the remainder of the land as a paddock.

In 2010, you submitted a development approval (DA) application to subdivide the property into several lots. Your application was approved in 2011.

You are aware that the surrounding properties are being subdivided and sold by a property developer.

You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the DA. Some of the requirements include:

· landscaping works to provide street trees,

· servicing all lots with water, sewer, underground electricity and telephone facilities,

· construction of stormwater drainage, and

· construction of new roads, kerb and gutter.

You have no formal business plan.

You hope to be able to sell the subdivided lots as soon as the subdivision had occurred.

You have no business organisation for the subdivision and have no office, employees or letterhead in relation to the subdivision.

You intend to use consultants and contractors to perform the work and will take a passive role.

You engaged another entity to survey the land and prepare a draft of the proposed subdivision.

You intend to fund most of the costs of the subdivision from savings; however, you may be required to make some borrowings.

You intend to market the subdivided lots for sale through local real estate agents. Each lot is expected to sell for more than of $XX,000.

You have not claimed the expenses in relation to the current subdivision as deductions for income tax purposes.

You have not claimed any input tax credits in relation to the subdivision.

The current lease for the property will expire in 2012. You will need to give the tenants a notice to vacate the property as the subdivision will not proceed until the house is removed.

You have not done any subdivision previously and do not intend to subdivide any of your other properties that you currently lease.

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 and

A New Tax System (Goods and Services Tax) Act 1999 section 188-25.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if:

you make the supply for *consideration; and

the supply is made in the course or furtherance of an enterprise that you *carry on; and

the supply is *connected with Australia; and

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 under section 195-1 of the GST Act).

All the requirements of section 9-5 of the GST Act must be satisfied for the sale of the subdivided lots to be a taxable supply.

In this case, you will make the supply for consideration; and the supply will be connected with Australia. The requirements in paragraphs 9-5 (a) and 9-5(c) of the GST Act will be satisfied. As such, we must determine whether the sale of the subdivided lots will also satisfy paragraphs 9-5(b) and 9-5(d) of the GST Act.

Supply made in the course or furtherance of an enterprise carried on

While you are carrying on a leasing enterprise in respect of the property, that enterprise will cease when you terminate the lease and demolish the house to give way for the subdivision. The sale of the subdivided lots will not be made in the course of that enterprise; therefore, it must be determined whether your activities leading to the sale of the subdivided lots will amount to carrying on an enterprise.

For the purpose of paragraph 9-5(b) of the GST Act, 'enterprise' is defined in subsection 9-20(1) of the GST Act to include 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; or

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property

Miscellaneous Tax Ruling MT 2006/1 considers the meaning of 'enterprise' for the purpose of entitlement to an Australian business number (ABN). MT 2006/1 has equal application to the meaning of 'enterprise' for the purposes of the GST Act.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated property transactions. The issue to be decided is whether the activities are considered to be activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 contains a list of factors that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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.

It is necessary to examine the facts and circumstances of each particular case in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset. This may require a consideration of the factors outlined above; however, 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 this case, you acquired the property and initially used the house built on it as storage. You leased the property a year later when you moved out of the property.

In 2010 you lodged a DA application which was approved in 2011.

You neither have a formal business plan nor a business organisation for the subdivision. You will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the DA. You will take a passive role in the subdivision, instead, use the services of contractors, consultants and real estate agents.

Furthermore, you have not done any subdivision previously, and do not intend to subdivide any of your other properties in the future.

Based on the facts that you provided and the circumstances you have described, the subdivision of your property does not amount to an enterprise. The subdivision is a mere realisation of a capital asset. Therefore, the sale of the subdivided lots will not be made in the course or furtherance of an enterprise that you carry on.

As the requirement in paragraph 9-5(b) of the GST Act will not be met, the sale of the subdivided lots will not be a taxable supply.

Required to be registered

It is no longer necessary to determine whether you are required to be registered for GST as a result of the subdivision and the subsequent sale of the subdivided lots