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Ruling

Subject: GST and property development

Questions

Will the proposed sale of your subdivided block of land (Lot B) as vacant land, be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

If you build a townhouse on Lot B and sell it, will the sale be a taxable supply under section 9-5 of the GST Act?

Decisions

No, your proposed sale of Lot B as vacant land will not be a taxable supply under section 9-5 of the GST Act.

Yes, if you build a townhouse on Lot B and sell it, the sale will be a taxable supply under section 9-5 of the GST Act.

Relevant facts and circumstances

You are married and currently in the transition phase to retirement. Recently, you made plans to downsize from your suburban home to an inner city townhouse, as a part of your retirement. Your objective was to significantly reduce the work required to maintain your land and be closer to various amenities.

You commenced searching for a suitable inner city property. You were initially unsuccessful in your search for a low maintenance townhouse with minimal land in the area you preferred. You found that prices for completed townhouses were higher than what you were willing to pay. You also found it difficult to find a townhouse that had the main bedroom on the ground floor, which was a significant requirement.

Finally you bought an inner city property. It was an old timber house with no heritage overlay and two street frontages. A mix of cash and a short term bridging loan funded the purchase.

After purchase of the inner city property, you sold your suburban property. The proceeds from the sale were used to pay off the bridging loan and will also be used to finance the construction of a townhouse on the inner city property.

Proposed land activities

Subsequent to the purchase of the inner city property, you decided that the size of the land was too big for the dwelling you proposed to construct and your desired lifestyle requirement of minimum gardening. As such a proposal was made to subdivide the land into two lots (Lot A and Lot B), sell Lot B and retain Lot A.

In order to obtain the relevant subdivision approval from the local council, you were required to obtain architectural designs for a townhouse on each subdivided lot.

You plan to live at the new townhouse to be built on Lot A.

At this stage you propose to sell Lot B as vacant land with the approved architectural designs for a townhouse. However, you will not be obtaining a building permit prior to selling Lot B. Therefore, you will not provide a building permit for the construction of a townhouse to any purchaser of Lot B.

You have already obtained architectural designs and planning approval for the construction of two townhouses on the property, which includes stamped drawings showing the new proposed boundaries. This was obtained as per the local council requirements in order to subdivide the land. There has not yet been any progress made in relation to seeking surveying plans or submitting an application for subdivision to the local council.

You have estimated total expenses including selling expenses associated with the activities on Lot B. Also you have obtained a valuation from a local real estate agent on the market value of Lot B. It is quite clear that you will not make any gain from the proposed subdivision and sale of Lot B. You did not have an intention to make a gain on this sale.

General information

You do not require the proceeds from the sale of Lot B to fund the proposed construction of the townhouse on Lot A.

At no point you intended to be property developers. You do not have a history of property development related activities. This is a one-off transaction in relation to property development activities.

The proposed subdivision will be managed solely by you.

You also desire to obtain a private ruling on the GST consequences, if later on, instead of selling Lot B as vacant land only, you decide to build a townhouse and sell it. In this scenario, you will have to obtain a building permit from the council prior to commencement of the construction work.

You are not registered for GST either individually or as a partnership.

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 40-65

A New Tax System (Goods and Services Tax) Act 1999 - Section 40-75

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

Reasons for the decisions

Decision 1

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 in section 195-1 of the GST Act.

The supply of Lot B as vacant land is not GST-free or input taxed under any provision of the GST Act.

You will make the supply for consideration, when you sell Lot B for the agreed price with a purchaser. The supply will be connected with Australia as the land is located in Australia. Therefore, paragraphs 9-5(a) and (c) of the GST Act will be satisfied. However, you are not registered for GST. It is necessary to ascertain whether your supply will be made in the course or furtherance of an enterprise that you carry on and whether you will be required to be registered for GST.

Carrying on an enterprise

Enterprise is defined in subsection 9-20(1) of the GST Act, which states:

An enterprise is 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; or

Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the meaning of 'an entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the principles in MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 - 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' 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.

We consider that your proposed subdivision and sale of Lot B will be a 'one-off' or isolated real property transaction.

Paragraphs 264-269 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ ( Statham ) and Casimaty v. FC of T ¹⁰⁶ ( 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…. 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 follow:

· 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.

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.

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience……

Example 33 of MT2006/1 considers the scenario, where a husband and wife have subdivided their residential property into two lots and sold one lot as vacant land and continued to live on the remaining lot.

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Application of the ATO view to your proposed transaction

An analysis of your proposed activities in relation to Lot B using the factors quoted in paragraph 265 of MT 2006/1 reveals the following:

Was there a change of purpose for which the land was held?

You originally bought this property to build a new townhouse with minimum maintenance work on the garden. You found that if you demolish the existing structures and build a townhouse on the property, there will be excess vacant land. You consider that maintaining a garden on that land requires substantial work on your part. You do not want to spend time and energy for such work at your age. Therefore, you decided to subdivide the property to sell that excess land. As such, there was a change of purpose for which the land was held.

Was additional land acquired to be added to the original parcel of land?

No, there was no additional land acquired to be added to the property purchased by you.

Was the property brought into account as a business asset?

No, the property has not been brought into account as a business asset. You have mentioned that you are not in the business of property development.

Was there a coherent plan for the subdivision of the total property?

Yes, after purchasing the property, you developed a plan to subdivide the property into two lots so that you could sell the excess land on your property.

Was there a business organisation such as a manager, office and letterheads etc?

No, there is no business organisation. You have not engaged a project manager. You have undertaken the work towards subdivision of the property yourself, by engaging the required professionals.

Were borrowed funds used to finance the acquisition and subdivision?

Yes, borrowed funds by way of a short term bridging loan were used for acquiring the property. The loan has been paid off with the proceeds from the sale of your suburban residence. You do not have to borrow funds for the subdivision of the property and construction of a townhouse on Lot A.

Was interest on borrowed money to defray subdivisional costs claimed as a business expense?

No. You have not claimed any interest expenses on borrowed funds as a business expense.

Was there a level of development of the property beyond that was necessary to secure council approval for the subdivision?

No. You will undertake the minimum actions required to obtain council approval for subdivision of the property. For example, you will not obtain a building permit for Lot B prior to sale of the land.

Will there be buildings erected on Lot B prior to sale?

No. You will not erect any buildings on Lot B prior to sale.

Other relevant arguments

You have estimated the expenses on Lot B by apportioning the purchase price and stamp duty and adding subdivision costs and selling expenses. You have obtained an estimated selling price of Lot B. It is quite clear that you will not make a gain from the sale of Lot B.

Considering the above facts and arguments, we consider that your proposed subdivision of the property and sale of Lot B will not be an adventure or concern in the nature of trade or a profit making undertaking or a scheme. It will simply be a disposal of excess land, which will be too cumbersome for you to maintain at your age. Therefore, we conclude that the sale of Lot B will be a mere realisation of a private asset.

Accordingly, you will not satisfy paragraph 9-20(1)(b) of the GST Act, as the sale of Lot B will not be a part of a series of activities undertaken in the form of an adventure or concern in the nature of trade.

The sale of this land will not be a supply made in the course or furtherance of an enterprise that you carry on. Accordingly, you will not satisfy the requirements of paragraph 9-5(b) of the GST Act.

As you will not carry on an enterprise in the process of sale of this land, you will not be required to be registered for GST. Therefore, you will not satisfy paragraph 9-5(d) of the GST Act.

Consequently, the sale of Lot B will not be a taxable supply under section 9-5 of the GST Act and you will not incur a GST liability on the sale.

Decision 2

You have requested a private ruling on the application of the GST Act, if you decide to build a townhouse on Lot B and sell it. As you have not made preliminary inquiries about the cost of building a new townhouse on Lot B and its probable sale price, at this stage you cannot provide that information.

As you are unable to provide all the facts and figures on this scenario, in answering this question, we will have to make a number of assumptions.

Example 29 of MT 2006/1 provides some guidance as to the application of the ATO view into this scenario.

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

If you decide to build a townhouse on Lot B and sell it, you will make the supply for consideration and satisfy paragraph 9-5(a) of the GST Act. The supply will be connected with Australia as the land is located in Australia. Therefore, paragraph 9-5(c) of the GST Act will be satisfied. However, you are not registered for GST. Therefore, it is necessary to ascertain whether your supply will be made in the course or furtherance of an enterprise that you carry on and you will be required to be registered for GST.

An analysis of this scenario using factors quoted in paragraph 265 of MT 2006/1 reveals the following.

You originally bought the property to build a new townhouse and live there. Now in addition to living on the property, you will build another townhouse on part of the property and sell it. As such, there will be a change of purpose for which the land was held.

Considering the suburb in which this new townhouse will be located, we consider that you will make a reasonable profit on the sale of this newly built townhouse.

In the previous scenario, you will be selling only a part of the land, which is excess for your needs and which is too cumbersome to maintain. In this scenario, you will do much more than selling excess land.

You have mentioned that you do not have experience in property development. Therefore, we consider that you will have to engage a project manager or building contractor or a similar person to supervise the construction of the townhouse.

You will have to incur substantial additional expenses for building the townhouse on Lot B. As such, we assume that you will have to borrow additional funds to finance such a project.

There will definitely be a level of development of the land beyond that necessary to secure council approval for the subdivision. In order to obtain council approval for the subdivision of the property, you do not have to build a townhouse on Lot B. You only have to submit architectural plans for a townhouse on each lot and subdivision plans prepared by a land surveyor.

However, rather than selling the vacant land, you will erect a townhouse on Lot B and sell it.

At this stage, you are unable to give an estimate of the construction costs for a new townhouse on Lot B and its probable sale price. However, considering the fact that your property is located in a very expensive inner city suburb, we consider that you will expect to make a profit on the sale of this new townhouse.

We consider that when the above factors are taken into account, your project will be a series of activities typically carried out by a property developer. Such a project when undertaken for profit satisfies the ordinary concept of an adventure or concern in the nature of trade. It has the characteristics of a business deal. Consequently, your sale of a new townhouse on Lot B will not be the mere realisation of a capital asset. Rather it will be the sale of a trading asset.

You will be considered to be carrying on an enterprise as defined in subsection 9-20(1) of the GST Act. It will be a property development enterprise. The sale of the new townhouse will be made in the course of your property development enterprise. Accordingly, paragraph 9-5(b) of the GST Act will be satisfied.

You are not registered for GST. It remains to be considered whether you are required to be registered and paragraph 9-5(d) of the GST Act will be satisfied.

Requirement to register for GST

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold. Currently the registration turnover threshold for non charitable entities is $75,000.

As discussed above, you will be carrying on an enterprise of property development in relation to the construction and sale of the new townhouse. It is necessary to determine whether your annual turnover will meet the registration turnover threshold.

Subsection 188-10(1) of the GST Act provides that you have an annual turnover that meets a particular turnover threshold if:

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

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

Section 188-15 of the GST Act provides that your current annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made or likely to make during that month and the previous 11 months.

Section 188-20 of the GST Act provides that your projected annual turnover is the sum of values of all supplies made in a particular month and the next 11 months.

When working out your current and projected annual turnover, supplies that are input taxed, not for consideration, not made in connection with an enterprise that you carry on and supplies that are not connected with Australia are disregarded.

Paragraph 40-65(2)(b) of the GST Act provides that the sale of residential premises is not input taxed if the residential premises are new residential premises.

Paragraph 40-75(1)(c) of the GST Act provides that residential premises are new residential premises if they have been built or contain a building that has been built to replace demolished premises on the same land.

We consider that your proposed sale of a new townhouse will be a sale of new residential premises and it will not be an input taxed supply. The proceeds from the sale of this townhouse will be included in your current annual turnover. We consider that your current annual turnover will meet the registration turnover threshold.

Projected annual turnover

Section 188-25 of the GST Act provides that when calculating your projected annual turnover, you do not include supplies made or likely to be made by you, by way of transfer of ownership of a capital asset or solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Goods and Services Tax Ruling 2001/7 (GSTR 2001/7) refers to the meaning of GST turnover, including the effect of section 188-25 on projected GST turnover. Paragraphs 31-36 of GSTR 2001/7 state:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject'¹⁴ of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.¹⁵

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'.¹⁶ An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock¹⁷) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.¹⁸

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

You do not intend to hold the townhouse on Lot B as an investment property for generating rental income. Therefore, at the time you offer the townhouse for sale, it becomes a revenue asset instead of a capital asset.

The disposal of this property is not a transfer solely as a consequence of ceasing to carry on an enterprise. We consider that your enterprise of property development ceases as a consequence of the disposal of this asset, rather than it is being disposed of in consequence of ceasing to carry on your enterprise.

Taking into account the above facts and arguments, we conclude that the value of the supply of the townhouse will be included in your projected annual turnover.

Taxable supply

As the selling price of the property would be expected to exceed $75,000, your current and projected annual turnovers will be above the registration turnover threshold. Consequently, under section 23-5 of the GST Act, you will be required to be registered and will satisfy paragraph 9-5(d) of the GST Act. Accordingly, you will satisfy paragraphs 9-5(a) - (d) of the GST Act.

As mentioned above, the sale of this new townhouse will not be an input taxed supply. The sale of this townhouse will not be a GST-free supply under any provision of the GST Act.

Consequently, if you build a new townhouse on Lot B and sell it, the sale will be a taxable supply of new residential premises. You will incur a GST liability on the sale.