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Ruling

Subject: GST and sale of sub-divided land

Question

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

Answer

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

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

You are currently in the transition phase to retirement.

· You acquired a property for farming activities in a partnership.

· You have included this property as an asset in the balance sheet of the partnership.

· The partnership was registered for goods and services tax (GST) and cancelled the GST registration as the partnership ceased carrying on the enterprise of farming.

· In the past you have subdivided portion of your property into a number of lots of residential land as stage 1 and sold them as taxable supply with the intension of scaling back of the farming activities.

· You received a private ruling for the purposes of Capital Gain Tax (CGT) in relation to the stage 1 development and the Commissioner has acknowledged that the subdivision activities were the mere realisation of a capital asset and did not amount to a business or a profit-making undertaking.

· After completing the stage 1 development, you received a development approval to subdivide another portion of the property into a number of lots of residential land as stage 2.

· The partnership was registered for GST at the commencement of stage 2 development activities.

· You advised us the following in relation to the stage 2 development;

(i) you will not build anything on the land but will sell the lots as vacant residential land;

(ii) you have no formal business plan for stage 2 development;

(iii) you have no business organisation for the subdivision and no office, secretary or letterhead in relation to the subdivision activities;

(iv) you will engage agents and contractors to undertake all the subdivision activities;

(v) you will use real estate agents to market the land for sale;

(vi) you have not claimed expenses in relation to the stage 2 development as deductions for income tax purposes;

(vii) you are not claiming any input tax credits in relation to the stage 2 development;

(viii) you have borrowed some funds to finance the stage 2 development; and

(ix) you will only carry out development activities on the subdivided land that are necessary to meet the requirements of the council.

· You also engaged in similar activities in the past where you have subdivided part of the property into a small number of lots of land and used the proceeds from the sale of these lots of land to reinvest in to the farming business activities.

· You intend to use the profits from the sale of the stage 2 development to fund your retirement.

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 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 and

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

Reasons for decision

You are liable to remit GST on any taxable supplies you make.

The term taxable supply is defined in section 9-5 of the GST Act. 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.

The supply of subdivided residential land is not GST-free or input taxed under any provision of the GST Act.

You will make the supply of the subdivided residential land for consideration and the supply will be connected with Australia as the land is located in Australia. However 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:

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; or

d) …….

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.

Based on the facts provided, you have undertaken more than one subdivision of land activity prior to ceasing your farming enterprise. Although you were not engaged in property development activities, the nature of your activities in selling the portions of the farm land indicates that it was of a revenue nature. Therefore, the stage 2 development activity will not 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.

...

Application of the ATO view to your stage 2 development activities

An analysis of your stage 2 development activities 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 acquired the property with the intention of using it in your farming activities. However, you have disposed portions of the property by subdividing them into a number of lots as residential land for various purposes. This clearly indicates that 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.

Was the property brought into account as a business asset?

Yes, the property was included as an asset in the balance sheet of the partnership.

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

Yes. You have developed plans to subdivide portions of your land into a number of residential land for sale under stage 1 and 2 development activities.

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

No. You have advised us that you do not have a business organisation for the subdivision and there is no office, secretary or letterhead in relation to the subdivision activities. However, you will engage agents and contractors to undertake the subdivision activities.

Were borrowed funds used to finance the acquisition and subdivision?

Yes. You will borrow some funds to finance the subdivision.

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 which was necessary to secure council approval for the subdivision?

No. You will undertake the minimum development activities required to obtain council approval for subdivision of the property.

Will there be buildings erected on the subdivided land prior to sale?

No. You will not erect any buildings on the subdivided land prior to sale.

The above analysis in relation to stage 2 development activities indicates that you may not be carrying on an enterprise of property development. Furthermore, during the stage 2 development activities you have ceased operating your farming activities and have cancelled your GST registration.

Therefore, we consider that your proposed stage 2 development activities and the sale of subdivided land as residential land 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 in order to fund your retirement.

Accordingly, you will not satisfy paragraph 9-20(1)(b) of the GST Act, as the sale of the subdivided land under stage 2 development will not be part of a series of activities undertaken in the form of an adventure or concern in the nature of trade.

The sale of subdivided residential land under stage 2 development, will not be a supply made in the course or furtherance of an enterprise that you carry on. Accordingly, the supply will not satisfy the requirements of paragraph 9-5(b) of the GST Act.

Annual Turnover Threshold

If you carry on an enterprise you are required to be registered for GST if your annual turnover exceeds the registration turnover threshold, which is currently $75,000. If you are not registered at the time you sell the subdivided residential land, you will be liable for GST on the sale only if you are required to be registered for GST.

As stated above, you will only be required to be registered for GST if your annual turnover exceeds $75,000. To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 month period covers the period of the current month and the proceeding 11 months, known as your current annual turnover, and the current month and following 11 months, known as your projected annual turnover.

However, section 188-25 of the GST Act specially excludes from projected annual turnover any supply made as a consequence of ceasing to carry on an enterprise.

You have ceased operating the farming activities and have cancelled your GST registration. Therefore, we are of the view that the proceeds from the sale of the subdivided residential land under stage 2 will be excluded from the calculation of your projected annual turnover.

You have advised us that you are not required to be registered for GST as your annual turnover threshold will not exceed $75,000. Therefore, you will not satisfy paragraph 9-5(d) of the GST Act.

Consequently, the sale of the subdivided residential land under stage 2 development 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.