Edited version of your private ruling

Authorisation Number: 1012389838619

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Supply of various vacant lots after subdivision of principal place of residence

Question

Are the supplies of the vacant lots by you taxable supplies?

Answer

No, the supplies of the vacant lots by you are not taxable supplies. You do not have to remit GST to the ATO on the sale of the vacant lots.

Relevant facts and circumstances

You are partners in a partnership. The partnership is registered for goods and services tax (GST) for your enterprise of leasing commercial premises

A number of years ago, you jointly purchased the original property. The land was big with a small cottage at the front of the site. This cottage is a residential building with a kitchen, bathroom, and bedrooms. The existing brick cottage on the original property was used as your principal place of residence. It was too small for your purposes so later you built another residential building on the land to use as your principal residence/family home.

The original property has neither been used as a business asset in your business (ceased a number of years ago) nor in your enterprise of leasing commercial premises.

You considered the subdivision of the original property, so you could remain in the family home, and you would have a more manageable block. However, at the time, the original property was zoned in Low Density Residential Land, which prevented the property being subdivided.

X years ago, you requested that your local Council (the Council) rezone the original property so that it could be subdivided. However, your request was rejected.

You wish to subdivide the original property so you can keep the family home; live on a manageable block; and allow your children to acquire vacant lots at a discounted price after subdivision, so they can build their own homes.

Eventually, the Council agreed to allow the original property and the adjoining land owned by a neighbour to be subdivided. A Planning Permit was issued.

After receiving the Planning Permit, you began to obtain estimates of the costs in proceeding with the proposed subdivision. However, no subdivision happened due to personal circumstances, and the Planning Permit lapsed.

Eventually, you and the neighbour reapplied to the Council for the proposed subdivision of the original property and adjoining land. The Council certified the Plan of subdivision. Construction of the subdivision commenced and the expected completion date is soon. You did not enter into a section 173 agreement with the Council. Section 173 agreement is about conditions or restrictions on the use or development of the land.

The development can be summarised as follows:

· You will subdivide the original property into a specific number of vacant lots.

· No other work will be done to the original property other than the minimum required by Council to complete the subdivision. These works include the construction of a service road.

· You will finance the subdivision with you own savings, no other finance will be required. You will continue to reside in the family home located on Lot A. You intend to rent out the existing residential building on lot B.

· You intend to sell lot C and D to your children at a substantial discount to the market value so they can construct their own family homes at their own costs.

· You intend to sell the remaining vacant lot, lot E, to the general public.

· You have engaged the services of a surveyor to assist you with regards to the proposed subdivision of the land. You do not have a business plan. You are not paying for the construction of the houses on the lots to be transferred to your children.

You have never been involved in any residential property development.

You were involved in a commercial property development as follows: You bought a property and resided on the house on the site for several years and it was then demolished and factories were constructed on the site. You occupied one factory to carry out your business until the business ceased. You rented out the remaining factories. Later, the factories were strata titled and separate titles were issued for each factory.

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 Paragraph 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

Reasons for decision

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act 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 defined term under section 195-1 of the GST Act)

Based on the facts provided, all the new 5 lots are owned as joint tenants by two individuals thus we first need to examine whether the vacant lots will be provided by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership.

Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership.

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the vacant lots.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a), 9-5(c), and 9-5(d) of the GST Act as the supplies that you make are for consideration, the vacant lots are located in Australia respectively, and you are registered for GST (to carry on the enterprise of leasing commercial premises).

Therefore, we need to consider whether your sale of the vacant lots is in the course or furtherance of an enterprise of leasing commercial premises that you carry on (paragraph 9-5(b) of the GST Act).

Is your supply of the vacant lots made in the course of your enterprise of leasing commercial premises; or in the course of an enterprise of property development?

We consider that your development and sale of the new vacant lots is not in the course of your enterprise of leasing commercial premises. This is because the original property has been used as your principal place of residence. It has neither been used as a business asset in your business, nor in your enterprise of leasing commercial premises.

The next step is to consider if you are carrying on an enterprise of property development.

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

· in the form of a business

· 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, license or other grant of an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in the ruling and the determination have been applied to your circumstances.

Paragraph 10 of Goods and Services Tax Determination GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in residential property development before and that your activities represent a one off transaction on the original property that you have purchased and used as your principal place of residence. In the absence of other facts, it is considered that your activities are not carried out in the form of a business if these activities are part of a one off transaction on the original property and not the beginning of an ongoing property development business.

As your activities of development and sale of vacant lots is an isolated transaction, it is necessary to determine whether the development and sale of the vacant lots will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

In the form of an adventure or concern in the nature of trade

Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

· 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 for council approval for the subdivision, and

· buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

From the facts provided, you purchased the original property a number of years ago with an existing residential building to be used as your principal residence. Later, you built another residential building on the original property to be used as your principal residence.

You made plans to subdivide the original property into five blocks of land. You will continue to reside in the family home located on Lot A. You intend to rent out the existing residential building on lot B. You intend to sell lot C and D to your children at a substantial discount to the market value so they can construct their own family homes at their own costs. You intend to sell the remaining vacant lot, lot E, to the general public.

You engaged the services of a surveyor to assist you with regards to the proposed subdivision of the original property.

We consider that your development and sale of the new vacant lots is not a one off enterprise of property development because:

· There is no change in purpose for which the original property is held. It remains your principal place of residence.

· You applied for the subdivision of the original property due to the block of land being too big for you to manage, however, your request to the Council was rejected. You again applied for the subdivision with the owner of the adjoining land and the Council granted a Planning Permit, however, due to personal circumstances, no subdivision happened and the Planning Permit lapsed. You again applied for approval from council for the subdivision. The Council approved the subdivision and construction of a service road for your original property and the adjoining property. All planning and construction and finishing work are completed by professionals. The lots to be sold are vacant land. We consider that there is no coherent business plan for the subdivision of the original property and construction of a service road; and later the sale of the vacant lots. This is in accordance with example 35 in paragraphs 297 to 302 of Miscellaneous Taxation Ruling MT 2006/1.

· There is no development of the land beyond that necessary for council approval for the subdivision.

· You use your own funds to finance the subdivision, construction of the service road and/or other costs.

· You have owned the original property for a number of years. Although you have obtained the consent of the owner of the adjoining land to develop the land together so you can obtain Council's approval to subdivide the original property, this was due to the fact that no sewer service was available to the original property or to the adjoining property before the subdivision.

Based on the facts provided, these activities do not indicate a commercial approach and there is no clear intention of profit making. Accordingly, the activities undertaken by you in the development of the original property do not have the characteristics of activities that would constitute an adventure or concern in the nature of trade. The subdivision can be regarded as the mere realisation of a capital asset according to examples 32 and 33 in paragraphs 288-293 of Miscellaneous Taxation Ruling MT 2006/1.

Therefore, you are not considered to be carrying on an enterprise of property development as defined in section 9-20 of the GST Act, and the sale of the new vacant lots will not satisfy paragraph 9-5(b) of the GST Act. Hence your supply of the vacant lots does not satisfy the requirement of section 9-5 of the GST Act and are not taxable supplies. You do not have to remit the GST payable to the ATO on the sale of the vacant lots.

All public rulings and publications are available on the ATO website at www.ato.gov.au