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Ruling

Subject: GST and subdivision of property

Question

Is the sale of the subdivided blocks and new house, under the three options, subject to goods and services tax (GST)?

Answer

Based on the information provided, only the sale of the subdivided block with the new house under option 1 is subject to GST.

Relevant facts and circumstances

You are joint owners of property consisting of a house on a corner block of land which was acquired before 1 July 2000.

The property has always been used as your principal place of residence.

You were thinking about selling the property and you were advised that the property would be worth more if it was developed.

You are now considering the possibility of demolishing the house and developing the property under one of the following three options:

Option 1 - Subdivide the property into two equal blocks, build a house on each subdivided block, one for you to live in and the other to sell.

Option 2 - Subdivide the property into two equal blocks, build a house for you to live in on one of the new subdivided blocks and sell the other subdivided block as vacant land.

Option 3 - Subdivide the property into two equal blocks and sell both subdivided blocks as vacant land.

As yet, you do not know the local Council's minimum requirements for the subdivision.

You intend to engage a builder to do the plans and development application and, if necessary, to also construct the new houses. A real estate agent will be engaged to sell the subdivided blocks.

To fund the development you intend to borrow money.

You have never been involved with the real estate industry nor done any property development work before.

You are not currently registered for GST.

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 Subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Division 75

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

Reasons for decision

Summary

Based on the information provided, only the sale of the subdivided block with the new house under option 1 is subject to GST. This is because the sale under option 1 satisfies all of the requirements of a taxable supply.

The sale of the vacant subdivided blocks under options 2 and 3 are not subject to GST as they are not taxable supplies. Rather, the sales under options 2 and 3 will be the mere realisation of a capital asset.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 GST Act provides that you must pay GST on any taxable supply that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

Section 9-5 of the GST Act provides that you make a taxable supply if:

· you make the supply for consideration

· the supply is made in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

In respect of your proposed sale of the subdivided blocks (with or without a house attached) there is clearly a supply, being a supply of real property. Consideration is also present as the subdivided blocks will be sold for an amount of money and the supply is connected with Australia because the subdivided blocks are located in Australia. In addition, there are no provisions in the GST Act that will make the sale of the subdivided blocks (with or without a new house attached) either GST-free or input taxed.

Therefore, the issues to be considered in this case are:

· whether the sale of the subdivided blocks will be made in the course or furtherance of an enterprise that you carry on, and

· as you are not currently registered for GST, whether you are required to be registered for GST.

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, among other things, 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.

However, subsection 9-20(2) of the GST Act provides that the term 'enterprise' does not include, among other things, an activity or series of activities, done:

· as a private recreational pursuit or hobby, or

· by an individual or a partnership without a reasonable expectation of profit.

Based on the information provided, it is considered that the above exclusions will not apply to your circumstances.

The Commissioner in Goods and Services Tax Determination GSTD 2006/6 and Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of the term 'enterprise' for GST purposes.

According to MT 2006/1, the term 'business' would encompass a trade engaged in on a regular or continuous basis. 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 or one-off transactions will fall into this category.

The use of the words 'in the form of ' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. That is, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria for being regarded as a business or an adventure or concern in the nature of trade, do have the appearance or characteristics of these activities.

From the facts provided, it is clear that you are not carrying on a business or undertaking activities that are in the form of a business as there is no repetition involved in your planned activities. That is, this is a one-off transaction that is unlikely to be repeated. Therefore, it is necessary to determine if the activities of subdividing the land under the three options is an adventure or concern in the nature of trade or the mere realisation of a capital asset.

In relation to isolated transactions and the subdivision of land, paragraphs 262 and 263 of MT 2006/1 state:

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

Following on from this, paragraph 266 of MT 2006/1 states:

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.

The factors referred to in paragraph 266 of MT 2006/1 as requiring consideration are listed in paragraph 265 of MT 2006/1 and 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.

As stated in paragraph 266 of MT 2006/1 no single factor is determinative rather it is a combination of factors that will lead to a conclusion as to the character of the activities.

To assist with determining when activities constitute an enterprise, paragraphs 271 to 287 of MT 2006/1 provide examples of subdivisions of land that are enterprises. Of relevance to this case is example 31 which is contained in paragraphs 284 to 287 of MT 2006/1. Example 31 states:

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

· their house to be demolished;

· the land to be subdivided;

· a builder to be engaged;

· two houses to be built;

· water meters, telephone and electricity to be supplied to the new houses; and

· a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

The activities carried out in example 31 are similar to the activities that you propose to undertake under option 1. That is, you propose to demolish your existing house, subdivide the property into two equal blocks and build new houses on each subdivided block. One of the houses will be retained as your main residence while the other will be sold.

In carrying out this development, there will be a coherent plan for the subdivision and, whilst you will not personally be undertaking the subdivision, you will be engaging professionals to oversee the planning and development of the subdivision and the construction of the houses including the sale of one of the houses. You also intend to borrow to finance the whole development. These activities and the business like manner in which the subdivision will be carried out are common to any property development enterprise.

In addition, there is a level of development of the property that goes beyond that which would be necessary to secure the local Council's approval of the subdivision as you propose to build new houses on both of the subdivided blocks.

Therefore, after weighing up all of the facts, it is considered that the activities proposed to be undertaken under option 1 are in the form of an adventure or concern in the nature of trade as the overall development has the characteristics of a business deal. As such, you will be carrying on an enterprise for GST purposes if you develop the property under option 1.

In relation to options 2 and 3, the activities proposed to be undertaken under these options do not include the construction of a new house on any of the subdivided blocks to be sold. In other words, the subdivided blocks will be sold as vacant land.

Therefore, as the level of development needed to prepare these vacant subdivided blocks for sale would only be minimal, it is considered that the activities proposed to be undertaken under options 2 and 3 are not in the form of an adventure or concern in the nature of trade. As such, these activities are not an enterprise for GST purposes. Accordingly, if you develop the property under either option 2 or 3 the sale of the vacant land will not be subject to GST. Rather, it will be the mere realisation of a capital asset.

As determined above, the activities proposed to be undertaken under option 1 are an enterprise for GST purposes. However, to satisfy the requirement in section 9-5 of the GST Act the sale of the subdivided block with the new house must be made in the course or furtherance of the development enterprise that is being carried on.

The term 'in the course or furtherance of' is not defined in the GST Act, but is broad enough to cover most supplies made in connection with an enterprise. This means that once an enterprise is being carried on, most activities in relation to that enterprise will be considered to be in the course or furtherance of that enterprise unless the GST legislation specifically states otherwise. As well, anything done in the course of commencing or terminating a business or enterprise will also be caught.

Therefore, the sale of the subdivided block with the new house under option 1 will be a supply in the course or furtherance of the development enterprise that you are carrying on. As such, the requirement in section 9-5 of the GST Act is satisfied.

Required to be registered for GST

As you are not currently registered for GST, it is necessary to determine if you are required to be registered 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 GST turnover meets the registration turnover threshold of $75,000.

As determined above, you are carrying on an enterprise with regards to the sale of the subdivided block with the new house under option 1 and therefore, it needs to be determined if your GST turnover meets the registration turnover threshold of $75,000.

The term 'GST turnover' includes both current GST turnover and projected GST turnover. Current GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the previous 11 months. Projected GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the next 11 months.

However, section 188-25 of the GST Act specifically excludes from the calculation of projected GST turnover:

· the supply of a capital asset by way of transfer of its ownership, and

· any supply made solely as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

The Commissioner's view on the application of section 188-25 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2001/7. Paragraph 31 of this ruling provides that a capital asset is generally the profit-yielding subject of an enterprise. This can be contrasted with a revenue asset, which is described in paragraph 34 of this ruling as an asset 'whose realisation is inherent in, or incidental to, the carrying on of a business'.

Following on from this, paragraph 35 of GSTR 2001/7 provides that, if you derive income 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.

Furthermore, isolated transactions are also discussed at paragraphs 46 and 47 of GSTR 2001/7. These paragraphs provide that the disposal of a single asset is not the transfer of a capital asset in circumstances where the asset is considered to be in the nature of a revenue asset. Likewise, the disposal of a single asset, or the completion of an isolated transaction, is not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances, the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

In this case, the sale of the subdivided block with the new house under option 1 is not excluded from the calculation of projected GST turnover under section 188-25 of the GST Act because, at the time of its sale, it is not a capital asset nor is it a transfer solely as a consequence of ceasing to carry on an enterprise.

Therefore, as the proceeds from the sale of this subdivided block will be over $75,000, your GST turnover will also be over $75,000, and as such, you are required to be registered for GST.

At this stage, the development has not yet been started and therefore, your current GST turnover is under $75,000. Consequently, the requirement to be registered for GST will only occur when your projected GST turnover is at or above the registration turnover threshold of $75,000.

From the information provided, we consider that this will occur 12 months before the expected date of sale of the new house. However, in order to be entitled to claim input tax credits for the costs incurred in relation to the subdivided block and house to be sold you may choose to register for GST from an earlier date.

In conclusion, as all of the requirements of section 9-5 of the GST Act are satisfied, you will be making a taxable supply when the subdivided block with the new house is sold. As such, you are liable for GST on the sale of this subdivided block with the new house.

Additional information

Generally, GST is payable on the full sale price of real property but Division 75 of the GST Act allows a vendor to use the margin scheme to calculate the GST payable on sales of real property if certain requirements are satisfied.

One of these requirements is that, on or before the making of the supply, the vendor and the purchaser have agreed in writing that the margin scheme is to apply. In most cases, it is expected that this agreement will be included in the contract for sale.

More information about the margin scheme is available on the ATO website at www.ato.gov.au .