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Ruling

Subject: GST and the sale of subdivided land

Question 1

If the taxpayers demolish a residential rental premises on a block of land they own jointly and then subsequently sub-divide the land, will the sub-division be a supply subject to GST?

Answer

No, the mere sub-division of land will not constitute a supply for GST purposes.

Question 2

If the taxpayers demolish a residential rental premises on a block of land they own jointly and then subsequently sub-divide the land, will the sale of either or both of the sub-divided blocks of land be subject to GST?

Answer

Yes, the sale of the vacant land created through the subdivision will be a taxable supply and subject to GST.

Relevant facts and circumstances

You (taxpayers) acquired property with a dwelling in Australia on xxx.

You intend to demolish the dwelling, subdivide the block and sell one or both blocks.

Recently, you have been managing the residential property to enable you to obtain rental income. You have made any necessary repairs to the property by engaging professional services such as plumbers.

Previously, you have used the services of a real estate agent.

Commercial property

You also manage a commercial property (without real estate agents) which you acquired in xxx.

The commercial property is operating as a xx.

The rental income is deposited directly into your account.

The tenants of the commercial property are responsible for their own repairs and maintenance.

Systems and arrangements

In your letter dated xx you state:

· You do not have a business plan for the development work, or market research.

· You do not use specialised knowledge or skill.

· You do not have prior experience in relation to demolition, subdivision and sales of residential property.

· You have used some of your own savings and money borrowed from banks to invest in these rental properties.

· Investment loans were taken out for the residential properties.

· You are both retired, the rental properties were used to fund your retirement.

· You do not issue tax invoices or give quotes.

· You do not advertise for tenants.

There was no change in purpose for the land which is planned for subdivision.

No additional land has been acquired and added to the property.

There is no coherent plan to subdivide the property.

The property is being subdivided to take advantage of the size of the single block, to enable you to realise the maximum amount of funds from the sale to remove all remaining debt on the properties.

You contend this is spouses trying to maximise the sale proceeds of a rental property, there is no manager, office or letterhead.

Since the original borrowing to acquire the property there has been no borrowing to defray any costs incurred to date on the subdivision.

You do not intend to erect any buildings on the vacant subdivided land.

You await a response to this Private Binding ruling request before making any further progress on the idea.

Subdivision of residential property

In your letter dated xx you clarified:

The tasks you will be undertaking to perform the sub-division include engaging a:

· surveyor to prepare the plan of subdivision and arrange for its approval by Council and lodgement with Land and Property information;

· contractor to demolish the exiting residence;

· contractor for rubbish removal and site clearing;

· other appropriate professionals as required.

You do not intend to prepare a development approval, as part of the sub-division.

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 9-10.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

1. The mere subdivision of land is not a supply

The definition of supply is very broad. Section 9-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines supply. It states:

'(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of ^*real property;

(e).'

*Note that the asterisk denotes a defined term in the GST Act, but it does not alter the meaning of the wording.

Real property is defined in section 195-1 of the GST Act. It states:

'real property includes:

(a) any interest in or right over land; or

(b) a personal right to call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.'

In accordance with the above definition, subdivided land is real property.

However, under section 9-10(d) of the GST Act for a supply of sub-division to take place the land needs to be surrendered (where there is no change in ownership the land has not been surrendered) Therefore, we agree with your submission, that the mere sub-division of land does not constitute a supply for the purposes of GST.

2. The sale of subdivided vacant land is a taxable supply

According to subsection 7-1(1) of the GST Act, GST is payable on taxable supplies.

When you are registered for GST you are liable to remit goods and services tax (GST) on any taxable supplies you make. You make a taxable supply of land where the transaction satisfies all the requirements of section 9-5 of the GST Act.

Under section 9-5 of the GST Act, 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.

The facts indicate that you satisfy requirements under paragraphs 9-5(a), 9-5(c) and 9-5 (d) of the GST Act as the supplies will be for consideration, the properties are located in Australia, and you are currently registered for GST, respectively.

Therefore, we need to consider whether:

· your sales of the subdivided land are in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act).

Are you carrying on an enterprise?

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 these rulings have been applied in this case.

Paragraph 10 of 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 acquisition, 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.

In this case, you advised that you are not and have never been engaged in land development activities on a regular or continuous basis and that the subdivision is a one-off transaction. Based on these facts, your activities are not carried out in the form of a business.

As your activity of land development leading to subdivision and sale of the land is an isolated transaction, it is necessary to consider whether the subdivision and sale of the subdivided land is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

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 borrowed funds 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. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

In xx you acquired property for residential investment purposes and you have never lived in the property. You own properties including the residential and commercial properties as joint tenants. You were advised by an estate agent that you could maximise your profit on the sale of your residential properties by subdividing it to take advantage of the size of the single block.

Therefore, you intend to demolish an existing residential property, subdivide the block and sell one or both blocks of vacant land.

You are both retired and you advised that you do not have the necessary skills or knowledge to undertake the development, any necessary works will be contracted out. You have not taken any steps to obtain a development approval or approach contractors at this stage.

You propose to use your own savings to subdivide the land. You have taken out investment loans for the initial purchase of the residential properties and you do not intend to erect structures on the land.

There are several factors presented in this proposed subdivision and sales of the properties for which we consider will be in the course of an enterprise and more than mere realisation of capital assets. Significant factors that are relevant which lead to this conclusion are as follows:

§ You initially purchased the residential property as a residential rental property and it was acquired as an investment asset. The character of this asset will change from one of an investment to one of trade if you commence additional subdivision activities which had a commercial flavour. You have held the rental properties for a short time and are now considering subdivision options. Hence, there is a change of purpose for which the whole residential property is held.

§ You have used your own savings and borrowed money from banks to invest in both residential and commercial property. You have not taken out additional borrowings or supplied any funding for this residential subdivision proposal.

§ You intend to carry out the activity of subdivision in an organised and professional manner by enlisting the services of professional advice for your subdivision options. You will engage the services of professionals including, a surveyor to prepare the plan of subdivision for approval through the Council and lodgement with the land property titles office. You will also engage contractors experienced in demolishing and rubbish removal to carry out the demolition and rubbish removal works with additional professionals as necessary for example a real estate agent for the marketing and sales of the new lots.

§ You were advised by a real estate agent that the sale of the vacant blocks will result in larger profits than if you were to sell the existing house on a large block. Your activity of subdividing the land is likely to be profitable.

On balance, we consider that there is a significant commercial component in your subdivision activities, and the extent of the activities is not merely the realisation of capital assets. These activities indicate a commercial approach and there is a clear intention of profit making. Accordingly, the activities undertaken by you in the creation and sale of the subdivided lots are of property development and have the appearance and characteristics of activities that would constitute an adventure or concern in the nature of trade. It has the characteristics of a business deal.

Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act. Accordingly, the sales of the subdivided blocks of vacant land will be in the course of your property development enterprise, and paragraph 9-5(b) of the GST Act will be satisfied.

Conclusion

You will be considered to be carrying on a property development enterprise in respect of your subdivision and sales of vacant land and you are already registered for GST. There is no provision in the GST Act or any other Act to make your supplies of the vacant land as GST-free or input taxed. Therefore, all the requirements of section 9-5 of the GST Act will be satisfied, and you will have made taxable supplies if you sell the proposed subdivided vacant lots. If you were to sell the vacant land you will be required to remit 1/11^th of the sale price to the Tax Office.