Edited version of your private ruling

Authorisation Number: 1012470738359

Ruling

Subject: Sale of inherited land

Question

Will the sale of inherited farm land, following subdivision into residential lots, be taxable supplies under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No; your activity is the mere realisation of farm land by subdivision and sale. It is not in the course or furtherance of an enterprise that you carry on.

Relevant facts and circumstances

· You together with your sibling, inherited farm land containing two residences and farm buildings.

· The Widow of the deceased currently occupies one of the residences.

· The premises are currently rented. You are considering returning to that residence.

· You and your sibling are registered as a tax law partnership in relation to other leased commercial property.

· The land is currently held by you and your sibling, as joint tenants, as executors of the estate. You intend to convert the title to Tenants in Common 50/50 with the completion of the administration of the estate, for the protection of your respective heirs

· The land was originally acquired by your parents over thirty years ago and was only used as farm land.

· The company that carried out the farming enterprise has been wound down and no farming activity is currently being carried out.

· You and your sibling have no intention of continuing the farming activity and have decided to sell the land.

· The land has been rezoned residential and approved for subdivision into 48 lots.

· You and your sibling have decided to retain the relevant subdivided lots containing the residential premises and buildings.

· You sought expressions of interest from property developers to purchase the property and conduct the proposed development. In the absence of any interest to purchase the land for an acceptable price, you and your sibling have decided to arrange for the land to be prepared for sale by lots.

· You and your sibling do not have the time or skills required for the development.

· You and your sibling work in and manage other enterprises full time.

· You work in another State.

· Minimal infrastructure works including road works, drainage, water and sewerage will be required to meet council requirements. The level of development of the land will not go beyond that necessary to secure council approval for the subdivision

· Another entity will plan the development and negotiate with the State Authorities and Council.

· Contractors will carry out the required works.

· The contractors will be supervised by another (no official appointment has yet been made).

· You and your sibling will finance the works, estimated million, from funds borrowed against the security of the land.

· The proposed sales proceeds are estimated at $x million.

· The lots are to be sold by local real estate agents who will arrange any marketing they require.

· You and your sibling will not be involved in any separate marketing of the land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Division 9

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 9-25

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

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

Because your activity is not in the course of an enterprise you carry on, the sale of the land in the form of subdivided lots will not be taxable supplies because paragraph 9-5(b) of the GST Act will not be satisfied.

The basic rules

Section 7-1 of the GST Act states that GST is payable on *taxable supplies

Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies.

Taxable Supply

Section 9-5 of the GST Act states:

You make a taxable supply if:

a. you make a 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 for GST.

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

*Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act.

You

The term "You" refers to the entity which is carrying on the enterprise. This may refer to either you as an individual or to a partnership consisting of the co-owners of the property.

Partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the ITAA 1997. That definition states:

partnership means:

a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

b) a limited partnership.

Goods and services tax ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property, explains what is meant by being in receipt of ordinary income jointly and the implications for a tax law partnership. GSTR 2004/6 states at paragraphs 9 and 10 as follows:

9. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. We refer to this type of partnership as a general law partnership.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

In determining which entity the word "You" in section 9-5 of the GST Act refers to, it is necessary to determine who is the principal or who are the principals in the enterprise, to have regard to the nature of the enterprise and then to select the appropriate category of entity as defined.

If the proposed sale of lots is carried out as part of an enterprise it will be because the lots are trading stock. If so, the sale consideration would be joint income of the vendors. In this case the 'You' would be the tax law partnership of the vendors created and defined under subsection 995-1(1) of the ITAA 1997. However, if the proposed sales are the mere realisation of capital and not in the course or furtherance of an enterprise, the 'You' would be the owners of the land disposing of their individual interests as tenants-in-common.

Making a taxable supply

The sale of a subdivided lot is making a supply for consideration.

The application of the GST to your supply of vacant lots depends primarily on whether such a supply is made in the course or furtherance of an enterprise that you carry on.

Because the land is situated in Australia, the supply is connected to Australia (subsection 9-25(4) of the GST Act).

Both you and your sibling are registered for GST as individuals in relation to other enterprises and as a tax law partnership in relation to a commercial property lease.

Carrying on an enterprise

Under section 9-20 of the GST Act the term 'enterprise' has a wide and variable connotation. The concept includes the activities of major banks and mining conglomerates, but also includes those of odd-job men and minor dealers in second-hand goods. The essence of the concept is an organised activity on a regular or recurrent basis in which goods or other property are acquired and sold, goods are produced for sale or services are provided for reward.

Miscellaneous Tax 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 - considers the meaning of certain key words and phrases used to define an enterprise and provides assistance to entities in determining whether their activities constitute an enterprise and their entitlement to an Australian Business Number under the A New Tax System (Australian Business Number) Act 1999.

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

Subsection 9-20(1) of the GST Act relevantly defines an enterprise as 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.

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity or series of activities done as a private recreational pursuit or hobby.

Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

In the form of a business

An enterprise includes activities done in the form of a business. The phrase 'in the form of a business' has not been defined. However, the phrase clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' alone. The term 'business' is defined with the same definition of 'business' as that provided in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Further guidance on the meaning of 'business' is provided in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

This is confirmed by MT 2006/1 from paragraph 177; it provides:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

· a significant commercial activity;

· a purpose and intention of the taxpayer to engage in commercial activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

· activity is systematic, organised and carried on in a businesslike manner and records are kept;

· the activities are of a reasonable size and scale;

· a business plan exists;

· commercial sales of product; and

· the entity has relevant knowledge or skill.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states: 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

You and your sibling have inherited real property that was used for farming. You have decided to sell the property and have engaged professionals to ensure the sale is to best advantage. Your activity in relation to the planning and development of the land, since this will be performed by professionals engaged for the purpose, is minimal

In George Casimaty v Commissioner of Taxation [1997] FCA 1388; 97 ATC 5135; (1997) 37 ATR 358; 151 ALR 242 (Casimaty's case) and McCorkell v Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell's case) the Federal Court and AAT have held that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of the land being income according to ordinary concepts is greatly diminished.

In Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation [1950] HCA 16; (1950) 81 CLR 188 the taxpayer company purchased a large area of land near Newcastle known as the Lambton Freehold Estate. It carried out coal mining operations on the land and, in 1864, set aside 45 acres for miners' homes. Williams J. concluded (at CLR 195) that:

A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset.

You propose to sell the land except for two lots which will be retained for personal reasons. There is no indication that the activity will be recurrent and regular in nature. You will not be involved in the planning or management of the project since this activity will be performed by the professional you propose to engage.

In these circumstances, your activities are not carried out as a business or in the form of a business. Your activity is the disposal of land acquired as an inheritance to the best advantage.

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

Paragraph 265 of MT 2006/1 recognises that the question of whether an entity is carrying on an enterprise arises where there are 'one-offs' or isolated real property transactions. Factors that provide an indication that an adventure or concern in the nature of trade is being carried on include:

· there is a change of purpose for which the land is held;

· there is a coherent plan for the subdivision of the land;

· 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.

Again, you and your sibling have inherited the farming property and have decided to sell it. You have not developed a coherent plan; you have engaged professionals to undertake this planning on your behalf to ensure the sale is to best advantage.

You have stated that the level of development of the land will not go beyond that necessary to secure council approval for the subdivision. You do not intend to construct any buildings; you intend to sell the land as vacant lots. You intend to retain the land on which existing buildings have been erected.

MT 2006/1 provides the following example of circumstances, similar to yours, where it was considered that an enterprise of property development had not arisen:

Example 35

297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell.

298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property.

299. A few years later Oliver and Eloise decide to sell some more land to meet their increasing debt obligations. They arrange for council approval to subdivide another part of Flat Out into four lots. Again they undertake the minimal amount of work necessary to enable the lots to be subdivided and arrange for the real estate agent to sell these lots.

300. Three years later Oliver's and Eloise's personal and financial circumstances are such that they again decide to sell some more land. They arrange for further council approval to subdivide part of their remaining property into three lots. Again they undertake the minimal amount of work necessary to enable the lots to be sold and arrange for the real estate agent to sell the lots.

301. Over the years involved Oliver and Eloise have subdivided 30% of Flat Out. They continue to live on the remaining part of their property.

302. Oliver and Eloise are not entitled to an ABN as they are not carrying on an enterprise. They are merely realising a capital asset. In this example the following factors are relevant:

· There is no change of purpose or object with which the land is held - it has remained their home.

· There is no coherent plan for the subdivision of the land - the subdivision has been undertaken in a piecemeal fashion as circumstances change.

· A minimal amount of work has been undertaken in order to prepare the land for sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision.

This example closely aligns with the Federal Court's decision in Casimaty's Case which involved the creation of approximately 90 lots over 8 subdivisions. In providing the Federal Court's decision, Ryan J. referred to a number of precedential cases from the Federal Court through to the House of Lords. He approved the comment by Farwell LJ in Hudson's Bay Co v Stevens (1909) 5 TC 424 that:

Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator.

Ryan J. noted that the source of the distinction developed in later cases between an entrepreneur and a landowner who realizes the land in an enterprising way can be traced to the judgment of Rowlatt J in C.H. Rand v The Alberni Land Co Ltd (1920) 7 TC 629 where the respondent company was incorporated to acquire, manage and develop, with a view to ultimate sale, certain lands in British Columbia … His Lordship observed at 638:

Now the Company proceeded in a very enterprising way undoubtedly. It cleared the land and formed roads. It sold parts of it and kept some of the money and put it back into the land, and so on, and it gave a share in its capital to certain people who were instrumental in bringing a railway there. Undoubtedly it has done very well. Under those circumstances the Attorney-General and the Revenue contend that it has gone beyond the stage of merely realising the property, and has embarked upon a business in land … If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land.

Based on the common law decisions and the example provided in MT 2006/1, the circumstances of your activities do not constitute an adventure or concern in the nature of trade.

The supplies of the vacant lots represent the realisation of a capital asset; your activities are not carried on in the form of an adventure or concern in the nature of trade.

Conclusion

Because your activities are not carried out in the form of a business or as an adventure or concern in the nature of trade, the activities do not constitute an enterprise under section 9-20 of the GST Act.

Accordingly, the supplies of the vacant lots of land by way of sale will be the mere realisation of a capital asset and will not be made in the course or furtherance of an enterprise that you carry on. The requirements of a taxable supply under paragraph 9-5(b) of the GST Act will not be satisfied; your supplies of the vacant lots will not be taxable supplies.