Edited version of your private ruling

Authorisation Number: 1012490859748

Ruling

Subject: GST and sale of subdivided property

Question

Are you required to register for goods and services tax (GST) when you sell the subdivided land?

Answer

Yes, you are required to be registered for GST when you sell the subdivided land.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are in a partnership carrying on an enterprise of property development.

You own a property located in Australia as tenants in common.

In 20XX, you entered into a Development Agreement (the agreement) with another entity (the Developer).

According to the agreement, you appoint the Developer to undertake the project that it proposed to maximise the financial return to you from the sale of the property.

The agreement defines the project as:

· 'the division of the Land into residential Allotments in accordance with and as contemplated by the Development Approval and Project Plan;

· all works required to complete the Project including all earthworks, road and drainage works, landscaping, augmentation charges, the installation of services utilities and services provided by consultants in relation to such works ("Development Works"); and

· the marketing and sale of the Allotments.'

The agreement your obligations as follows:

· you must not grant any encumbrance in respect of the land without the prior written consent of the Developer

· you must not deal with the land in any manner that is inconsistent with the project;

· you agree that the Developer has the right to access and occupy the land and carry out the project without interruption from you provided that the Developer performs its obligations under the agreement;

· prior to the date on which the development approval is obtained, you must not sell the land without first granting the Developer a first and last right of refusal to purchase the land; and

· from the date on which the Development Approval is obtained, you have an option to sell the land to the Developer under specified terms.

Within seven days of the execution of the agreement, you received an exclusivity payment of more than $75,000 from the Developer in consideration for entering into an obligation not to deal with the land in a manner which is inconsistent with the agreement.

The Developer does not have interest in the land and does not acquire any estate or interest in the land by virtue of the agreement.

Under the agreement, the Developer is responsible for all the costs associated with the development. The Developer's obligations in relation to the development include:

· developing strategies, detailed designs and marketing programs for the project;

· managing the development and civil works component of the development;

· liaising with all authorities and community consultative groups having any interest in the project to ensure that the project progresses efficiently; and

· doing all things as would reasonably be required of a developer experienced in undertaking developments similar to the project in a professional and competent manner.

The land will be subdivided into a number of allotments. It is anticipated that the average sale price for the allotments will be more than $75,000.

In accordance with the agreement, the sale proceeds received for each allotment will be distributed as follows:

· 'Landowner's Sale Proceeds' (for you) - X% of the sale proceeds or $Y, whichever is greater; and

· 'Developer's Fee' (for the Developer) - proceeds after deducting the 'Landowner's Sale Proceeds'.

You advised that the activities you reported in your partnership's activity statements (BAS) relate to proceeds of a previous sale of a property owned by you. You also reported in those BAS the exclusivity payment that you received from the Developer.

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 23-5,

A New Tax System (Goods and Services Tax) Act 1999 section 188-10 and

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

Reasons for decision

According to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are required to be registered if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 ($150,000 for non-profit entities).

Carrying on an enterprise

Our records indicate that you are in a partnership carrying on an enterprise of property development. For the purpose of this ruling, this is your enterprise, and not your respective enterprises.

GST turnover

Subsection 188-10(1) of the GST Act provides that your GST turnover meets a particular turnover threshold if:

(a) your current GST-turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Will the proceeds from the sale of the subdivided land be included in your GST turnover?

You submitted that the sale of the subdivided land will be a disposal of a capital asset as a result of winding up your respective enterprises.

Section 188-25 of the GST Act states:

In working out your *projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an *enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise

(*denotes a term defined in section 195-1 of the GST Act).

The meaning of 'capital assets' is not defined in the GST Act. Generally, the term 'capital assets' refers to those assets that make up the profit yielding subject of an enterprise. Capital assets can include tangible assets such as factory, shop or office, (and the land on which they stand), fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained to produce income.

Goods and Services Tax Ruling GSTR 2001/7 considers the meaning of 'capital assets' for the purpose of section 188-25 of the GST Act.

Paragraph 34 of GSTR 2001/7 provides that capital assets are to be distinguished from revenue assets. A 'revenue asset' is an 'asset whose realisation is inherent in, or incidental to, the carrying on of a business.

Paragraph 36 of GSTR 2001/7 further provides that the character of an asset may change from capital to revenue or from revenue to capital over the period that it is held by an entity. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of expected supply.

Will the subdivided land be a capital asset at the time of sale?

Land that has become the subject of a development has clearly undergone changes physically, legally and commercially. Each subdivided allotment is a new saleable item brought into existence through the activities of an enterprise. The inherent purpose of a subdivided allotment (not necessarily the purpose of the enterprise) is to provide a buyer with a serviced piece of land as distinct from its previous purpose of land forming part of undeveloped land. The purpose of the enterprise in selling the subdivided allotments is recoup expenses incurred in developing the land and to make a profit.

The property that you held for a considerable period of time and that will be converted, through the conduct of your enterprise, into something else for resale, is not a capital asset for the purpose of paragraph 188-25(a) of the GST Act.

At the time that you sell the individual allotments, they have been brought into existence for the purpose of sale in carrying on your enterprise and the character of the asset has, for GST purposes, changed to a trading asset. They are not capital assets. Thus the value of the supply of each allotment is not excluded in calculating your projected GST turnover under paragraph

188-25(a) of the GST Act.

Will the sale of the subdivided lot be made solely as a consequence of ceasing to carry on your enterprise or substantially and permanently reducing its size?

The sale of the subdivided allotments is inherent in carrying on your enterprise. Thus, the sale of the subdivided allotments is not a supply made solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size and scale of an enterprise.

Accordingly, the value of the supply of each allotment is not excluded in calculating your projected GST turnover under paragraph 188-25(b) of the GST Act.

Conclusion

You advised that the allotments will be sold at an average of more than $75,000; therefore your GST turnover will meet the registration turnover threshold. And as mentioned above, you are carrying on an enterprise. Therefore, you will be required to be registered for GST when you sell the subdivided land.

Additional information

GST is payable on a taxable supply.

A supply is a taxable supply under section 9-5 of the GST Act if:

(a) you make the supply for consideration;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(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.

Exclusivity payment

You advised that you reported the exclusivity payment in your partnership BAS.

The exclusivity payment that you received from the Developer is consideration for the supply that you made in entering into an obligation as specified in the agreement. The supply satisfies the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act and is not GST-free or input taxed. Therefore, the supply is a taxable supply.

Accordingly, it is correct to include the exclusivity payment in your BAS.

Sale of the allotments

The sale of the allotments or the subdivided land will also meet the requirements of paragraphs

9-5(a) to 9-5(d) of the GST Act and will not be GST-free or input taxed. Therefore, the supply will be a taxable supply.

Note that for the purpose of calculating the GST payable on the supply of the allotments, the consideration paid for each allotment is the 'Gross Proceeds' (GST-inclusive price) and not the 'Landowner's Sale Proceeds'.