Edited version of your private ruling

Authorisation Number: 1012533039311

Ruling

Subject: GST and subdivision of real property

Question

1) Is the entity required to be registered for goods and services tax (GST) under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as a consequence of the subdivision, improvement and sale of subdivided lots from the property?

2) Will the entity be liable for GST in respect of the sale of excess lots from the Property?

Answer

1) No, the entity is not required to be registered for goods and services tax (GST) under the GST Act as a consequence of the subdivision, improvement and sale of subdivided lots from the property.

2) No, the entity will not be liable for GST in respect of the sale of excess lots from the Property.

Relevant facts and circumstances

· The entity is a trust. The trustee of the trust is the sole registered proprietor of the property and owns the property in its capacity as trustee of the trust.

· A couple are the principal discretionary beneficiaries of the trust and have at all times been such beneficiaries of that trust since it was established a number of years ago.

· Shortly after the property was acquired by the Trustee, a home was constructed for use by the couple and their family.

· The property and the home constructed on that property has, at all times since the acquisition date, been used as the principal place of residence and matrimonial home of the couple and their children (prior to their children leaving home) as beneficiaries of the trust.

· At no time since the acquisition date has the property been used for commercial purposes or otherwise for the purposes of deriving income.

· The trust acquired the whole property with the intention of holding it over the long term as the family home of the couple. The trust did not have an intention of realising the property in a short or long term profit making undertaking or scheme, as a business activity, or for profitable resale. Accordingly, the property is held on capital account by the trust.

· Proposed subdivisional works

· The matrimonial home located on the property is several years old. The couple as the principal beneficiaries of the trust now wish to modernise and improve that home. However the property is too large for the couple's current needs as. Moreover, as they are now retired, the couple wish to downsize their home as there are substantial costs and effort required to maintain a large property.

· Thus as part of that plan to modernise their home, the couple have decided to sell the excess part of the property. To do that, the trust needs to subdivide the property. Various permits and improvements need to be made to the property to achieve that plan. That will involve the following:

o Obtaining planning permits;

o Demolition of the existing matrimonial home;

o Subdivision of the Property into several separate lots;

o Connection of essential services to each of the lots, such as electricity, water, gas, sewerage and road access;

o One of the lots will be retained by the couple. They will construct a new, modern home on that block which they will live in as their new matrimonial home;

o The remaining lots will be sold as vacant blocks to third party purchasers. The proceeds from these sales will help fund construction of the couple's new home and their retirement.

· The trustee and the couple have never developed the property or any other properties before. Accordingly the proposed subdivision works will be undertaken by third party contractors. The trustee's and the husband and wife's involvement in the proposed subdivision will be limited to merely appointing a project Manager to manage the works and a real estate agent to handle the sales of the subdivided lots.

· Other third party contractors may also be engaged as required, such as engineers and surveyors, to assist with the subdivision work as recommended by the project manager. The latter will supervise all contractors engaged in the subdivision works.

· The Certificate of Plan of Subdivision has already been obtained. However, the title to the Property cannot be legally subdivided into derivative lots with separate certificates of title until the subdivisional works (including all relevant services) have been completed and further certified. Thereafter, the plan is sealed by the council and then lodged at the Titles Office for processing the formal subdivision into separate legal titles for each lot.

· The ATO, in another private ruling in regards to income tax implications of the subdivision has confirmed that the proceeds from sale of the subdivided lots would be assessable on capital account and not as income.

· The owner of the property (i.e. the trustee for the trust) has applied for a loan via a finance broker in its own name. Given that the borrower is not an individual (i.e. the borrower is a trustee company) the lender may have treated the loan as a business loan.

Relevant legislative provisions

9-5 of the A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Question - 1

Who is required to be registered for GST?

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

Accordingly, if the trust satisfies the two requirements as set out in section 23-5 of the GST Act, the trustee in it's capacity as the trustee of the trust is required to be registered for GST.

Carrying on an enterprise

Subsection 9-20(1) of the GST Act defines the term enterprise as follows:

An enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d) by the trustee of a fund that is covered by, or by an authority or institution that is covered by, Subdivision 30-B of the *ITAA 1997 and to which deductible gifts can be made; or

(da) by a trustee of a *complying superannuation fund or, if there is no trustee of the fund, by a person who manages the fund; or

(e) by a charity; or

(f) (Repealed by No 169 of 2012)

(g) by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

(h) by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

The Commissioner of Taxation (Commissioner) has provided guidance on the meaning of "carrying on an enterprise" in Miscellaneous Taxation 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 (MT 2006/1). Therefore it is necessary to consider whether the one off venture that the Trust has entered into (by engaging a project manager) will amount to an enterprise.

In this regard, paragraphs 170 and 170B of MT 2006/1 states the following about the Commissioner's views of "in the form of a business";

In the form of a business

170. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts.

…

170B. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. In the case of non-profit entities, the Commissioner considers that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business. In addition, smaller superannuation funds that arguably are not carrying on a business were however intended to be covered by the original definition of enterprise (that is, 'in the form of a business') and this was put beyond doubt by an amendment to section 5.

We agree with the submission that the trust does not conduct the property development activities in the form of a business. However, as has been acknowledged, the definition of 'enterprise' is wider than the meaning of 'business' which is considered under the Income Tax Assessment Act 1997 when determining whether something is assessable income for income tax purposes. Therefore, it is necessary to consider whether the property development activities in this case come within any other paragraphs of the definition of the term 'enterprise' in subsection 9-20(1) of the GST Act.

In this regard, MT 2006/1 states the following in regards to isolated transactions and sales of real property:

242. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

Isolated transactions and sales of real property

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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation¹ (Statham) and Casimaty v. FC of T² (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors 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.

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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

Furthermore, paragraph 270 of MT 2006/1 states:

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

In this case, the trust purchased the property with the intention of providing it to the beneficiaries for private purposes. Furthermore, we agree with the contention that the circumstances in this case are similar to that of example 33 that is explained in paragraphs 291 to 293 of MT 2006/1.

The trust will not be constructing buildings, on the subdivided lots other than on one lot where a house will be built for the couple to be used as their principal place of residence. The work undertaken will be limited to the minimal work that is required under the relevant council for subdivision of a property. On that basis and considering the other facts of this case, we are of the view that the property development activities undertaken by the trust (albeit through a manager) do not amount to an enterprise.

Question - 2

When is GST payable?

According to subsection 7-1 of the GST Act, GST is payable on taxable supplies. Therefore, the trust will be liable for GST if the sale of the lots is considered as a taxable supply.

What is a taxable supply?

A taxable supply is defined in section 9-5 of the GST Act as follows:

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.

Therefore, in order for the lots to be considered as a taxable supply the requirement under 9-5 of the GST Act must be satisfied.

As mentioned in question 1 above, we have concluded that the trust is not carrying on an enterprise. Accordingly, paragraph 9-5(b) of the GST Act is not satisfied and as such the supply of the subdivided lots is not a taxable supply.

As the supply of the lots is not a taxable supply, no GST is payable on the sale of those lots.

¹ 89 ATC 4070; 20 ATR 228.

² 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358. Further to footnote 104, isolated sales of land by an enterprise already registered for GST would be subject to GST.