Edited version of your private ruling

Authorisation Number: 1012539112975

Ruling

Subject: GST and the subdivision of property

Question 1

Are the sales of property A and property B taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the sales of property A and property B are taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

The entity operates a small retail business and also owns commercial rental property and is registered for GST.

The entity purchased property at which included residential premises and was made available for rent at that time.

The property was subdivided prior to the commencement of GST into two lots - 1 and 1A.

The premises was located on lot 1 and continued to be rented out.

Lot 1A was used by the entity to store equipment in the course of operating a business until a particular year when the business was sold.

In the year when the business was sold, some works were undertaken along the boundary of 1A. In the same year, the entity discussed the possibility of subdividing 1A with a development consultant.

The entity placed both 1 and 1A on the market for sale. However neither were sold.

Then entity applied to have the two lots subdivided into several lots. However, this development did not proceed.

The entity again placed both 1 and 1A on the market for sale. Lot 1 was sold however 1A was not sold and remained unused.

Then, the entity decided to subdivide 1A into three lots in order to sell two and retain one (1B). The entity intends to construct three premises on the retained lot (1B) to generate rental income.

The local council granted a development permit for 1A to be subdivided into 3 Lots 1A, 1B and 1C and also a development permit for multiple dwellings to be built on 1A and a development permit for multiple occupancy on 1C.

The entity has borrowed an amount of money in order to complete the subdivision. The entity has claimed input tax credits in relation to expenses incurred in the subdivision.

The entity states that it has no formal business plan or business structure in relation to property development or this property.

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 9-20

Reasons for decision

The sale of 1A and 1C will be taxable supplies if the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met: Section 9-5 states:

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.

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

The sale of 1A and 1C are connected with Australia as they are located in Australia. They will for consideration as they will be sold in return for payment and the entity is registered for GST. Therefore, the sales will be taxable supplies if they are made in the course or furtherance of an Enterprise is defined by section 9-20 of the GST Act as follows:

(1) 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) …

If the sale of the two lots are either an activity (or series of activities done in the form of a business or are an activity (or series of activities) done in the form of an adventure or concern in the nature of trade, they will be done in the course or furtherance of enterprise and will be taxable supplies.

In the form of a business

The use of the phrase 'in the form of a business' indicates a wider meaning than the word 'business' on its own. Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of 'enterprise' in detail and, at paragraph 177 and 178 in relation to 'in the form of a business', states:

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.

It is accepted that the activities of the Trust in relation to the subdivision and sale of the 1A and 1C do not amount to activities done in the form of a business because these activities are not undertaken by the entity on a regular basis, are not repeated, there is no business plan and they are not organised in a businesslike manner.

An adventure or concern in the nature of trade

The GST Act does not define 'in the form of an adventure or concern in the nature of trade'. However paragraph 13 of Goods and Services Tax Determination GSTD 2006/6 provides some general guidance on the phrase:

13. 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

MT 2006/1 discusses the meaning of 'in the form of an adventure or concern in the nature of trade' in detail from paragraph 233 to 261. MT 2006/1 refers to Taxation Ruling TR 92/3 which explains the general principles and factors to be considered in determining whether an isolated transaction is revenue in nature and, at paragraph 6 states:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Specifically in relation to property, paragraphs 41 and 42 of TR 92/3 explain that the intention of the property owner may change over time and that, generally, transactions involving the purchase and eventual resale of real property are done with a profit-making intention:

41. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property….

42. For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

(a) as the capital of a business; or

(b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

The commercial nature of a transaction or scheme is significant in determining whether the activities are done in the form of an adventure or concern in the nature of trade. This is further explained in MT 2006/1:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

…

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Sales of real property in isolated transactions or 'one-offs' is discussed in MT 2006/1 from paragraph 264:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (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.

In Stratham, the taxpayer purchased the property from his late father so that 'he might raise his family in a rural environment and in order to engage in some desultory farming. He did not acquire the property with the purpose, let alone the dominant purpose, of subdividing it and selling off the subdivided parts'.

In Casimaty, the taxpayer carried on a farming business for over 20 years on the property before subdividing and selling. In both cases, the properties were not purchased with the intention of selling for a profit or gain.

It should also be noted that, had the taxpayer in Casimaty been registered for GST, then the sales of the property would have been made in the course or furtherance of his enterprise and would have been taxable supplies under section 9-5 of the GST Act.

From various case law, MT 2006/1 explains that a list of factors may provide assistance in considering whether activities are done in the form of an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 states:

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.

The activities undertaken by the entity match some of the factors listed in paragraph 265 of MT 2006/1. The purpose for which the land was held was originally to derive rental income. That changed with the first subdivision and 1A was then held to benefit the first business carried by the entity until it was sold. It is likely that the property was held at that period with a long-term idea to eventually sell at a profit or subdivide further and sell. Following the sale of the business, the use of the property changed again and the entity then considered the best way to realise the asset.

It is accepted that the entity's plans for the property did not form a final coherent plan until some time when it was decided to subdivide 1A into three lots. However, the entity's plans appear to have always been to sell the property in the way which would best maximise the return to the entity.

The level of 'business organisation' required by an entity to subdivide property is not the same as that required of a business undertaking regular or repeated transactions. The entity managed the operation and there was no particular need for an office, letterhead or business structure.

The entity borrowed money in order to undertake earthworks (including storm water infrastructure), pay council fees and charges, payments to essential service providers for upgrades to their infrastructure to support the planned use of the property and for surveying and other ancillary costs.

It is accepted that some of the costs incurred by the entity were necessarily incurred in the subdivision. However the entity has gone beyond the minimums required by the local council when it provided approval for the subdivision. The entity has engaged several third parties in order to obtain local council approval for multiple occupancies on the two properties. Although no buildings were erected on the properties and the entity did not take steps to have any buildings erected on the properties, the entity nevertheless undertook considerable activities in developing the properties beyond what was required by council for the subdivision.

The entity has claimed input tax credits in relation to the expenses incurred in relation to the properties. This provides some level of evidence of the intention of the entity as to its purpose for incurring those costs. That is, the entity understood that it was carrying on some form of enterprise when it incurred the expenses and rightly claimed the input tax credits. It is not suggested that the entity is an expert in tax matters and that it knew conclusively that the expenses were creditable acquisitions under the GST Act. However, it is understood that a related entity has been involved in other property developments in relation to different entities. Therefore, the knowledge of the related entity in regard to property development endeavours is relevant.

Paragraph 270 of MT 2006/1 specifically states that a transaction where land is purchased with the intention of resale at a profit is an activity that is done in the course of furtherance of an enterprise:

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.

The two properties were originally part of a single property purchased by the entity. There is no evidence as to the intention of the entity at the time of purchase however it is noted that the property was immediately used in the course or furtherance of an enterprise when it was rented out as residential premises. It is also likely that the property was purchased with the intention of subdivision and resale given that the property was first subdivided three years after purchase.

Following the first subdivision, both properties continued to be used in the course or furtherance of an enterprise, 1 was rented out as residential premises and 1A was used in the course of a business until 200X. Following the sale of the business, the entity undertook various activities to realise the property and maximise profit. Eventually, the entity decided to subdivide the property and, to better maximise the return (and to better enable the sale of lots 1A and 1C), the entity engaged third parties to develop plans for the possible use of the properties and obtained council approval for these plans. It is understood that the purchasers are not obliged to use the development approvals provided by council but these activities were considerably more than was required to sell the properties.

On balance, the activities undertaken by the entity leading to the sale of the properties were done in the form of an adventure or concern in the nature of trade and as such come within the definition of enterprise as stated in subsection 9-20(1) of the GST Act. Consequently, as the requirements of section 9-5 of the GST Act are met and the sales are neither GST-free nor input taxed, the sales of 1A and 1C are taxable supplies.