Edited version of your private ruling

Authorisation Number: 1012546548638

Ruling

Subject: Property development and enterprise for GST

Question 1

Are you carrying on an enterprise that is required to be registered for GST?

Answer

No, you are not carrying on an enterprise that is required to be registered for GST.

This ruling applies for the following periods:

N/A

The scheme commences on:

N/A

Relevant facts and circumstances

You own a property ('the property'). You are not registered for GST.

The property

You purchased the property over 40 years ago and you have used it solely as your main residence. The property contains your house, a swimming pool, a tennis court and surrounding gardens.

You have attempted to sell the property, but have been unsuccessful. You received advice from local real estate agents that you would have more success selling the property if it were subdivided.

The development

You applied to your local council ('the Council') for development approval with the intent of making the property more attractive for sale. The Council approved the development plan.

You plan to subdivide the property into X lots. You will retain Z lots and sell the remaining Y lots as vacant land. You will continue to live in the Z lots you will retain.

You will conduct the project management of the development through your privately owned company ('the company'). The company will organise the required contractors to undertake the development. You will pay the company a management fee. You will have little direct involvement in the physical activity of land development.

The level of development of the land will be enough to secure Council approval for the subdivision. You will not undertake any development past that required for Council approval.

Documents show that the following works have been approved by the Council and will be conducted on the property:

· A roofed structure and other structures will be removed;

· The house and pool will be retained;

· Earthworks required for the extension of a street to provide access to the subdivided lots;

· Kerbing and a stormwater channel will be constructed;

· The majority of the existing trees will be removed;

· Street frontage will undergo earthworks to provide a kerb and channel along the street;

· A formation of an easement with the neighbouring landowner to construct a stormwater drain;

· Constructing a new segment of sewer line to connect to an existing sewerage main, which also required an agreement from an adjoining property owner;

· Provide underground telecommunications services by entering into an agreement with a telecommunications carrier;

· Provide electricity services by entering into an agreement with an electricity supplier; and

· Provide a public street lighting system in accordance with Council requirements.

You informed that you will not remove the tennis court.

You have planned for an approximate value of development costs. You will fund part of this development through bank finance. You have produced a feasibility study to secure bank finance for the development.

You will engage a local real estate agent to sell the lots on your behalf.

You have not subdivided property or conducted a property development enterprise before. The property will not be brought into account as a business asset. You have not acquired additional land as part of the development. You will not claim the interest on money borrowed to defray subdivisional costs as a business expense.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 7-1; 9-5; 9-20 and 23-5.

Reasons for decision

Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act') provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act defines a taxable supply. It 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 is *GST-free or *input taxed.

(Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act).

In your case, you will make supplies for consideration and the supplies are connected with Australia. It must now be determined whether the supplies will be made in the course or furtherance of an enterprise that you carry on, and whether you are required to be registered for GST.

'Enterprise' is defined in subsection 9-20(1) of the GST Act. It states:

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; …

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) discusses when an entity can be said to be carrying on an enterprise. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) provides that the reasons in MT 2006/1 are considered to apply equally to the term 'enterprise' in the GST Act and can be relied on for GST purposes.

Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity or a series of activities that amount to an enterprise. Paragraph 159 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. Example 15 in MT 2006/1 provides that an activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if an enterprise has been carried on.

In the form of a business

An enterprise includes an activity, or series of activities, done in the form of business. MT 2006/1 presents some indicators of business derived from case law. These 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.

There is no single test to determine whether a business is being carried on.

In your case, you are not conducting a significant commercial activity and you do not intend to engage in a significant commercial activity. You intend to make a profit from the subdivision activity and it is expected that the activity will be profitable. You have not subdivided property before. The subdivision activity will be carried on in a businesslike manner and records will be kept, but the subdivision activity will be managed by the company. The activities are of a reasonable size and scale. No business plan exists. You do not have relevant knowledge or skill in subdividing property, as you will be engaging contractors and a real estate agent. Considering these factors, the sale of subdivided lots will not be in the form of a business.

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

There is also no single test to determine what is an adventure or concern in the nature of trade. MT 2006/1 recognises case law stipulating that an adventure or concern in the nature of trade implies a commercial, profit-making undertaking or scheme. Paragraph 244 of MT 2006/1 provides that this undertaking must have the characteristics of a business deal and be of a revenue nature. Paragraph 247 of MT 2006/1 provides that where the property being sold provides personal enjoyment to the owner it is more likely to be an investment rather than a trading asset. Paragraphs 249 to 255 of MT 2006/1 provide that the length of ownership, the frequency of the transactions, supplementary work on the property, the circumstances that were responsible for the realisation and the motive are also relevant factors when determining whether an activity is in the form of an adventure or concern in the nature of trade.

In your case, you have owned the property for over 40 years as your primary residence. The property has provided personal enjoyment to you as your home. You are engaging in the subdivision activity in an attempt to realise the value of your property after an earlier attempt to sell it. This subdivision activity is infrequent, as you have not made any other earlier attempts to subdivide the property. Considering these factors, the sale of the subdivided lots will not be in the form of an adventure or concern in the nature of trade.

Isolated transactions and sales of real property

MT 2006/1 also provides guidance on whether an entity is carrying on an enterprise where there is a 'one off' sale of real property. Paragraph 266 of MT 2006/1 provides that 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. 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.

Paragraph 265 of MT 2006/1 states factors to consider when determining whether an isolated sale of real property is a business or a concern in the nature of trade. These are:

· 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.

In your case, there is no change of purpose for which the land is held; it will still remain as your primary residence and you will retain the house, tennis court and swimming pool. You have not acquired any additional land. The parcel of land as a whole is not being brought into account as a business asset. You have borrowed money to finance the subdivision; however, you will not claim the interest on the borrowed funds as a business expense. The company is engaging contractors and managing the subdivision. You will not develop the land beyond that necessary to secure Council approval for the subdivision. You have not erected any buildings on the land as part of the subdivision. Considering these factors, your sale of subdivided lots will be the mere realisation of a capital asset.

As the sale of the property is a mere realisation of a capital asset, it is not made in the course or furtherance of an enterprise that you carry on. As you are not carrying on an enterprise, you are also not required to be registered for GST.

As you are not carrying on an enterprise and are not required to be registered for GST, the requirements in section 9-5 of the GST Act are not met. Therefore, the sales of subdivided lots are not taxable supplies. There is no requirement to report GST on these transactions and you cannot claim input tax credits for associated acquisitions.