Edited version of your private ruling

Authorisation Number: 1012587844040

Ruling

Subject: Enterprise

Question 1

Are you conducting an enterprise of subdividing the property for Goods and Services Tax (GST) purposes?

Answer

No, you are not conducting an enterprise of subdividing the property for GST purposes.

Question 2

Are you required to be registered for GST?

Answer

No, you are not required to be registered for GST.

Relevant facts and circumstances

ABC was the owner of land which was acquired prior to 20 September 1985 (pre CGT) and which was held for over 50 years until their death.

The land was transferred to the Estate (you/the Estate) by the executor.

ABC left a will which provided that the land is to be subdivided, with one lot containing a house and land to be left to one of their children and the remaining land to be left to their other children in equal shares. One of the children had taken legal action, that the land must be subdivided as they wish to retain the beneficial interest in the property in which is currently used for private purposes.

For the other beneficiaries to obtain their equal shares, they need to either retain land or cash, in equal shares from the subdivision. The subdivision has to be done in accordance with Council town planning requirements.

Consequently a number of blocks have been created on the Lot to fit into the overall planning requirements of the area. The beneficiaries had no say in the nature or size of the blocks as this was subject to overall governmental planning requirements. For one of the children to obtain a subdivided block, the entire Lot must be subdivided, otherwise separate titles can not be issued.

The Council requires that roads, services and utilities be installed or connected for the subdivision to take place. You will not construct any building on the lots of the subdivided land which are to be sold. You will engage real estate agents to complete the sale of the lots of subdivided land.

The land at the time of the deceased passing away was zoned rural. However, it was re-zoned as 'residential' by Council, at which time planning could commence to subdivide the land.

A property manager has been appointed. They are charging for their services but they have been appointed to reduce costs and also to provide the professional services required as the executor does not have town planning experience.

There are other pre-existing buildings on the land. One of the buildings will be demolished. Another is currently being used for private purposes and will remain as it is in one of the subdivided lots.

Another building which is on the land is currently being rented out. The rent from the family home has paid for the rates, taxes and firebreak charges on the lot and also for the costs relating to the Lot being approved by the Council for subdivision.

A 'development loan' has been taken out by the Estate. The loan will assist with payment for the costs associated with access roads, services and utilities required to obtain the requisite title for the individual lots so they can be sold.

The land is now ready to be subdivided into a number of lots.

Some lots will be sold to independent third parties. Other lots will be retained by the beneficiaries of the Will. You propose to sell the subdivided lots as vacant land only. You do not intend to build residential dwellings on the lots. You are only installing roads, services and utilities which is a council requirement as part of a sub-division.

Any cash surplus will be divided as per the conditions of the Will. The interest relating to the development loan is not intended to be claimed as a business expense.

You expect to receive revenue from the sale of the lots. You expect to make a net profit from the sales of the subdivided lots. This will be less any other taxes or costs.

Neither the Estate, nor the beneficiaries of the will, have ever engaged in property development enterprises before, and do not intend to do so again.

The only income you have generated from the property thus far has been rental income for the former family home which remains on the property. You have not used it in any other income earning activity or used it in any other leasing or other enterprises during the period of your ownership. You have not claimed any income tax deductions for expenses incurred on the property, except for those deductions associated with the rental property.

You do not intend to claim any income tax deductions associated with the subdivision.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 23-5

Reasons for decision

Question 1

Summary of decision

The subdivision of the property is not considered to be conducting an enterprise. As you are not registered or required to be registered, the subsequent sale of the subdivided lots will not be subject to GST.

Detailed reasoning

GST is payable on taxable supplies. The sale of the lots of subdivided land will be a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).  Section 9-5 of the GST Act 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.

(*denotes a term defined in the GST Act)

Based on the information that you have provided, the sale of these lots will not be GST-free or input taxed. As the supply will be for consideration and the supply is connected with Australia as the property is located in Australia, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

It remains to be determined whether the sale of the lots of subdivided land will be made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act and whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act.

Enterprise

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, 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.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It provides that the term business would encompass trade engaged in, or on a regular or continuous basis. However, it goes on to say that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business.

In respect of isolated transactions and sales of real property, paragraphs 262 to 266 of MT 2006/1 provide:

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 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.

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.

Based on the information provided, your subdivision activity will be a one-off activity, and is not an activity or series of activities done in the form of a business, or part of a series of property development and/or property trading activities.

Therefore, considering all of the facts and circumstances in your case, the subdivision of the property and the subsequent sale of the subdivided lots and the inheritance of the other lots by the beneficiaries will not have the characteristics of an enterprise. This is consistent with the guidelines in paragraphs 262 to 266.

Consequently, the sale of the subdivided lots does not meet paragraph 9-5(b) of the GST Act.

Question 2

Summary of decision

No, you are not required to be registered.

Detailed reasoning

Section 23-5 of the GST Act states who is required to be registered:

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.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

Since we have established that you will not be carrying on an enterprise you do not satisfy paragraph 23-5(a) of the GST Act. Accordingly, you will not be required to be registered for GST with regard to the subdivision of the subject property. As such, the sale of the property does not satisfy paragraph 9-5(d) of the GST Act.

Therefore, as the sale does not meet the requirements of section 9-5 of the GST Act (namely paragraphs 9-5(b) and 9-5(d) of the GST Act), it is not a taxable supply and therefore GST is not payable on the sale of the subdivided lots.