Edited version of private advice

Authorisation Number: 1012641985206

Ruling

Subject: GST and property

Question 1

Will you be required to be registered for GST and remit GST on the sale if you subdivide your property into two lots and

1. sell one vacant lot? or

2. build a dwelling on the vacant lot, rent out and sell the property within 5 years of construction? or

3. build a dwelling on the vacant lot and sell the property soon after construction was completed

Answer

Yes, you will be required to be registered for GST if your GST turnover meets the registration turnover threshold. Then, you will need to remit GST on the sale if you subdivide your property into two lots and

1. sell one vacant lot; or

2. build a dwelling on the vacant lot, rent out and sell the property within 5 years of construction; or

3. build a dwelling on the vacant lot and sell the property soon after construction was completed.

Relevant facts and circumstances

You are not registered for goods and services tax (GST).

You purchased a residential property post July 2000.

The property was immediately available for rent and is currently being let.

Your intention at purchase was to renovate or demolish the existing dwelling and to occupy the renovated or new dwelling as your main residence within 2 to 3 years of purchase.

You did not borrow money to fund the purchase of the property.

You now had plans drawn up and costing estimated for the renovation of your main residence.

You are looking to fund the renovation work of your main residence by subdividing the current block into two lots and sell one lot of vacant land.

Another option you are considering is to fund it via the sale of another unrelated investment property and build a new dwelling on that lot to be held indefinitely as an investment property to replace the other investment property sold. Alternatively you are also considering selling it soon after completion.

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

A New Tax System (Goods and Services Tax) Act 1999 - section 23-5

A New Tax System (Goods and Services Tax) Act 1999 - section 40-65

A New Tax System (Goods and Services Tax) Act 1999 - section 40-75

A New Tax System (Goods and Services Tax) Act 1999 - section 188-15

A New Tax System (Goods and Services Tax) Act 1999 - section 188-20

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

Reasons for decision

You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

To ascertain whether you are required to register for GST it must first be determined whether you are carrying on an enterprise, and if so, then whether your GST turnover meets the registration turnover threshold.

Carrying on an enterprise

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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; 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) ...

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) provides guidance on the meaning of 'an entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the principles in MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Based on the facts provided, you are carrying on an enterprise of leasing residential properties. It is necessary to consider whether your activities in renovating the existing residential premise, subdividing the land, and building another new residential premise for leasing or sale purposes, amount to an enterprise.

Isolated transactions and sales of real property

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 to 263 state:

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...

Paragraphs 264-269 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ (Statham) and Casimaty v. FC of T ¹⁰⁶ (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…. 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 follow:

• 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...

The following example from MT 2006/1 explains further on the ATO view in relation to isolated transactions and sales of real property. Example 31 states:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

• their house to be demolished;

• the land to be subdivided;

• a builder to be engaged;

• two houses to be built;

• water meters, telephone and electricity to be supplied to the new houses; and

• a real estate agent to market and the sell the house.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

Application of the ATO view to your proposed property development activities

Based on the information provided by you,

• There will be a change of purpose for which the property was held as you have decided to renovate the existing residential premise, subdividing the land and building another new residential premise for lease or sale.

• There will be a coherent plan for the subdivision of the property as you will have proposed development plans to renovate, subdivide and build.

• You will finance the proposed property development through selling the subdivided lot or selling another investment property.

• You intend to renovate and build another residential premise on the subdivided land which means that you will be undertaking more than the minimum development activities required for the council approval for the mere subdivision.

Accordingly, we are of the view that your property development activity amounts to an enterprise. This will still be the case even if you retain one of the residential premises as your main residence. This scenario is discussed at paragraphs 273 to 276 of MT 2006/1, whereby a taxpayer who develops two units and retains one as his principal residence is still considered to be carrying on an enterprise.

It is also necessary to consider the other activities carried on by you to determine whether an enterprise is being carried on.

Paragraphs 159 to 160 of MT 2006/1 state:

159. 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.

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise.

In this case, you are currently carrying on an enterprise of leasing of residential premises. Furthermore, the property in question which you propose to develop is not the residential premises you live in. Rather, the property has already been used in carrying on your leasing enterprise. The proposed property development will increase your activities from leasing of residential premises to include property development.

You will be continuing your leasing enterprise after the completion of the property development by leasing the new residential premise as the other investment residential property would have been sold to fund the construction of this new residential premise.

Should you decide to sell the subdivided lot as it is, or build and sell the residential premise upon completion or within 5 years of completion after being leased for a period, the supply will still be considered to be made in the course of your property development enterprise.

Consequently, based on the above analysis and having regard to all of your circumstances, the proposed development activity would be considered to be the carrying on of an enterprise of property development.

Annual Turnover Threshold

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The relevant registration turnover threshold is currently $75,000.

If you are not registered for GST at the time you sell the subdivided lot or the new residential premise, you will be liable for GST on the sale if you are required to be registered for GST. You will only be required to be registered for GST if your annual turnover exceeds $75,000.

To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 months period covers the period of the current month and the preceding 11 months, known as your current annual turnover, and the current month and the following 11 months, known as your projected annual turnover.

However, under sections 188-15 and 188-20 of the GST Act input taxed supplies are excluded from calculation of both your current GST turnover and your projected GST turnover respectively. Under section 188-25 of the GST Act supplies made by way of transfer of ownership of a capital asset and supplies made in relation to ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise are also disregarded in the calculation of your projected GST turnover.

Section 40-65 of the GST Act provides that supplies of residential premises are input taxed supplies. However, the supply of new residential premises is excluded from being an input taxed supply.

According to section 40-75 of the GST Act the proposed two residential premises will be regarded as new residential premises because one has not previously been sold as residential premises, or not been lived in for a period of five years since it first became residential premises and the other has been created through substantial renovations of a building.

Although you were not engaged in property development activities in your individual capacity in the past, the nature of your activities in developing the property, in selling the subdivided lot; leasing or selling the new residential premise, clearly indicate that it will be an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

As the sale of this new residential premise will not be an input taxed supply, any consideration received for it will be included in the calculation of both your current GST turnover and your projected GST turnover for your enterprise. If the consideration you will receive for this new residential premise is in excess of $75,000, your GST turnover will meet the registration turnover threshold.

As a consequence you will be required to register for GST for your enterprise and remit GST when you sell the subdivided lot; or sell the new residential premise upon completion or within five years of completion.