Edited version of private advice

Authorisation Number: 1012654410778

Ruling

Subject: Sale of real property

Question

Is the sale of subdivided vacant land by you subject to GST?

Answer

No, the sale of the subdivided land by you is not subject to GST.

Relevant facts and circumstances

You acquired the property before 2000.

You do not have an Australian Business Number and you are not registered for GST and have never been registered for GST.

A partnership has been carrying on a farming enterprise on the property.

You subdivided the property and sold a few acres of land to an independent third party. The sale proceeds of this sale was used to fund building your new principal place of residence on the remainder of the property.

A few years after that first subdivision, a further few acres which contained that residence was subdivided and that subdivided lot including the residence was sold to an independent third party.

Later, you subdivided the remainder of the property and sold some acreage to your son for farming purposes.

You set up a trust (the Trust) which you are a beneficiary of to carry on the farming enterprise. You leased the property to the Trust for no consideration. There is no formal lease agreement between yourself and the Trust for the lease of the property.

The Trust is registered for GST.

All outgoings for the property are met by the Trust. These outgoings are less than $75,000 per annum.

For a variety of personal reasons, you decided to sell the balance of the property. However, no offers were received for a straightforward sale of farmland. Therefore, you decided to obtain development approval from the council. The approval was granted.

You then relisted the property for sale through various local real estate agents. However, you were still unsuccessful in finding a buyer. The development approval has since been extended.

The total cost to obtain the approvals has been funded through bank finance.

It was never your original intention to develop the property. However, as you are at retirement age with no superannuation, you have decided to develop the property by yourself.

You have engaged an engineer and other parties to develop the property.

You will completely cease leasing the property to the trust for farming operations before any subdivision work start on the property.

You will be building the roads, installing drainage and water supply and other developments to meet the minimum council requirements. You will be selling vacant land.

The subdivision cost will be funded through pre-sales and bank finance. The subdivisions are for rural residential premises.

You have been holding the ownership of the property since the time it was purchased.

Relevant legislative provisions

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

Reasons for decision

GST is payable on taxable supplies that you make.

A taxable supply is defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

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

Although a farming enterprise by other entities (that is, the partnership and the Trust) will be carried on until the property is subdivided, it is not these entities that are selling the property. As you have been holding the ownership of the property since the time it was purchased, the GST consequences of the sale needs to be assessed against your actions, as you are the entity that is selling the property.

You will be supplying the subdivided blocks of land for consideration and the supply is connected with Australia. Accordingly, the sale satisfies, paragraphs 9-5(a) and 9-5 (c) of the GST Act. Therefore, in establishing whether the sale of the subdivided lots is a taxable supply, what needs to be determined in this case is whether the sale of the property by you is in the course or furtherance of an enterprise that you carry on. If you are considered to be making the supply in the course or furtherance of an enterprise that you carry on, then it needs to be determined whether you are required to be registered for GST.

Enterprise

Section 9-20 of the GST Act defines an enterprise 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) …

….

(h) …….

(1) However, enterprise does not include an activity, or series of activities done:

(a) …

(b) …

(c) by an individual (other than a trustee of a charitable fund, or 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), or a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain; or

You have leased the farm to other entities (that is, the partnership and the trust) since the time you purchased the property. According to paragraph 9-20(1)(c) of the GST Act, activities done on a regular basis in the form of a lease amounts to an enterprise. However, according to paragraph, 9-20(2)(c) of the GST Act, an activity done by an individual without a reasonable expectation of profit or gain does not come within the definition of an enterprise. Accordingly even though the activity of leasing of your property comes within paragraph 9-20(1)(c) of the GST Act, as you have leased lease the property for no consideration, we consider that your actions come within paragraph
9-20(2)(c) of the GST Act and therefore you are not considered to be conducting an enterprise for the purposes of the GST Act.

The next issue to determine is whether the subdivision activities undertaken by you amount to another enterprise such as property development.

Miscellaneous Tax Ruling, 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) presents the Commissioner's view on what is meant by 'carrying on an enterprise' which can be used for GST purposes. The following is stated in relation to isolated transactions and sales of real property

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.

When assessing the extent of subdivision work you have undertaken against the guidance provided in MT 2006/1, we are of the view that your activities do not amount to an enterprise. Further, we are of the view that your circumstances and the work that you have undertaken thus far are similar to the following example provided in MT 2006/1.

Example 35

297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell.

298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property.

299. A few years later Oliver and Eloise decide to sell some more land to meet their increasing debt obligations. They arrange for council approval to subdivide another part of Flat Out into four lots. Again they undertake the minimal amount of work necessary to enable the lots to be subdivided and arrange for the real estate agent to sell these lots.

300. Three years later Oliver's and Eloise's personal and financial circumstances are such that they again decide to sell some more land. They arrange for further council approval to subdivide part of their remaining property into three lots. Again they undertake the minimal amount of work necessary to enable the lots to be sold and arrange for the real estate agent to sell the lots.

301. Over the years involved Oliver and Eloise have subdivided 30% of Flat Out. They continue to live on the remaining part of their property.

302. Oliver and Eloise are not entitled to an ABN as they are not carrying on an enterprise. They are merely realising a capital asset. In this example the following factors are relevant:

• There is no change of purpose or object with which the land is held - it has remained their home.

• There is no coherent plan for the subdivision of the land - the subdivision has been undertaken in a piecemeal fashion as circumstances change.

• A minimal amount of work has been undertaken in order to prepare the land for sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision.

Accordingly, as your activities of property development are not considered to be carried on in the form of an enterprise, the sale of your property does not meet paragraph 9-5(b) of the GST Act. Therefore, the sale of your property is not a taxable supply and no GST is payable on the sale of the subdivided lots.