Edited version of private advice

Authorisation Number: 1012676926699

Ruling

Subject: Goods and services tax - isolated real estate transactions

Question 1

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

Answer

No.

Question 2

Is your sale of a vacant block of land a taxable supply?

Answer

No.

Question 3

Are you required to be registered for GST?

Answer

No.

Relevant facts and circumstances

You are the executor of your deceased parent's estate.

The estate is comprised of one or more vacant blocks of land.

One of these blocks of land at the time of your parent's death was zoned a specific way. However, recently the land has become zoned as residential land.

During the period of ownership of the land by both you and your late parent, the property was not used for any income producing purpose.

Following the death of your parent, you entered into an agreement with a third party, anticipated purchaser who proposed to have the land rezoned. The third party was successful in obtaining the rezoning but did not ultimately proceed to purchase the property.

You now propose to enter into a contract to sell the property to another unrelated party who intends to subdivide the land for the purpose of sale of residential lots.

Relevant legislative provisions

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

Section 9-5

Section 9-20

Section 9-40

Section 23-5

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on any taxable supply that you make.

Section 9-5 of the GST Act, provides that a supply is taxable if it is:

• made for consideration

• made in the course of furtherance of an enterprise carried on by the entity making the supply

• connected with Australia, and

• made by an entity registered or required to be registered.

Additionally, section 23-5 of the GST Act provides that 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.

When you sell the land in question, you will be making a supply for consideration and will thereby satisfy paragraph 9-5(a) of the GST Act.

As the land is connected with Australia, you will also satisfy paragraph 9-5(c) of the GST Act.

Therefore it is necessary to determine whether your supply of the land will be made in the course or furtherance of an enterprise carried on by you and therefore, whether you will be required to be registered for GST.

Enterprise

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of adventure or concern in the nature of trade.

In 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) the Commissioner explains when an entity is carrying on an enterprise and entitlement to an Australian Business Number (ABN).

Paragraph 262 of MT 2006/1 explains that an entity undertaking 'one-offs' or isolated real property transactions may be carrying on an enterprise.

Paragraph 263 of MT 2006/1 further explains that 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.

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.

Paragraphs 284 to 287 of MT 2006/1 provide an example of activities which amount to an enterprise:

Example 31

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 sell the houses.

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.

To contrast, the activities detailed in paragraphs 291 to 293 of MT 2006/1 are not considered to be an enterprise:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

In your case, negligible (if any), development work has been undertaken by you in order to sell the vacant land. The land in question was rezoned on the application of an unrelated potential purchaser, with anticipated subdivision of the land to be undertaken by another unrelated purchaser.

We therefore consider that your activities do not constitute the carrying on of an enterprise in the form of an adventure or concern in the nature of trade for GST purposes under paragraph 9-20(1)(b) of the GST Act. Your sale of the land is merely a realisation of a capital asset.

As we have established that you will not be carrying on an enterprise in relation to the sale of the subject property you do not satisfy paragraph 23-5(a) of the GST Act and you will not be required to register for GST in this regard.

Further, as you are not registered or required to be registered for GST, all of the requirements of section 9-5 of the GST Act have not been met.

Therefore, your sale of the land in question will not be a taxable supply and will not be subject to GST.