Edited version of your written advice

Authorisation Number: 1012711046265

Ruling

Subject: GST and sale of subdivided farm land

Question

Will you be carrying on an enterprise for GST purposes in relation to the proposed property development known as "ABC" and make a taxable supply of capital assets?

Answer

No, you will not be carrying on an enterprise for GST purposes in relation to the proposed property development known as "ABC". However, the disposal of capital assets by you will be a taxable supply.

Relevant facts and circumstances

• You are registered for goods and services tax (GST) and carrying on an enterprise of farming.

• You have voluntarily registered for GST for the purposes of your farm enterprise as your annual turnover does not exceed the GST registration turnover threshold.

• Due to ongoing bookkeeping and compliance requirements you may seek to deregister for GST purposes in the near future.

• You have been active in the farming business at all times since 19XX, but now struggling to maintain the workload required due to your advancing age and declining health.

• You acquired the current Lots AA, AB and AC from your parents in-law and the adjoining property namely the current Lots AD, AE and AF in or around 19XX. You reside on Lot AF.

• There are number of property development activities carried out by the council in your area such as rezoning under the urban development.

• In 20XX, the State Government acquired approximately YY acres of your properties for the construction of a Motorway. You and your late spouse received consideration.

• In 20YY, the Council acquired a small parcel of land to construct a reservoir and you received consideration.

• Now the property developers are eager to develop the whole area into a residential subdivision including a substantial part of your properties to be called "ABC".

• The council is concerned that if a property owner did not participate in the whole of rezoning, the property of that particular land owner would become landlocked in a developing urban setting.

• In early 20ZZ, a property developer made a formal offer to develop rather than acquire a significant part of your properties. The formal offer includes the following:

• The developer would proceed to develop a defined part of the lots as part of a larger scale development of the area.

• It is estimated that the defined part of the property subject to the proposed development agreement would result in a number of developed residential lots.

• The developer will pay you $X exclusive of GST upon entering of a formal agreement and if the developer fails to secure the development application within the specified period, then you will refund this amount less $Y to be retained by you.

• The development will be fully conducted by the developer and they will have the final decisions in relation to all development related matters concerning the properties.

• The developer will fund the development costs and the sale of the individual lots will be made by the developer on your behalf.

• From the sale proceeds of the lots you are required to reimburse the developer for all the costs incurred for the development and/or a development fee; and

• After reimbursing the above costs and fee, you are entitled to retain ZZ% of the gross proceeds of the sales.

• The residual land will be retained by you and you will continue to live in the farm house at Lot AF and will continue to operate your farming activities on a smaller scale.

• Your tax agent has confirmed that you will be selling subdivided vacant land and will only carry on the minimum development activities required by the council. You may build a sales office for the development purposes.

• Your tax agent also indicated that the final outcome with the developer would be that you retain ZZ% of the gross proceeds of sales of the developed properties, which is a fully variable option.

Relevant legislative provisions

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 188-25

Reasons for the decision

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 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.

In this case, you are carrying on an enterprise of farming and currently registered for GST although you are not required to be registered for GST as your annual turnover for registration purposes is less than the registration turnover threshold of $75,000. You also intend to continue your enterprise of farming after the proposed property development. However, it is necessary to determine whether your activities in relation to the proposed property development will amount to carrying on an enterprise for the purpose of the GST Act.

Isolated transactions and sales of real property

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

Paragraphs 262-263 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 (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. 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.

Application of the ATO view to your proposed property development activities

Based on the information provided by you,

• There is no change of purpose for which the property was held. You have decided to dispose the property due to a large amount of development activities planned by the council in the surroundings of your property. If you do not participate in the proposed urban development your property will be landlocked due to the other development activities in the surroundings.

• There is no coherent plan for the subdivision of the land. The property developer who is engaged in a larger property development in the area has made various offers to you to develop your property. You are considering the offer under the fully variable option where you will retain ZZ% of gross proceeds from the sale of the developed properties.

• The developer will undertake minimal amount of work in order to prepare the land for sale. You have confirmed that you will not construct any building on the subdivided lots of land except a sales office by the developer. The work undertaken would be necessary to secure approval by the council for the subdivision.

• You will not borrow any funds to finance the subdivision. The property developer will fund all the development costs and you will reimburse the development cost and/or a fee to the developer.

• You will retain the residual land that is not being developed and will continue to carry on your farming enterprise on a much smaller scale due to the change in the circumstances such as your health, age.

The above analysis indicates that your activities would not amount to an enterprise of property development. There is a need for you to dispose a part of your properties as the circumstances have changed in holding your properties.

You were not engaged in property development activities in the past. However, some of your properties were acquired by State Government and council for various purposes. Now the large property development in the area under the urban development has made you to consider disposing part of your properties.

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. In this case, you are carrying on an enterprise of farming and registered for GST although your GST turnover is less than the registration turnover threshold. You are considering to, deregister for GST purposes in relation to the enterprise of farming in the near future. This indicates that you are not required to be registered for GST. Since you will not be carrying on an enterprise of property development as explained above, you may not require to be registered for GST in the future.

Furthermore, 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.

The disposal of your properties will reduce the workload involved in continuing your farming activities as you were no longer able to operate the farm at its current scale. This will also permanently reduce the scale of your current enterprise. Therefore, the proceeds from the sale of your properties will not be included in the calculation of your projected GST turnover.

Disposal of capital assets

Carrying on an enterprise includes doing anything in the course or furtherance of an enterprise. A transaction is a supply in the course or furtherance of an enterprise that is carried where the supplies can be considered to be connected to the entity's enterprise.

The term in the course or furtherance is not defined, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise or achieving its goals is a furtherance of an enterprise although it may not always be in the course of that enterprise.

Although, you are not carrying on an enterprise of property development, it is our view that the disposal of capital assets which were used in carrying on your farming enterprise would be a taxable supply, if the supply satisfies all of the requirements of section 9-5 of the GST Act.

Section 9-5 of the GST Act provides that you make a taxable supply if you make the supply for consideration; and the supply is made in the course or furtherance of an enterprise that you carry on; and the supply is connected with Australia; and you are registered or required to be registered for GST.

In this case, when you dispose the capital assets, you will be receiving consideration for the supply of capital assets; and the supply of capital assets will be made in the furtherance of your enterprise of farming; and the supply is connected with Australia and you are registered for GST. As explained above, the supply of your capital assets is connected to your enterprise of farming.

Also a supply of subdivided farm land is not a GST-free or an input taxed supply under any provision of the GST Act.

Therefore, when you dispose the capital assets that you used in carrying on your enterprise of farming, it will be a taxable supply and you will incur a GST liability.