Edited version of your written advice

Authorisation Number: 1012713785678

Ruling

Subject: GST and sale of subdivided vacant land

Question

Will the goods and services tax (GST) apply to your sale of vacant blocks of land which will be subdivided from the property located in Australia?

Answer

No, GST will not apply to the sale of vacant blocks of land which will be subdivided from the property located in Australia because based on the information received you will not be carrying on an enterprise under paragraph 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when the subdivided blocks of vacant land are sold.

Relevant fact

You purchased a property located in Australia several years ago and have resided at the property from that date. The property was purchased as a residence with a small crop farm.

At some time, the title to the property was transferred into the joint names of you and your spouse.

You and your spouse carried on farming on the property for a short period and were registered as a partnership for GST. The farming stopped when your spouse became ill. The partnership was deregistered for GST after you stopped carrying on the farming enterprise.

Since your spouse passed away (more than a decade), you have continued to use the property as your main residence. You inherited your spouse's interest in the property and title to the property was transferred into your sole name. There is no mortgage over the property.

In recent years, the neighbouring properties have been developed into smaller residential lots as part of the urban sprawl.

To help transition into and fund your retirement, you propose to conduct a subdivision of xx lots on the property. You intend to retain and continue to live on the subdivided lot that contains your current residence. You may also retain some of the lots adjoining your residence until such time as those lots need to be sold. You may gift some of the lots to your children and grandchildren.

You have no experience in property development and you have not subdivided property in the past. You intend to use consultants and contractors to perform the subdivision activities.

You will not acquire additional land to add to the original part of the land and will not build anything on the land or perform any works beyond the minimum amount necessary to satisfy the development approval conditions.

You have no formal business plan or timeline for completing the subdivision works and selling the subdivided lots. You have no business organisation for the subdivision. There is no office, no secretary and no letterhead in relation to the subdivision activities.

You expect the cost of the subdivision to be approximately $XXXX. You will borrow funds to finance the subdivision activities.

You intend to advertise the subdivided lots for sale through local real estate agents. You expect the subdivided lots to be sold above $75,000 each.

You have not claimed any expenses in relation to the current subdivision as deductions for income tax purposes.

You have not claimed any input tax credits in relation to the subdivision for GST purposes. You are not registered for GST

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

Reasons for decision

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received, you will satisfy paragraphs 9-5(a) and 9-5(c) of the GST Act when you sell the subdivided blocks of vacant land as you will make the supply for consideration and the supply will be connected with Australia as the subdivided blocks of vacant land are located in Australia.

There is no provision in the GST Act that makes a supply of vacant block of land in Australia GST-free or input taxed.

We will now consider whether the sale of the vacant blocks of land will be made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and whether you will be required to be registered for GST as you are currently not registered for GST (paragraph 9-5(d) of the GST Act).

Paragraph 9-5(b) of the GST Act

Subsection 9-20(1) states:

(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

…

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) considers the meaning of carrying on an enterprise.

Paragraphs 262 and 263 of MT 2006/1 state:

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. ...

Your subdivision of the property and sale of the vacant lots will be a 'one-off' or isolated real property transaction.

Paragraph 265 of MT 2006/1 outlines factors that indicate whether activities undertaken on a one-off are an 'adventure or concern in the nature of trade' and states:

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 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.

Applying the information received to the factors in paragraph 265 of MT2006/1

From the information received:

• You use the property originally as your family home. After the subdivision is made, the purpose for which the land was held will remain unchanged as it will still be your principle place of residence but on a smaller scale.

• No additional land will be acquired.

• The land has not been brought into account as a business asset because you have not carried on a business of land development.

• You have a coherent plan for the subdivision in that you have lodged the development application and completed all the requirements to obtain the subdivision approval and you will also engage a real estate agent to sell the vacant blocks of land. However, you do not have a formal business plan and you are not carrying on the activity in a businesslike manner. You intend to sell some of the lots, gift some and retain some. You have not yet decided which lots you will sell and which lots you will gift or retain to allow you to better enjoy your residence.

• You have no business organisation for the subdivision. There is no office, no secretary and no letterhead. You intend to have a passive role as you will appoint consultants and contractors to perform the work that needs to be done. You will appoint real estate agent for the marketing of the vacant blocks.

• You will need to borrow funds to finance the subdivision. The borrowed funds will be used to perform the minimum works necessary to meet the development approval requirements.

• No costs have been claimed as a business expense.

• The land will be developed only to the bare minimum necessary to satisfy the conditions of the Council.

• No buildings will be erected on the land as part of the subdivision.

From the above we consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the activities to be undertaken on the property are not an 'adventure or concern in the nature of trade'. The subdivision therefore does not amount to an enterprise but a mere realisation of a capital asset.

Accordingly, you will not be selling the vacant blocks of land in the course of an enterprise that you are carrying on under paragraph 9-5(b) of the GST Act.

Paragraph 9-5(d) of the GST Act

Under section 23-5 of the GST Act, you are required to be registered if:

• you are carrying on an enterprise, and

• your GST turnover meets the registration turnover threshold (currently $75,000).

As determined above, the sale of the subdivided vacant blocks of land will not amount to an enterprise for GST purposes and therefore you will not be required to be registered for GST. Accordingly, section 23-5 of the GST Act will not apply.

As you are not registered, nor required to be registered for GST, the requirement in paragraph 9-5(d) of the GST Act will not be satisfied.

Summary

As all the requirements in section 9-5 of the GST Act will not be satisfied, your sale of the subdivided vacant blocks of land as outlined will not be a taxable supply and therefore will not be subject to GST