Edited version of your written advice

Authorisation Number: 1012729064726

Ruling

Subject: Whether an entity is carrying on an enterprise

Question

Is the Trustee carrying on an enterprise where:

the Trustee (which already owns Lot A) acquires Lot B from X;

the Trustee enters into a Project Management Agreement (PMA) with S Group (SG) as project manager in respect of Lots A and B;

pursuant to the PMA, SG (at SG's cost but on behalf of and with the assistance of the Trustee) obtains approvals for the subdivision of Lots A and B into X lots and the construction of a townhouse on each subdivided lot;

pursuant to X Domestic Building Contracts (which are stated by the PMA to be supplemented by the PMA) the Trustee and/or nominee engages Builder to construct a townhouse on each subdivided lot;

pursuant to the PMA and subject both to finance approval from the bank and to the Trustee ensuring that there are no mortgages over Lots A and B, SG arranges funding by the bank of the construction of the X townhouses (which will require a security over Lots A and B) and the Builder's claims for the costs of construction of the townhouses are paid out of the funding arranged by SG;

the Trustee grants to SG an irrevocable Power of Attorney and Authority (Limited) to undertake the subdivision of Lots A and B, to sell the townhouses allocated to SG under the PMA (below), and to deal with the bank to enable the subdivision and development to occur and the release of the mortgages over the townhouses allocated to SG;

pursuant to the PMA, the Trustee agrees that the Trustee does not have a legal interest in the future proceeds of sale of Z of the townhouses which are allocated to SG and that SG is to receive the whole of the sale proceeds including GST for each of the homes sold by it on behalf of' the Trustee, and SG agrees that the receipt by SG of the sale proceeds of the seven townhouses extinguishes any liability that the Trustee has under the Domestic Building Contracts; and

pursuant to the PMA, the Trustee retains the remaining Y townhouses (but agrees not to market or sell any of those townhouses until SG has sold the Z townhouses allocated to SG)?

Answer

Yes, the Trustee is carrying on an enterprise where:

the Trustee (which already owns Lot A) acquires Lot B from X;

the Trustee enters into a Project Management Agreement (PMA) with S Group (SG) as project manager in respect of Lots A and B;

pursuant to the PMA, SG (at SG's cost but on behalf of and with the assistance of the Trustee) obtains approvals for the subdivision of Lots A and B into X lots and the construction of a townhouse on each subdivided lot;

pursuant to X Domestic Building Contracts (which are stated by the PMA to be supplemented by the PMA) the Trustee engages Builder to construct a townhouse on each subdivided lot;

pursuant to the PMA and subject both to finance approval from the bank and to the Trustee ensuring that there are no mortgages over Lots A and B, SG arranges funding by the bank of the construction of the X townhouses (which will require a security over Lots A and B) and the Builder's claims for the costs of construction of the townhouses are paid out of the funding arranged by SG;

the Trustee grants to SG an irrevocable Power of Attorney and Authority (Limited) to undertake the subdivision of Lots A and B, to sell the townhouses allocated to SG under the PMA (below), and to deal with the bank to enable the subdivision and development to occur and the release of the mortgages over the townhouses allocated to SG;

pursuant to the PMA, the Trustee agrees that the Trustee does not have a legal interest in the future proceeds of sale of Z of the townhouses which are allocated to SG and that SG is to receive the whole of the sale proceeds including GST for each of the homes sold by it on behalf of' the Trustee, and SG agrees that the receipt by SG of the sale proceeds of the seven townhouses extinguishes any liability that the Trustee has under the Domestic Building Contracts; and

pursuant to the PMA, the Trustee retains the remaining Y townhouses (but agrees not to market or sell any of those townhouses until SG has sold the Z townhouses allocated to SG).

Relevant facts and circumstances

The applicant is the Trustee of the Trust.

Trust Deed:

The Trust Deed gives the Trustee the power to use purchase construct demolish maintain repair renovate reconstruct develop improve sell transfer convey surrender lease exchange take and grant options or rights in alienate mortgage charge pledge reconvey release or discharge or otherwise deal with any real or personal property. The Trust Deed also gives the Trustee power to carry on anywhere in the world and either alone or in partnership any trade or business whatsoever and to discontinue the same from time to time.

Project Management Agreement:

The PMA describes the project as 'X two-storey townhouse housing units' and states:

This Agreement is a document to facilitate the beginning of a relationship that would have the site funded, developed, marketed and sold by SG on behalf of the Trustee as soon as practical as a project manager for the Trustee.

The Contract Conditions in the PMA include:

Trustee to enter into X domestic building contracts (the contracts) with Builder for the construction of X townhouses on the land …The building contracts are supplemented by this Project Management Agreement (the agreement) between the Trustee and SG.

SG will also facilitate the sale of Z of those properties. The remaining Y properties will remain with the Trustee.

Builder will make the claims for construction to the Trustee for the payments to be made by funding arranged by SG.

The Trustee to effectively swap an interest in part of existing land for the construction of newly created homes on part of that land. The Trustee does not have any legal interest in the future sale proceeds of the Z homes to be sold by SG.

As consideration SG will receive the proceeds from the sale of Z properties. During the development the Trustee will not be required to provide any money to SG. SG is to receive the whole of the sale proceeds including GST for each of the homes sold by it on behalf of the Trustee.

The receipt of the whole of the sale proceeds by SG will extinguish any liability the Trustee has under the domestic building contract.

Whole deal is subject to:

Obtaining planning approval for the X dwelling project on terms and conditions satisfactory to both parties;

SG selling 'off the plan' a minimum of Y of the Z dwellings that have been allocated for SG to well within 6 months of planning approval;

The remaining properties to be sold by the SG within 12 months of completion of the first dwelling or SG must pay for the land component of remaining properties;

SG remains responsible for the properties from commencement on site until sold;

The Trustee will retain Y dwellings and cannot sell or market those until SG has sold Z.

This agreement is subject to finance approval with the Bank. SG will arrange funding of the project with the Bank. This will require unencumbered security on the land…

The Trustee will be required to assist with the finance arrangements and submissions for council approval.

The Trustee grants to SG an irrevocable Power of Attorney and Authority (Limited) to enable SG to:

Undertake the required land subdivision;

Sell the dwellings that have been allocated to SG to sell;

Deal with their bank to enable the land division to occur and release their mortgages over the dwellings that have been allocated to SG to sell.

…

SG can sell their allocated units for whatever SG want - any uplift in price is SG's benefit.

Domestic Building Contract:

The Trustee supplied a copy of a Domestic Building Contract between the Trustee (Owner) and the Builder in respect of one of the X townhouses (identified as 'Unit 1').

The Domestic Building Contract states that the Builder and Owner agree that, for a stated GST-inclusive amount of money, the Builder will carry out and finish the building work.

Activity to date:

It was stated in the ruling request that the only activity undertaken since the PMA and the Domestic Building Contracts were entered into is preparation of plans and submission of those plans to council and that no building approval has been granted, nor have any building works commenced.

Submissions in the ruling request:

It was stated in the ruling request that essentially the Trustee is to have no active role in the development and merely perform some minor administrative duties. Reference was made to the PMA which states that the Trustee will be required to assist with the finance arrangements and submissions for council approval and that the Trustee will grant SG a Power of Attorney and Authority to enable SG to undertake the land division, sell the dwellings allocated to SG, and deal with the Bank. It was submitted:

For clarity, providing assistance with financing arrangements and council approvals in effect involves no more than the mere signing of certain bank and council documents rather than any activity that requires special technical knowledge such as drawing up the plans or making judgments in respect of council requirements for the development. As the Trustee has no specialist knowledge or experience in undertaking a development of this type, nor any development at all for that matter, it can be seen that the trustee's role in this transaction is merely administrative.

Alternate versions of the transaction steps

Contemplation was given to a transaction where SG attended to the subdivision of the land into X allotments and the Trustee then transferred Z allotments to SG as consideration for the construction of Y townhouses. At the insistence of SG this was not the preferred option. It is the Trustee's understanding that this would not result in the most efficient stamp duty outcome for SG given SG's intention to develop and sell the properties that it would have owned.

The submissions referred to paragraph 23-5(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) which states that an entity is required to be registered under the GST Act if that entity is carrying on an enterprise. The submissions also referred to Miscellaneous Taxation Ruling MT 2006/1 which provides guidance as to whether an activity or series of activities is done in the form of a business or in the form of an adventure or concern in the nature of trade in terms of paragraphs (a) and (b) of the 'enterprise' definition in subsection 9-20(1) of the GST Act.

Applying the indicators of a business listed in MT 2006/1 at paragraph 178 (i.e. a significant commercial activity, and intention to make a profit from the activity, the activity is systematic, organised and carried on in a businesslike manner), it was submitted that the Trustee is not carrying on a business because, although the activity to be undertaken is significant (i.e. constructing X dwellings, selling Z and retaining Y) and organised, the project is one-off and the Trustee is engaging specialists to construct and sell the dwellings as the Trustee does not have the relevant skill or knowledge, there is no business plan, and the intention is not to make a profit but to swap existing parcels of land for houses on other parcels of land.

Applying the indicators of whether isolated transactions and sales of real property amount to carrying on an enterprise set out in MT 2006/1 at paragraph 265 (i.e. 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, there is a coherent plan for the subdivision of the land, borrowed funds finance the acquisition or subdivision, buildings have been erected on the land), it was submitted that the key criterion is whether the arrangement was entered into for the purpose of making a profit. It was submitted that the Trustee's purpose is not to make a profit but to provide for the beneficiaries of the Trust initially in the form of rental income and subsequently in the form of a residence for each of the five beneficiaries. It was submitted that there was no business organisation (e.g. a manager, office and letterhead), the land will not be brought to account as a business asset, that there was no change in the purpose for which the land was held as it was always intended that the properties be held long term to derive rental income and ultimately provide residences for the beneficiaries of the Trust. It was submitted that although the project involves the development and sale of seven dwellings, the substance of the project is to swap an interest in existing land for newly constructed dwellings on part of that land and that the Trustee does not intend to profit from the project, as evidenced by the fact that the Trustee does not have any legal interest in the sale proceeds of the seven dwellings to be sold by SG. It was submitted that the Trustee is not active in the project but has merely signed documents such as the Power of Attorney and Authority rather than undertaking the activities referred to in paragraph 286 of MT 2006/1 (i.e. arranging for a house to be demolished, land subdivided, a builder to be engaged to build two dwellings and a real estate agent to market and sell the dwellings) and therefore is not performing any duties associated with an entity undertaking a development.

Relevant legislative provisions

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

Reasons for decision

Summary

Applying the factors listed in paragraph 265 of Miscellaneous Taxation Ruling MT 2006/1 for determining whether isolated real property transactions amount to the mere realisation of a capital asset or activities of carrying on a business or an adventure or concern in the nature of trade, we consider that the Trustee is carrying on an enterprise in relation to the subdivision, development and sale of the property.

Detailed reasoning

Requirement to register for GST:

Division 23 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with entities that are required to be registered for GST and entities that may be so registered. Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are carrying on an enterprise; and

Section 9-20 of the GST Act states that 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….

Section 195-1 of the GST Act defines business as:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Miscellaneous Taxation Ruling MT 2006/1 discusses the meaning of 'entity carrying on an enterprise' for the purposes of entitlement to an Australian Business Number. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 states that the A New Tax System (Australian Business Number) Act 1999 (ABN Act) uses a definition of 'enterprise' that appears in the GST Act and that the principles in MT 2006/1 apply equally to the term 'enterprise' as it appears in the GST Act.

Activity or series of activities:

The 'enterprise' definition refers to 'an activity, or a series of activities, done…'. Paragraph 153 of MT 2006/1 states that an activity is essentially an act or series of acts that an entity does and paragraph 154 states that it is necessary to identify one activity or a series of activities that amount to an enterprise. Example 15 in MT 2006/1 discusses activities associated with the sale of real property:

Example 15 - activities associated with the sale of real property

161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise ?

162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included :

• assessing the economic viability of the project ;

• purchasing the land ;

• engaging an architect ;

• constructing a block of units on the land ;

• engaging a real estate agent and auctioneer ; and

• arranging for the sale of the units at auction.

163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise.

Paragraph 162 in Example 15 suggests that in the present case the Trustee will carry out a series of activities which will result in SG selling seven townhouses on behalf of the Trustee (with SG entitled to the sale proceeds) and the Trustee retaining five townhouses in order to derive rental income. Example 15 indicates that where an entity engages a third party to perform a task (e.g. engaging an architect or a real estate agent) that entity is nevertheless carrying out an activity. We therefore consider that in the present case where the Trustee engages Builder to construct a townhouse on each lot and grants to SG an irrevocable Power of Attorney and Authority (Limited) to undertake the subdivision of Lots A and B, sell the townhouses allocated to SG under the PMA, and deal with the Bank the Trustee is carrying on those activities. Consequently we reject the submission in the ruling request that, based on the PMA, essentially the Trustee is to have no active role in the development and merely perform some minor administrative duties.

Example 15 also suggests that the activities leading up to the sale of real property commence with an assessment of the economic viability of the project and end with arranging a sale. Applying that analysis to the present case, we consider that the Trustee is carrying on a series of activities which commenced when the Trustee entered into the PMA with SG and, assuming subdivision and planning approvals are obtained, will continue until the townhouses are constructed, the Trustee holds unencumbered titles to Y of the townhouses, and the Trustee has paid to SG the sale proceeds of the other Z townhouses sold by SG on behalf of the Trustee.

Isolated real property transactions:

Paragraphs 261 to 302 of MT 2006/1 deal specifically with whether an entity is carrying on an enterprise (i.e. either in the form of a business or in the form of an adventure or concern in the nature of trade) or merely realising a capital asset where there is a 'one-off' real property transaction. MT 2006/1 refers to Statham & Another v FCT 89 ATC 4070 and Casimaty v FCT 97 ATC 5135 and paragraph 265 of MT 2006/1 states that if several of the following factors are present in relation to an isolated property transaction it may be an indication that a business or an adventure or concern in the nature of trade is being carried on:

• 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

In relation to the first factor (there is a change of purpose for which the land is held) it was submitted in the ruling request that there was no change of purpose as Lots A and B were not acquired for the purpose of development but, respectively, to derive rental income and provide a residence for beneficiaries of the Trust and that after the project is completed the Trustee will hold the Y townhouses retained by the Trustee for the same purposes (i.e. initially to derive rental income and ultimately to provide homes for the beneficiaries of the Trust).

We do not agree with this submission. In Casimaty Ryan J held that there had been no change in the purpose for which the land was held where part of a 988 acre farming property (Acton View) had been subdivided and sold in eight subdivisions over 18 years and where the works undertaken by the taxpayer (roads, water, sewerage and fencing) were limited to those required in order to obtain approvals of the subdivisions (p.5151):

Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there is nothing to suggest a change in the purpose or object with which 'Acton View' was held.

In this respect, the present case is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change in purpose. In Whitfords Beach those circumstances were the passing of control of the landholding company from the owners of the fishing shacks to the three development companies. In Official Receiver v FCT the critical circumstance was that control of the land passed to the Official Receiver who sought the instructions of the creditors as to whether he should dispose of the land in its undeveloped state or undertake its extensive development to increase returns to creditors. In the Melbourne Trust case one critical consideration was the formation of the realization company as a distinct entity with shareholders unrelated to the failed banks or their creditors.

Ryan J's judgment indicates that whether there has been a change of purpose for which land is held is not a subjective test of the taxpayer's intention but an objective test based on the circumstances surrounding the land and the taxpayer. Applying that objective test to the present case, we consider that there has been a change of purpose in relation to Lot A (which the Trustee acquired in 2007 in order to derive rental income) which can be imputed from the entry by the Trustee into the PMA pursuant to which the Trustee and SG agree to terms which enable the land to be 'funded, developed, marketed and sold on behalf of the Trustee as soon as practical'.

We also consider that Example 29 in MT 2006/1 (Paras 273-6) is relevant as it distinguishes between, on the one hand the object of the taxpayer's plan (i.e. to enable the taxpayer to live in a popular beachside town) and, on the other hand the taxpayer's intentions and activities in relation to the land.

Example 29

273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units.

In the present case, while the object of the Trustee's plan is to construct Y townhouses in order to derive rental income and ultimately provide homes for the beneficiaries, the subdivision and development of Lot A involves a change of the purpose for which the Trustee holds Lot A.

The second factor listed in paragraph 265 of MT 2006/1 (additional land is acquired to be added to the original parcel of land) will also be present as the ruling request states that the Trustee will acquire Lot B prior to commencement of building works. Paragraph 270 of MT2006/1 states that the Commissioner considers purchasing land with the intention of resale at a profit is an enterprise, including where the land is subdivided before sale.

The fourth factor (there is a coherent plan for the subdivision of the land) is also present in relation to the Trustee as the PMA and X Domestic Building Contracts entered into by the Trustee evidence such a coherent plan. In particular the PMA sets out the respective responsibilities of the Trustee and SG entities in relation to obtaining planning and development approvals and titles, obtaining finance, construction of the X townhouses and sale of Z of the townhouses.

The sixth factor (borrowed funds finance the acquisition or subdivision) will also be present in relation to the Trustee as the PMA provides for funds to be borrowed from a bank to finance the construction of the X townhouses and obliges the Trustee assist with the borrowing and provide the land as security.

The seventh factor (there is a level of development of the land beyond that necessary to secure council approval for the subdivision) is also present. As noted above, in Casimaty, where the taxpayer occupied and operated a 988 acre farm and but only carried out the development required in order to obtain approval of the subdivisions undertaken in respect of part of the farm, Ryan J held that the taxpayer was not carrying on a business or a profit-making undertaking or scheme. However, Ryan J also approved the following passage from the dissenting judgment of Dean J in Whitfords Beach Pty Ltd v FCT (79 ATC 4648) which was approved on appeal by the Full High Court (82 ATC 4031, 4666):

A receipt can constitute the proceeds of sale of an item sold in the course of a business of the vendor and yet be capital. A receipt can be the proceeds of sale of something acquired quite out of the ordinary course of a business and yet, in whole or in part, be income as representing gross profits made in the ordinary course of that business.

…

The project builder who acquires a parcel of land as a capital asset and sells it unimproved will not necessarily receive the proceeds of sale as income merely because he uses the selling facilities of his business to sell that single parcel of land. On the other hand, if he subdivides the land into a dozen blocks upon each of which he erects a residence, the profit resulting from the proceeds of sale of the improved lots (after making allowance for the value of the land) will be profit made in the ordinary course of his business as a project builder notwithstanding that the land was acquired as a capital asset for some quite different purpose.

Example 31 in MT2006/1 applies the seventh factor to the case of taxpayers who demolish of an existing dwelling, subdivide the land, engage a builder to construct two new dwellings on the subdivided land and sell the new dwellings. Paragraph 287 of MT2006/1 states that, in those circumstances, the taxpayers are carrying on an enterprise:

…on the basis that their activities go beyond the minimal activities needed to sell the subdivided land.

In the present case the Trustee will subdivide Lots A and B into X lots and, in addition to any development required in order to obtain approval of that subdivision, erect a townhouse on each of the X lots, sell Z of the townhouses and retain Y. The portion of Dean J's judgment approved by Ryan J and Example 31 suggest that the seventh factor listed in paragraph 265 of MT 2006/1 will be present.

The eighth factor (buildings have been erected on the land) will also be present as the Trustee has engaged Builder to erect X townhouses.

In our view six of the nine factors listed in paragraph 265 of MT 2006/1 are present in relation to the Trustee. We therefore consider that the Trustee is carrying on an enterprise.

In addition to the submission already addressed above (i.e. that there is no change of purpose for which the land is held), it was submitted in the ruling request that the Trustee did not hold themself out to be in the business of development and there was no business organisation (e.g. manager, office and letterhead) per the fifth factor listed in paragraph 265 of MT2006/1 and that the Trustee merely has a passive role in the subdivision, development and sale. We do not consider this to be significant given that the terms of the PMA engage SG to act on the Trustee's behalf and instruct others to secure planning approvals and titles for the project, for builder to construct the X townhouses, and for SG to sell Z of the townhouses on behalf of the Trustee.