Edited version of your written advice

Authorisation Number: 1012738253888

Ruling

Subject: Goods and Services Tax and Property Subdivision

Question 1

Will the Commissioner accept your cancellation of GST registration under section 25-55 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The Commissioner will not accept your cancellation of GST registration under section 25-55 of the GST Act.

Question 2

If the answer to question 1 is yes, will the supply of land be a taxable supply under the GST Act?

Answer

The answer to question 1 is no. The Commissioner will not accept your cancellation of GST registration. The supply of land will be a taxable supply under the GST Act.

Relevant facts and circumstances

You registered are registered for GST

X and Y are equal shareholders in you.

You acquired 4 adjacent lots of land (collectively referred to as the land) to run a primary production business.

Lots 1 & 2 were transferred to X's parent Z in 19XX.

While Y owned the 2 lots, these lots continued to be used by you as part of your primary production business. However, at the same time, Y had a house built on a small portion on Lot 1.

The quarter acre portion of the lot that contained the house was then subdivided out of the lot 1 to form lot A.

Lot 2 and the remainder of lot 1 (excluding lot A) were then transferred by Y to you in 19YY and continued to be used by you as part of your primary production business. At the same time lot A was sold by Y to an unrelated third party.

X & Y's family trust repurchased lot A from the unrelated third party in 19ZZ and this was subsequently transferred back to you in 2014.

You ran the primary production business on the land until 200X.

From 200X to 20XX, the land was used by two companies related to you. Essentially, following the closure of your primary production business, the land would have otherwise sat idle. Parts of the land were therefore used on a temporary basis by your two related companies. However, this was never a commercially viable long term use of the land, As such, following closure of your business, the land was surplus to requirements.

Initially the land was zoned rural. At the initiation of the local council, in light of the transition of the area from a rural area to a suburban residential area, the land was subsequently re-zoned reserved residential and then residential between 19XX and 19XY.

As a result of the re-zoning, if the primary production use of the land had ceased for more than a 6 month period or the land had been sold, it would not have been possible to use the land again to carry on a primary production business and it would only have been possible to use the land for residential purposes. Indeed, the use of the land as a primary production had been a "non-conforming" use since the land was re-zoned residential.

In light of this, you are currently only able to sell the land for residential purposes and not for the purpose of carrying on a primary production business.

You wish to sell the land as you have now ceased the primary production business and have no further use for the land.

So as to achieve the best price for the sale of the land as residential land, you propose that the land be subdivided into X lots for individual sale (plus 1 lot comprising a reserve). You, as the landholding company continues to be controlled by the same individuals who controlled the company for the purposes of carrying on a primary production business on the land.

The subdivision will be done in three stages.

A planning application was submitted in 200Y to seek approval to subdivide the property.

DA approval was received in 200Y.

The first stage of works (demolition) commenced in 20XX. The residence was demolished as part of the subdivision project.

Stage 1 (Y lots) is largely complete. Titles should be issued in late 2014.

All Y lots of stage 1 are under contract. However, they will not be sold until titles have been obtained and the sales have settled.

You discussed with a real estate agent how best to market the property.

You hired a real estate agent to market the lots.

A promotional estate name, is being used.

You will not maintain a sales office.

You will not use corporate letterhead on letters you prepare in relation to the subdivision activity.

Access roads to most of the lots will be constructed. Electricity, water and sewerage and telephone services will be connected to most of the lots. The access roads will be sealed roads with kerbing. Culverts and other stormwater drainage works will be constructed.

You have hired a project manager, who engaged contractors to survey the land and do the construction work associated with the development

The construction and development work will be limited to what Council requires for the subdivision to be undertaken.

You will not construct any buildings or structures on the land in connection with the subdivision project.

The subdivision work will cost approximately $x million.

You will borrow $y million to fund stage 1 and $z million to fund stage 2 and stage 3.

You have not claimed income tax deductions for subdivision related expenses.

You have claimed input taxed credits on subdivision related expenses.

The proposed subdivision is a one-off subdivision project.

The property has been recorded as an asset in your balance sheets.

The sale price of each subdivided lot will be at least $75,000.

As at July 2014, you expected to sell one or more lots in July 2014 or the following 11 months.

Lot A was transferred back to you only to simplify the legal/marketing issues associated with having more than one entity owning the total area of land to be subdivided. The reacquisition of the lot A was to secure the best price.

Lot A is of a modest size relative to the entire area of land the subject of the subdivision and the entire area of land is of a modest size.

At the time of acquisition of the land and at all times subsequent to that acquisition there was no intention on the part of you to subsequently sell the land at a profit. The sole intention was to run a primary production business on the land.

The cessation of your primary production business was not related to the subdivision. Rather, it reflected the fact that plant production by independent companies such as you on small nurseries such as the land in question had become unprofitable. The primary production business was an old fashioned labour intensive production facility which obviously could not be upgraded and was not commercially viable to continue.

Your only income in the year ended 30 June 20YY was approximately $xxxx representing royalties from the primary production business. Since 1 July 20YY, such royalties have continued to be your only source of income.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 25-55(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1

Summary

The Commissioner will not accept your cancellation of GST registration under section 25-55 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Subsection 25-55(1) of the GST Act states:

The Commissioner must cancel your *registration if:

(a) you have applied for cancellation of registration in the

*approved form; and

(b) at the time you applied for cancellation of registration, you

had been registered for at least 12 months; and

(a) the Commissioner is satisfied that you are not required to be

registered.

(*Denotes a term defined in section 195-1 of the GST Act)

If you apply for cancellation of GST registration in the approved form, you will meet the requirement of paragraph 25-55(1)(a) of the GST Act.

You have been registered for GST for at least 12 months. Therefore, you meet the requirement of paragraph 25-55(1)(b) of the GST Act.

We shall now consider whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise, and

(b) you meet the registration turnover threshold of $75,000.

Section 195-1 of the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement or termination of an enterprise.

Enterprise

Subsection 9-20(1) of the GST Act 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…

The Tax office view on what constitutes an enterprise is contained in Miscellaneous Taxation Ruling 2006/1 (MT 2006/1).

Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) provides that the principles contained in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraph 24 of MT 2006/1 considers the term 'business' and states:

Ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or on-off transaction that does not amount to a business but has a the characteristics of a business deal.

It is appropriate in your case to determine whether the sale of the subdivided land is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 lists factors 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.

No single factor will be determinative as to whether the activities of the subdivision and sale of your property go beyond merely realising a capital asset. Rather it is a combination of factors that will lead to a conclusion as to the character of the activities.

We consider each of those factors in turn as they apply to your circumstances.

• There is a change of purpose for which the land is held.

• You operated a primary production business on the property and subsequently you allowed related parties to carry on business activities on the property. There has been a change of purpose as you now plan to subdivide the land and sell residential lots.

• Additional land is acquired to be added to the original parcel of land.

• You re-acquired additional land, being lot A, to be added into your subdivision project. You stated that you re-acquired Lot A to simplify the legal/marketing issues associated with having more than one entity owning the total area of land to be subdivided. It was also reacquired to secure the best price upon sale of the lots. We consider that the dominant purpose of acquiring lot A was to add this property to your land, subdivide the whole area in a more advantageous way for the purpose of sale.

• The parcel of land is brought into account as a business asset.

• The property has been recorded as a business asset in your balance sheets.

• There is a business organisation.

• You have a coherent plan for the subdivision of the land. The project is to be completed in stages. You have engaged a project manager to manage the project. The blocks of land will be marketed and sold through a real estate agent. A promotional estate name is being used.

• Borrowed funds financed the acquisition or subdivision;

• You have stated that the subdivision work will cost approximately $x million. You will borrow $y million to fund stage 1 and $z million to fund stage 2 and stage 3.

• Interest on money borrowed to defray subdivisional costs was claimed as a business expense;

• You have stated that you have not claimed any subdivision related expense as income tax deductions. However, you have claimed input tax credits for subdivision costs.

• There is a level of development of the land beyond that necessary to secure council approval for the subdivision;

• More is being done to the land than simply securing council approval for the subdivision. You undertook demolition work as part of the subdivision project. The subdivision requires road construction and provision of infrastructure services. Access roads to most of the lots will be constructed. Electricity, water and sewerage and telephone services will be connected to most of the lots. The access roads will be sealed roads with kerbing. Culverts and other stormwater drainage works will be constructed.

• Buildings have been erected on the land.

• No buildings have been erected on the land.

Having given consideration to the above factors, it is our view that there is a change of purpose for which the land is held, and the manner in which the activities of subdivision and sale of your property have been undertaken go beyond merely realising a capital asset. It can therefore be viewed as a one-off or isolated transaction in the form of an adventure or concern in the nature of trade, amounting to an enterprise (of subdivision and sale of property) as defined under section 9-20 of the GST Act.

GST turnover

Subsection 188-10(1) of the GST Act explains when you meet a particular turnover threshold. It states:

You have GST turnover that meets a particular *turnover threshold if:

(a) your *current GST turnover is at or above the turnover

threshold, and the Commissioner is not satisfied that your

*projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold

Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of the month other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on

Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on

Section 188-25 of the GST Act provides that the following supplies are excluded from projected GST turnover:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequences of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

You submitted that your turnover will not meet the registration turnover threshold, as the sales of the subdivided lots will be the sales of capital assets. We do not agree with your submission for the following reasons.

The meaning of capital assets is discussed in paragraphs 31 to 36 of GSTR 2001/7.

GSTR 2001/7 provides that the GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refer to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. That is, if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital nature even if such a disposal is an occasional or one-off transaction.

However, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

In your situation, you carried on a primary production enterprise on the property and the property was held as part of that enterprise. We acknowledge that the property was held as a capital asset for the purposes of that enterprise.

We consider that by the time the subdivided blocks are sold, the nature of the land will have changed through the physical and commercial activities that have taken place to that of a trading or revenue asset.

Consequently, for the purposes of paragraph 188-25(a) of the GST Act, the subdivided blocks will not be capital assets, and therefore they will not be excluded from the calculation of projected GST turnover under that paragraph.

Under paragraph 188-25(b) of the GST Act, supplies made as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise are also excluded from projected GST turnover calculations. However, in your case, the supplies of the subdivided lots are not the result of ceasing an enterprise or substantially or permanently reducing the size of the enterprise but are an inherent part of conducting the enterprise of subdividing and selling the subdivided blocks. Accordingly, supplies of the subdivided blocks are not excluded from projected GST turnover calculations under that paragraph.

No other exclusions from projected GST turnover apply.

As at July 2014, you expected that you would sell one or more lots in July 2014 or the following 11 months. You will sell the lots for at least $75,000 each. Therefore, your projected GST turnover is at least $75,000.

As you are carrying on an enterprise and your GST turnover is at least $75,000, you are required to be registered for GST.

In accordance with paragraph 25-55(1)(c) of the GST Act, as you are required to be registered for GST, the Commissioner will not accept your cancellation of GST registration.

Question 2

Summary

The Commissioner will not accept your cancellation of GST registration. The supply of land by Ashley will be a taxable supply under the GST Act.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states:

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.

As you are required to be registered for GST, you will satisfy all the requirements of section 9-5 of the GST Act. Your sales of the subdivided blocks will be taxable supplies and you will have to remit 1/11^th of the sale prices to the Australian Taxation Office (ATO).

Additional information

Please note that you may be eligible to use the margin scheme where the requirements of Division 75 of the GST Act are satisfied. Refer to Goods and Services Tax Ruling GSTR 2006/7 and Goods and Services Tax Ruling GSTR 2006/8, which can be found on the ATO website, www.ato.gov.au.

You may also be entitled to input tax credits for acquisitions you make in connection with the property development. Refer to Goods and Services Tax Ruling GSTR 2006/4.