Edited version of your written advice

Authorisation Number: 1012774703438

Ruling

Subject: Whether an entity will be carrying on an enterprise

Question 1

Will the Applicant be required to remit GST to the Commissioner in respect of the supply by the Applicant of the lots that are to be created by the development (Development) comprising the subdivision of the Property into X lots in accordance with the Conditional Approval for Plan of Subdivision?

Answer 1

No, the Applicant will not be required to remit GST to the Commissioner in respect of the supply by the Applicant of the lots that are to be created by the Development.

Question 2

Will the Applicant be entitled to claim input tax credits in respect of acquisitions made in relation to the Development?

Answer 2

No, the Applicant will not be entitled to claim input tax credits in respect of acquisitions made in relation to the Development.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Property comprises less than 10,000 square metres which was formerly part of a larger parcel of land (X Acres) which was purchased by the Applicant's late spouse in 19YY. Between 19YY and 19ZZ the spouse cleared a W acre portion of the X Acres and used the cleared land for a market gardening business and to erect a house which the Applicant and his/her family occupied from February 19ZZ.

Before 1980 the Applicant, his/her spouse and their child entered into a partnership trading as a food processing and sales business from the X Acres.

In 1983 the Applicant's spouse received compensation in respect of the compulsory resumption of a portion of the X Acres for an extension of a road which split the X Acres into two blocks, i.e.

the Property; and

the East Block (i.e. situated to the east of the road).

In 1987 parts of the East Block were resumed for roads, the Applicant's spouse sold a portion of the East Block to a third party and another portion to a family trust which constructed four warehouses and leased them out to commercial tenants.

Before 1990 the Applicant's spouse constructed a purpose-built facility on a portion of the East Block (L) and leased it to R Ltd.

When his/her spouse died the Applicant inherited the Property and the lease to R Ltd from the spouse's estate and the Applicant registered for GST for the purpose of continuing the lease to R Ltd. Subsequently the Applicant transferred L (subject to the lease to R Ltd) to a trust.

The Development:

When the Applicant inherited the Property from his/her spouse the Property was zoned 'Urban Deferred'.

At some time prior to 2003 the Property was re-zoned 'Residential R20'. In the relevant year the Applicant lodged a request to re-zone the Property from 'Residential R20' to 'Residential R40' but withdrew that request before it was considered by Council because it did not have the support of Council staff.

Subsequently Council proposed amendments to the District Town Planning Scheme (Scheme) and placed a moratorium on all amendments to the Scheme until the Scheme was gazetted. Prior to 2010 the Applicant engaged planning consultants (RG) to make a submission to Council that, notwithstanding the moratorium, the Property should be re-zoned from 'Residential R20' to 'Residential R30' prior to formal advertising of the Scheme. Council re-zoned the Property from 'Residential R20' to 'Residential R30' and that re-zoning was gazetted in a particular year.

In 2013 RG prepared and lodged on the Applicant's behalf an application for subdivision approval in respect of the Property. In 2014 a Conditional Approval of the plan submitted on behalf of the Applicant was granted. If the Conditional Approval is not acted upon and all conditions are not satisfied by 2018, the Conditional Approval will lapse.

Since inheriting the Property the Applicant has incurred expenses on legal fees, land tax, utilities, and subdivision consulting fees which have been capitalised and not treated as deductible for income tax purposes. The Applicant has not claimed any input tax credits (ITC) in relation to expenses incurred to date in respect of the Development.

The Applicant proposes to undertake the Development in accordance with the Conditional Approval, subdivide the Property into X lots (Lots), and sell each Lot to a third party purchaser.

It was stated in the ruling request that neither the Applicant nor the Applicant's family has previously been involved in the business of property subdivision or development for resale at a profit but rather to develop land into income-producing assets that are held as long term investments. It was further stated that the Applicant has not been directly involved in the subdivision process but has engaged Ltd, a company that employs the Applicant's son (G) and provides building design, construction and project management services to third parties as project manager and that Ltd has engaged contractors as follows:

• RG in relation to re-zoning the Property and obtaining the Conditional Approval;

• surveyors in relation to site surveys and preparation of the subdivision plan for submission to the planning authority;

• engineers in relation to site inspections, advice on site works (levelling, retaining and back filling) required to implement the Development; and

• Council in relation to extension of an existing road that will run through the Development.

It was also stated in the ruling request that, to date, no earthworks have been carried out in relation to the Property (other than annual maintenance of fire breaks required by council), that the only works proposed to be carried out in relation to the Development are those required by the Conditional Approval, and that Ltd will engage contractors to complete those works. It is proposed that the lots will be sold as vacant land using a real estate agent engaged by the Applicant and it is not proposed to have a sales office located on the Property. The Applicant does not propose to construct dwellings on the lots or to sell 'house and land packages'. The Applicant has not acquired any land adjacent to the Property for the purpose of increasing the return on the Development. At present the Applicant does not intend to borrow funds in order to complete the Development, but may borrow funds from either entities associated with the Applicant or a bank if that becomes necessary.

Submissions in the ruling request:

It was submitted that the Applicant will not be required to remit GST on the supply of a lot because the supply will not be in the course or furtherance of an enterprise as required by section 9-5(b) of the GST Act. The submissions referred to the definition of 'enterprise' in section 9-20 of the GST Act (particularly an activity, or series of activities, done in the form of a business) and to paragraph 177 of Miscellaneous Taxation Ruling MT 2006/1 (which states that in order to determine whether an activity amounts to a business the activity needs to be considered against the indicators of a business established by case law).

It was submitted:

Where an asset has historically been held as an investment by a taxpayer on capital account, a taxpayer may nevertheless change their purpose for holding an asset such that the taxpayer may subsequently hold the asset on revenue account as a trading asset in a business carried on by the taxpayer or as a revenue asset held for the purpose of resale at a profit in an isolated profit-making transaction engaged in by the taxpayer (FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355).

The submissions then referred to the discussion of trade assets as opposed to investment assets and isolated transactions and sales of real property in paragraphs 260 to 269 of MT 2006/1, particularly paragraph 265 which derives a number of factors from Statham and Another v FCT 89 ATC 4070 and Casimaty v FCT 97 ATC 5135 that assist in determining whether activities to subdivide land amount to a business or profit-making undertaking or scheme.

It was then submitted (paragraphs 54 to 56, referring to the Applicant as 'Rulee'):

It is clear from the Commissioner's views in MT 2006/1 that the key issue in determining whether the Rulee is carrying on an enterprise is to ascertain whether the activities constituting the Development are:

of a revenue nature and considered to be activities of carrying on a business, or an adventure or concern in the nature of trade (profit-making undertaking or scheme) - in which case there will be an enterprise; or

are the mere realisation of a capital asset - in which case there will not be an enterprise.

Our client has previously sought clarification of these issues in a private ruling [in respect of income tax]. In that private ruling, the Commissioner determined that, based on the facts outlined, in relation to the Development, the Rulee was merely realising a capital assets and hence:

was not carrying on a business of property development; and

was not engaged in an isolated profit-making undertaking or scheme.

Given that the Commissioner considers that the Rulee is merely realizing a capital asset (being the Property) by carrying on the Development, the Development should not be considered an 'enterprise' and hence the supply of a Lot will not be a supply in the course or furtherance of any enterprise.

It was further submitted that the Applicant is not GST registered (the Applicant's GST registration was cancelled with effect from 30 June 2014) and not liable to be GST registered because the Applicant is not carrying on an enterprise.

In relation to Question 2 it was submitted that the requirement in section 11-5(a) of the GST Act that the Applicant acquire anything solely or partly for a creditable purpose was not satisfied because subsection 11-15(1) states that an entity acquires a thing for a creditable purpose to the extent that that entity acquires in in carrying on the entity's enterprise and the Applicant is not carrying on an enterprise. It was submitted:

Therefore, the Rulee will not be entitled to any GST input tax credits for any GST paid in the course of carrying on the Development.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20.

Reasons for decision

Question 1 - Will the Applicant be required to remit GST on the sale of a lot?

Summary

The Applicant will not be carrying on an enterprise in relation to the subdivision of the Property and the sale of the subdivided lots and therefore will not be required to remit GST on the sale of those lots.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You must pay the GST payable on any taxable supply that you make.

Section 9-5 of the GST Act states that an entity (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.

The supply of a lot by the Applicant following the subdivision of the Property will satisfy the requirements in paragraphs 9-5(a) and (c) as that supply will be for consideration and connected with Australia (as the lot is real property in Australia).

There is an issue as to whether the supply of a lot by the Applicant will be in the course or furtherance of an enterprise as required by paragraph 9-5(b) of the GST Act.

In relation to paragraph 9-5(d), the Applicant cancelled his/her GST registration with effect from 30 June 2014 but would be required by section 23-5 of the GST Act to be GST registered (in relation to the sale of the lots) if he/she is carrying on an enterprise and his/her GST turnover meets the GST registration turnover threshold.

Consequently it is necessary to consider whether the Applicant is or will be carrying on 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….

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.

and states that 'carrying on' and enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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, in the absence of a statutory definition, the words 'activity, or series of activities' take their ordinary meaning and that an activity is essentially an act or series of acts that an entity does. Paragraph 10 of GSTD 2006/6 states that 'activity or series of activities' for an entity can range from a single act or undertaking, groups of related activities, or the entire operations of the entity and paragraph 154 of MT 2006/1 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 suggests that a number of activities which lead up to the sale of real property may amount to a 'series of activities' for the purpose of subsection 9-20(1) and should be considered in determining whether an individual is carrying on an enterprise:

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.

It was stated in the ruling request that the Applicant 'has not been directly involved in any of the subdivision process' (Para 30(d)). Reference was made to McCorkill v FCT 98 ATC 2199 where it was held that the taxpayer was not carrying on the business of subdividing and selling land because the taxpayer undertook a passive role by entering into a contract with a surveyor and engineer and another contract with joint estate agents.

Example 15 in MT 2006/1 indicates, however, that an activity which is done by a third party engaged by an individual to do that activity (e.g. engaging an architect, a real estate agent or an auctioneer) should be taken into consideration when determining whether that individual is carrying on an enterprise. Similarly, Example 30 in MT 2006/1 (Paras 277-283) indicates that an individual who engages a town planner, surveyor and project manager in relation to subdivisional works and engages sales agents to sell the subdivided lots is carrying on an enterprise. We also note that the passivity of the taxpayer in McCorkill was unusual as it extended to placing the divided lots 'in the hands of two local estate agents who recommended and had accepted prices' (98 ATC 2204).

We therefore consider that in the present case, where the Applicant engaged Ltd who in turn engaged RG (to prepared and lodge the applications for re-zoning of the Property and the Conditional Approval) and surveyors (to survey the Property and prepare the subdivisional plan for the application for the Conditional Approval) and engineers (to inspect the site and provide ongoing advice in relation to levelling, retaining and backfilling the Property in order to carry out the Development), those activities are done by the Applicant.

The Conditional Approval endorses the deposited plan submitted by the Applicant 'once the conditions set out have been fulfilled' and is valid for 4 years from 2014. It was stated in the ruling request that, to date, no earthworks have been carried out in relation to the Property and that it is proposed that the only works to be carried out in relation to the Development are what has been prescribed by the Conditional Approval which will be undertaken by contractors engaged by Ltd on behalf of the Applicant. The ruling request further stated that engineers continue to advise the Applicant on the site works required to implement the Development.

This suggests that some of the conditions in the Conditional Approval (e.g. any remediation works required to support a geotechnical report that the land is physically capable of development, filling, draining and grading to ensure that stormwater is either contained on site or connected to the local drainage system, and connection of the land to the comprehensive drainage system) may involve undertaking significant works.

Other conditions (e.g. installation of street lighting, provision of shared paths, arranging suitable water supply and sewerage services to the lots, arranging drainage of the land into a drain controlled by the local Water Corporation, and arranging the provision of underground electricity supply to the lots) will also involve works by third parties engaged by Ltd on behalf of the Applicant in order to have the deposited plan endorsed and be able to offer the lots for sale.

It was stated in the ruling request that the Applicant will engage a real estate agent to sell the lots as vacant land.

Example 15 in MT 2006/1 suggests that series of 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 there is a series of activities done by the Applicant which commenced shortly after the Applicant inherited the Property in 2002 with the lodging of the application for 'Residential R40' zoning in 2003 and which will continue until the conditions of the Conditional Approval are satisfied, the Planning Commission endorses the deposited plan, and the lots are sold.

Activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade:

Paragraph 9-20(1)(a) of the 'enterprise' definition in the GST Act refers to an activity, or series of activities, done in the form of a business. Paragraph 170A of MT2006/1 refers to FCT v Swansea Services Pty Ltd 2009 ATC 20-100 in which McKerracher J stated that the words 'in the form of' have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such, although the activities must still be reasonably intended to be profit-making. In Toyama Pty Ltd v Landmark Building Developments 62 ATR 73 White J stated that the words 'in the form of' have the effect of extending the meaning of enterprise beyond entities carrying on a business, to encompass activities that have the appearance or characteristics of business activities (Para 69).

Paragraph 178 of MT 2006/1 refers to the main indicators of carrying on a business set out in Taxation Ruling TR 97/11, such as a significant commercial activity, an intention to make a profit, and repetition and regularity of activity.

Paragraph 233 of MT 2006/1 acknowledges that 'adventure or concern in the nature of trade' is not defined in the ABN Act and states that the meaning of that term should be taken from Australian revenue law and judicial decisions. Paragraph 235 of MT2006/1 refers to section 25A of the Income Tax Assessment Act 1936 (which refers to profit arising from the carrying on or carrying out of any profit-making undertaking or scheme) and paragraph 237 states:

The term 'profit-making undertaking or scheme' like the term 'adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an ongoing business.

Paragraph 237 of MT 2006/1 also states that both 'profit-making undertaking or scheme' and 'adventure or concern in the nature of trade' require the features of a business deal, citing FCT v McClelland 70 ATC 4115, 4120 per Donovan LJ:

What criterion is to be applied to determine whether a single transaction produces assessable income rather than a capital accretion? It seems to their Lordships that 'an undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and re-sale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Isolated property transactions:

Paragraphs 261 to 302 of MT 2006/1 deal with whether an entity either 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 is merely realising a capital asset in the case of 'one-offs' or isolated property transactions.

The principles stated in those paragraphs are based primarily on United Kingdom and Australian court decisions discussed in Statham & Another v FCT 89 ATC 4070 and Casimaty v FCT 97 ATC 5135. Statham and Casimaty held that the subdivision of farm land into lots and sales of those lots were mere realisations of capital assets and that the profits were not assessable pursuant to the Income Tax Assessment Act 1936 as either income according to ordinary concepts, profits arising from property acquired for the purpose of profit-making by sale, or profits arising from any profit-making undertaking or scheme (Statham) or as either income derived from carrying on a business or profits derived from a profit-making undertaking or scheme (Casimaty).

Statham involved four stages of subdivision and the sale of 105 lots over six years. Casimaty involved eight separate subdivisions and the sale of 81 lots over 18 years. We therefore consider that the proposed subdivision and sale of X lots by the Applicant will be a 'one-off' or isolated property transaction for the purposes of applying MT 2006/1.

Paragraph 265 of MT 2006/1 lists nine factors derived from Statham and Casimaty and states that if several of those factors are present it may be an indication that a business or adventure in the nature of trade is being carried on. Paragraph 266 of MT 2006/1 states that it is necessary to examine the facts and circumstances of each case, including the nine listed factors, that there may also be other relevant factors to be weighed up, and that no single factor will be determinative, rather it will be a combination of factors that lead to a conclusion as to the character of the activities.

There is a change of purpose for which the land is held:

The first factor listed in paragraph 265 of MT 2006/1 is that there is a change of purpose for which the land is held.

In Statham the Full Federal Court did not dispute the finding by the Administrative Appeals Tribunal (AAT) that the deceased taxpayer had changed the purpose for which the land was held from farming to land development, but held that that did not mean that the proceeds of sale necessarily became taxable. In Statham the taxpayer acquired a 270 acre farm in 1970 'in order to engage in desultory farming'. In 1976 the taxpayer sold two urban blocks and a 36 hectare block and sold a half share in the balance of the land to a company controlled by relatives. In 1979 the taxpayer and the company decided to sell all of the land and sought council approval of a staged plan of subdivision. In all 105 lots were sold between 1980 and 1986. The AAT described the change of purpose as follows (Case V65 88 ATC 498, 501):

In terms of this application, this 'tiger' changed his spots when he gave up farming and became a land developer, and it is not to the point that the farm had been in the family since the time of Governor Macquarie. Farming is one occupation, land developing another and never the twain shall meet.

The Full Federal Court allowed the taxpayer's appeal from the AAT's decision. Woodward, Lockhart and Hartigan JJ did not dispute the AAT's finding that there was a change of purpose but held that that did not necessarily make the profits from sales of the lots taxable (89 ATC 4075):

It is implicit in the Deputy President's statement that, because the owners decided not to persist with farming the land in partnership, but instead to sell it by means of subdivision, the proceeds of realisation necessarily became taxable. This conclusion is erroneous as is shown by the decisions in such cases as Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188; FC of T v N F Williams 72 ATC 4069; Burnside v FC of T 77 ATC 4588; F C of T v Whitfords Beach Pty Ltd 82 ATC 4032; Allied Pastoral Holdings Pty Ltd v F C of T 83 ATC 4015; and Mount Louisa Grazing Co v F C of T 86 ATC 4933.

It is well established by the reported cases, including those mentioned above, that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must come from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant matter to be taken into account in determining the nature of the realisation, i.e. in determining whether the facts establish a mere realisation of a capital asset or business or a business or profit-making undertaking or scheme.

The Deputy President fell into error in concluding that, when the owners changed their intentions in respect of the land from farming to selling off allotments of the land profitably, the profit from such sales necessarily became subject to tax.

In Casimaty, on the other hand, the Federal Court (Ryan J) found that there was no change of purpose for which the land was held where the taxpayer acquired a 988 acre farm in 1955, farmed it for 20 years and then undertook eight subdivisions between 1975 and 1993. Ryan J stated (97 ATC 5151):

Taking the approach suggested by the authorities canvassed above, I have been led to resolve the question of fact in this case in favour of the taxpayer. In coming to that conclusion, I have been influenced primarily by the indisputable fact that that he acquired and continued to holds Acton View for use as a residence and the conduct of the business of a primary producer. 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.

In both Statham and Casimaty the land which was subdivided and sold was previously used for a different purpose (i.e. farming). In the present case the ruling request suggests that the Property was never used for the purposes of the businesses carried on by the Applicant and her family. Based on the ruling request, we understand that:

• prior to the extension of the road, the market gardening business was carried on on a seven acre portion of the X Acres situated to the east of the road;

• following the extension of the road (which split the X Acres into the East Block and the Property), the market gardening business and the food processing and sale business were carried on from the East Block;

• the commercial leasing business (i.e. the lease of L to R Ltd) was created when another road was extended through the East Block;

• following the extension of the road, the Property remained vacant because it was unsuitable for the market gardening business; and

• to date, no earthworks have been carried out on the Property (other than annual maintenance of fire breaks) and all existing retaining walls were constructed by neighbouring landowners.

Assuming that our understanding of the ruling request is correct, the issue of whether the purpose for which the Property was held changed from either the market gardening business, the food processing and sale business, or the commercial leasing business to land subdivision and sale does not arise.

In Casimaty Ryan J referred (97 ATC 5143) to The Scottish Australian Mining Co Ltd v F C of T (1950) 81 CLR 188. In Scottish Australian Mining Co the taxpayer purchased a large area of land known as the Lambton Freehold Estate for the purpose of its coal mining business and carried on that business on the land for 59 years until it was no longer economic to do so. The taxpayer then subdivided and sold the Lambton Freehold Estate, carrying out significant subdivisional works. The High Court (Williams J) stated:

The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the steps to realize the land to best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out. The plain facts of the present case are that the appellant purchased the Lambton lands for the purpose of carrying on the business of coal mining and carried on that business on the land until it was no longer businesslike to do so. It then had the land on its hands and it was land which because of its locality and size could only be sold to advantage in subdivision. A sale in subdivision inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset.

We see little difference between the situation in Scottish Australian Mining Co Ltd (where the purpose for which the land had been held had been exhausted) and the present case (where the Property appears to have remained vacant and not been held for any purpose).

The principle stated in Scottish Australian Mining Co Ltd has been both approved and questioned in subsequent court decisions. It was approved by a majority of the Privy Council in McClelland v FCT 70 ATC 4115 where the taxpayer inherited a half interest as tenant in common with her brother in 3,600 acres of land. The brother wanted to sell his interest and had found a buyer. As the taxpayer did not wish to sell her interest in the land or co-own the land with a stranger she sought to acquire her brother's interest by obtaining an option from her brother to acquire his interest, preparing a plan of subdivision of the land into three lots, contracting to sell one lot (and receiving a deposit from the purchaser) and using that deposit to exercise the option to acquire her brother's interest. A majority of Privy Council held that the taxpayer's profit was not assessable as the profit of a profit-making scheme on the ground that in order for a single transaction to produce assessable income rather than a capital accretion it must exhibit features which give it the character of a business deal. The majority expressly approved Scottish Australian Mining Co (70 ATC 4119) when discussing the reasoning of Kitto J in the High Court that the taxpayer had no other purpose than to sell all of the land, part of the land immediately and the rest at a future time.

Their Lordships would hesitate to draw from this single answer the conclusion that the appellant's sole purpose in 1962 was the sale of the whole land. She reiterated constantly in her evidence that she wanted to keep it unsold: and at one stage implied that this would be for the benefit of her family. Moreover if the implication be read into the evidence that it was the appellant herself who would build the cottages, or cause them to be built, she said nothing which proved her intention to sell them, rather than to let them and retain them as investments. It is fair to say that the learned Judge did not rest his conclusion in favour of the respondent solely on his assumption regarding the intentions of the appellant. Nor could he have done so consistently with a considerable body of judicial authority, to the effect that a landowner may develop and realise his land without making a profit which partakes of the character of income: even though he goes about the realisation in an enterprising way so as to secure the best price. Looking at Australian authorities alone one need only instance Scottish Australian Mining Co. Ltd. v. F.C. of T.

However the authority of Scottish Australian Mining Co Ltd may have been eroded by the decision of a majority of the Full High Court in FCT v Whitfords Beach Pty Ltd 82 ATC 4031. There three companies acquired the entire share capital of the taxpayer company in 1967 for $1.6 million. The taxpayer company then procured a zoning change, development as a residential subdivision and sale of vacant subdivided lots over a number of years. A majority of the Full High Court held that the taxpayer's activities involved more than realization of a capital asset and constituted carrying on the business of land development. Gibbs CJ relied on the acquisition of the taxpayer company's shares by the three other companies in December 1967 to distinguish Whitfords Beach Pty Ltd from Scottish Australian Mining Co Ltd (82 ATC 4039)

In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20th December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co. Ltd. v. F.C. of T. However, on 20th December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit.

…

The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly.

Mason J expressly doubted Scottish Australian Mining Co Ltd (82 ATC 4047):

Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. F.C. of T. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development.

…

From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under sec. 25(1).

Touram Pty Ltd v FCT 2008 ATC 10-070 (which was decided after MT 2006/1 was issued) did not consider the principle stated in Scottish Australian Mining Co Ltd but must be considered because the AAT held that the sale of vacant land which had been acquired eleven years earlier by the vendors and did not form part of a separate GST registered enterprise carried on by the vendors in partnership but was nevertheless made in the course or furtherance of a separate property investment enterprise and the purchaser (Touram Pty Ltd) was entitled to claim an input tax credit (ITC).

In Touram Pty Ltd the vendors acquired a small fruit farm in 1988 and carried on a primary production business as a GST registered partnership. The vendors acquired the vacant land on the main road in a nearby town in 1994 when the land was zoned 'village residential', successfully applied to have the land re-zoned 'village business' in 1997, and sold the vacant land to Touram Pty Ltd in 2006. The Commissioner denied Touram Pty Ltd's ITC claim on the ground that the supply of the land was not made in the course or furtherance of an enterprise.

The vendors gave evidence that the vacant land was purchased with the intention that it be held as an investment with a view to capital appreciation and that at the date of the application for re-zoning the vendors did not have the intention or means to develop the vacant land (Para 12). The AAT found that the borrowed funds used to acquire the vacant land were secured against the farm operated by the GST registered partnership, the vacant land was listed as an asset in the partnership's accounts, and holding costs associated with the vacant land may have been claimed as partnership expenses (Para 14). The AAT stated:

25. I accept the land in question did not form part of the Falconers' other businesses. The dealing with this land was separate from the rest of their activities, although I note the couple borrowed against the security of the farm to buy the land at Main Street. But even if I accept the acquisition and sale of the land was discrete from the rest of the business and a one-off that does not mean the Falconers were not also in the business of buying and selling this property.

26. I am satisfied the Falconers dealt with the land in a business-like way. While I accept they never intended to actively develop the land themselves, I do not think that matters. To the extent that a profit-making intention is relevant to the inquiry, I am satisfied from the evidence of both Mr and Mrs Falconer that they acquired the land with a view to selling it in due course for a profit. They had no other objectives in mind.

27. The more important indicia for present purposes is the practice of recording the purchase price, the holding costs and the development costs associated with the property in the partnership financial reports: see, for example, Exhibit 1, at folio 152. That is the sort of system and regularity one expects to see in a business. Mr Marks, for the respondent, suggested I should not read too much into this evidence: anyone holding property would probably record holding and other costs over time because those costs would be relevant when the time came to calculate the amount of any capital gain. I accept that is so, but one would not expect those records to be maintained in the partnership accounts if the property in question was a "personal asset". I note Mrs Falconer said they tended to list most of their assets in the partnership accounts, but she clearly understood that some assets - like the family car - did not belong there. I do not accept the property was included in the partnership accounts by accident.

28. While I have accepted the Falconers did not intend to develop the land themselves, they certainly went about doing the groundwork for a development in a business-like way. They commissioned a town planner to prepare plans for a commercial development and seek a re-zoning. They did so because they assumed it would make the property more valuable. They behaved exactly as a business person would behave if he or she was going to proceed with a development.

29. I am satisfied the vendors of the property were conducting a property investment enterprise. I reach that view because of the business-like way in which they went about the task of acquiring and holding the property.

In concluding that the taxpayers were also carrying on a separate property investment enterprise, the AAT found that the taxpayers acquired the vacant land with a view to selling it in due course at a profit (Para 26); placed particular importance on the recording of the purchase price, holding costs and development costs of the vacant land in the partnership's accounts (Para 27) and found that the taxpayers 'went about doing the groundwork for a development in a business-like way' by seeking a re-zoning and engaging a town planner to prepare plans for a commercial development of the vacant land and concluded that the taxpayers 'did so because they assumed that it would make the property more valuable' (Para 28).

In the present case the fact that the Applicant inherited (rather than acquired) the Property favours the application of the principle stated in Scottish Australian Mining Co Ltd that where land held by a taxpayer which, because of its size and locality can only be sold to advantage in subdivision, is developed and sold, that is simply part of the process of realizing a capital asset. In Scottish Australian Mining Co Ltd Williams J stated that the facts would have to be very strong before a court could hold that a taxpayer which had not purchased land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the taxpayer does is realize the land to the best advantage.

In Touram Pty Ltd, on the other hand, the land was acquired, rather than inherited, and the AAT's finding that the taxpayers 'acquired the land with a view to selling it in due course at a profit' (Para 28) was determinative.

In Statham the Federal Court confirmed (89 ATC 4075) the authority of Scottish Australian Mining Co Ltd, stating that that decision 'has not been overruled by any subsequent decision' and had been referred to with approval or apparent approval in later High Court decisions such as FCT v Williams and FCT v Whitfords Beach (noting that in Whitfords Beach Mason J questioned the conclusion reached in Scottish Australian Mining Co on the facts but did not cast doubt on the statements of principle).

Nor do we consider that in the present case there are particular circumstances which provide an occasion for imputing a change of purpose, as found to be the case in Whitfords Beach and discussed in Casimaty. In Casimaty Ryan J found that the taxpayer had acquired Acton View for the purpose of primary production, that there had been no change of purpose, and distinguished Whitfords Beach as follows (97 ATC 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 is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change of 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 the present case the re-zoning and Conditional Approval activities done by the Applicant in relation to the Property commenced after the Applicant inherited the Property in 2002, but Casimaty indicates that activities of that nature are insufficient to suggest a change of purpose.

For the reasons set out above we consider that this factor does not indicate that the Applicant is engaged in an activity, or series of activities, done in the form of either a business or an adventure or concern in the nature of trade.

Additional land is acquired to be added to the original parcel of land:

In Casimaty Ryan J referred (pp. 5146-7) to Crow v FCT 88 ATC 4260 where the taxpayer acquired Waterloo Farm, then acquired the Clifton land, subdivided and sold all of the Clifton land and then acquired a Cremorne property which adjoined the Waterloo Farm and subdivided and sold half of the Cremorne property etc. Ryan J distinguished Crowe from the facts in Casimaty (p.5147):

His Honour concluded that the taxpayer's subdivisional activities amounted to carrying on the business of land development so that the profits thereby derived were income for the purposes of s.25(1) of the Act. In the present case, although there was a series of repeated transactions in the sense of successive subdivisions, associated works and subsequent sales of allotments, that series did not embrace the acquisition of separate parcels of land as it did in Crow's case.

In the 'conclusion' section of the judgment Ryan J stated (p.5151):

Nor did the present taxpayer acquire other land to be added to the original 'stock' represented by Acton View. Had he done so, that would have facilitated the imputation of an intention to carry on a business of land development as occurred, for example, in Crow v Federal Commissioner of Taxation.

It was stated in the ruling request that no additional land adjacent to the Property has been acquired by the Applicant for the purpose of increasing the return of the Development as a whole.

This factor indicates that the Applicant is not engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

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

In Casimaty, Ryan J stated (97 ATC 5152):

It is also significant that, although the taxpayer had previously always carried on his business activities of farming and fencing in partnership with his wife and son respectively, he made no attempt to bring Acton View into account as a partnership asset.

In Touram Pty Ltd it was held that the supply of vacant land acquired by a GST registered partnership did not form part of the partnership's farming enterprise but did form part of a property investment enterprise also carried on by the partnership because the purchase, holding and development costs of the property were recorded in the partnership's financial reports.

In the present case the Applicant inherited (rather than acquired) the Property so the issue of how the Property is accounted for may not arise. Consequently this factor is not determinative of whether the Applicant is engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

There is a coherent plan for the subdivision of the land:

In Casimaty (which involved eight separate subdivisions carried out between 1975 and 1993) Ryan J stated that a 'coherent plan…conceived at the outset for the subdivision of the whole of the property, even in stages, to maximise the return from the aggregate of the individual lots' did not exist (p. 5152):

A related consideration is the fact that the development and subdivision of Acton View was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the subdivision of the whole property, even in stages, to maximise the return from the aggregate of the individual lots. Even at the date of the last of the assessments to which these proceedings are related, an area considerably over one third of the whole original property had not been subdivided.

In Touram, on the other hand, taxpayers who acquired vacant land in October 1984, commissioned a town planner to prepare some development plans and a re-zoning application in 1997, and entered into a contract to sell the land in May 2006 were held to be 'doing the groundwork for a development in a business-like way'.

In the present case there appears to be a coherent plan for the subdivision of the whole of the Property per the deposited plan lodged with the application for Conditional Approval, subject to the conditions imposed by the Planning Commission.

This factor indicates that the Applicant is engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

There is a business organisation - e.g. a manager, office and letterhead:

In Casimaty Ryan J stated (97 ATC 5152):

Similarly, had he set up his own sales organization or advertised or conducted sales himself instead of entrusting those activities entirely to his traditional agents…the inference would have been more strongly available that he had gone into the business of selling farmlets or rural residential allotments. That inference was drawn by the Tribunal in Stevenson's Case where the taxpayer, at least from stage 2 of his development, personally dealt with prospective purchasers as well as multi-listing the blocks with a variety of agents.

This suggests that this factor draws a distinction between a taxpayer who sets up his or her own sales organisation and personally deals with purchasers and a taxpayer who entrusts those activities to real estate agents.

In the present case it was stated in the ruling request that the Applicant proposes to engage real estate agents. This factor indicates that the Applicant is not engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade

Borrowed funds financed the acquisition or subdivision:

In Casimaty Ryan J compared Roberts v FCT 81 ATC 4421 and Stevenson v FCT 91 ATC 4476.

In Roberts the taxpayer carried on business as a market gardener on three or four separate parcels of land and decided to subdivide and sell one seven acre parcel. Green CJ held that the profits were not taxable.

In Stevenson the taxpayer had farmed 446 acres which the taxpayer's family had owned since 1904, sold 26 acres in 1965, sold another 360 acres in 1971, and subsequently decided to retain only a few of the remaining acres and created an eight stage subdivision of more than 180 lots which involved extensive borrowing in order to comply with subdivision conditions. The AAT had held that the subdivision, development and sale constituted more than the mere realisation of a capital asset and that the taxpayer was carrying on a business:

The subdivision and development was substantial. The land has been subdivided into over 180 small blocks. The development has turned farmland which had been unserviced by water supply or sewerage and without a made road into fully serviced residential blocks with a sealed road and draining. The taxpayer not only obtained finance but he risked it.

On appeal Jenkinson J declined to find that the AAT had erred in law.

In the present case the Applicant inherited he Property and therefore did not have to borrow funds to acquire the Property. It was stated in the ruling request that the Applicant does not presently intend to borrow funds to complete the development but may borrow funds from either related parties or a bank if it becomes necessary to do so.

Given the current uncertainty as to whether the Applicant will borrow funds, it is not possible to apply this factor to the Applicant.

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

In Casimaty Ryan J stated (p. 5152):

It is also significant that, although the taxpayer had previously always carried on his business activities of farming and fencing in partnership with his wife and son respectively, he made no attempt to bring Acton View into account as a partnership asset. Nor did he seek to claim as a business expense the interest on moneys borrowed to defray the subdivisional costs

It was stated in the ruling request that expenses incurred by the Applicant since inheriting the Property have been capitalised and not treated as deductible expenses.

This factor indicates that the Applicant is not engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

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

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 the present case it was stated in the ruling request that it is proposed that the only works to be carried out in relation to the Development are what has been prescribed by the Conditional Approval.

This factor indicates that the Applicant is not engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

Buildings have been erected on the land:

In Casimaty Ryan J stated (97 ATC 5152):

Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him a business of land development and improvement.

It was stated in the ruling request that the Applicant does not propose to construct any dwellings on the Lots to sell as 'house and land packages'.

This factor indicates that the Applicant is not engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade.

Conclusion:

Of the nine factors listed in paragraph 265 of MT 2006/1 only one (there is a coherent plan for the subdivision of the land) indicates that the Applicant is engaged in an activity, or series of activities, done in the form of either a business or adventure or concern in the nature of trade. Six of the factors indicate that the Applicant is not so engaged and the application of two factors cannot be determined. We therefore consider that the Applicant will not be carrying on an enterprise.

Question 2 - will the Applicant be entitled to claim input tax credits in respect of acquisitions made in relation to the Development?

Summary

As the Applicant will not be carrying on an enterprise, acquisitions made by the Applicant in relation to the Development will not be made for a creditable purpose and will not be creditable acquisitions. Consequently the Applicant will not be entitled to claim input tax credits.

Detailed reasoning

It was stated in the ruling request that the Applicant has not claimed input tax credits (ITC) for expenses incurred to date in relation to the Development.

Section 11-20 of the GST Act states:

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide, consideration for the supply; and

(d) you are registered or required to be registered.

In our view the requirement in paragraph 11-5(a) will not be satisfied. Subsection 11-15(1) of the GST Act states:

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

For the reasons set out in Question 1 we do not consider that the Applicant will be carrying on an enterprise as a result of undertaking the Development. Consequently any acquisitions related to the Development will not be made for a creditable purpose and will not be creditable acquisitions and the Applicant will not be entitled to claim input tax credits in respect of those acquisitions.