Edited version of your written advice

Authorisation Number: 1012797394753

Ruling

Subject: GST and the sale of subdivided land

Question

Will your supplies of the X lots be a taxable supply?

Answer

No

Relevant facts and circumstances

You are not registered for GST.

On ddmmyyyy you acquired a property (the Property) for $XX.XX. Your plan was to hold the property as a long term investment strategy.

The Property was approximately X acres and was divided into 3 areas:

• A house and its adjoining yard surrounded by a fence with driveway access to the main street (the house was unoccupied when it was acquired and required some initial repairs before it was in a condition to be leased)

• An area approximately X acres in size leased to a group of families (the families) that were growing food for personal consumption and

• A small area of the land leased to a mobile phone company on which one of its towers was located.

The rental income from the residential lease and lease of the mobile phone tower site is less than $75,000.

On ddmmyyyy you amended the lease to the families. The new lease was for a X acre paddock on a different portion of the property close to a water corridor at the bottom of your property.

Your spouse, began renovating the house and the property on ddmmyyyy. In mmyyyy, the house renovation was completed and you listed the house for rent. The house has been available for rent since that time.

In mmyyyy, the families leasing the X acres cancelled their lease. At the same time tenants moved into the house. Due to the size of the property and its set up, it was generally leased by tenants who kept horses. The property has been leased continually since that time and the tenants have had access to the whole property.

On ddmmyyyy, the City Council (CC) held a public meeting for consultation on a development plan for the area.

In mmyyyy, CC released a further concept plan for the area and this plan showed that % of your property would be rezoned for a wildlife corridor.

You entered into negotiations with CC about the effect of this rezoning on your property and to ensure that the value of your land was preserved and maximised and that a practical solution was found as to what parts of the land were to be preserved as wildlife conservation land.

On ddmmyyyy, you received a notice from BCC about a resumption of land on your property which related to the water corridor.

After negotiations you sold CC about X acres of your property for $XX.XX and received a Special Planning Agreement (the Agreement). Part of the Agreement was that xx% of your property was for wildlife conservation and the house was to be located on that part of the land. This agreement preserved your right of ownership of the wildlife conservation land regardless of what development might occur on the rest of the block. The balance of the property was available for development.

After your initial purchase, a number of offers were made by developers for the property over a period of time. In yyyy a developer offered $X million, however, you did not accept any of the offers.

You later made approaches to a developer, which had acquired adjacent properties in the area, to gauge their interest in the purchase of the property as a single lot. None of the offers the developer made to you were acceptable and in the end the developer decided not to acquire any more properties in the area for the foreseeable future, due to an internal policy. The offer for the whole property was around $X million with development approval.

In mmyyyy, you had a meeting with a town planner to discuss obtaining development approval (DA) for your property. Your spouse also had a meeting at this time with a property developer, (the Developer) and discussed various options for the development so as to retain the house and mobile phone tower. Your spouse had known the Developer before as he had completed small jobs for him/her on other matters.

The town planer has prepared an application which provides for the subdivision of the current property into the following:

• A single title of about X acres, which comprises the existing residential premises, mobile phone tower and adjoining land. The land is subject to the wildlife conservation corridor.

• A subdivision of about X lots on the remaining land of about Y acres, for residential purposes. Out of the Y acres, about Z acre next to the water corridor was to be given to the council for infrastructure use.

On ddmmyyyy, you received development approval.

The Developer intends to enter into a contract with you to develop the X lots through his company. The costs of the development are expected to be between $X and $Y million and you expect sale proceeds to be in the order of $A to $Z million.

It is intended that you will pay the developer out of the sale proceeds you receive from the development. You will pay the developer under the following formulae:

Development fee + Development costs (DC) + (50% x (Sale proceeds - DC - $X million)).

As part of the development process, the developer expects that:

• It will fund the development costs and recoup its costs from the sales according to the formulae set out above

• It will complete the works required by council. These include amongst other things:

• demolition of any structures in the area to be subdivided

• rehabilitation of relevant areas

• lodge a bank guarantee for the rehabilitation works

• submit a Street Tree plan

• erect a 2.1 metre high acoustic barrier

• design and construct all retaining walls and associated fences

• provide roadwork's, stormwater drainage, footpaths and pathways with any associated services and

• ensure utilities are connected properly to lots.

• Engage contractors to undertake the work

• Arrange for the marketing and sale of the lots

• Register a charge over the property to secure its interest, and

• You will not be involved in the development process. However, your spouse, will undertake an administrative role involving invoicing, assessing tenders and dealing with contractors.

Your agent advised that:

No formal discussions with (the Developer) have been undertaken in relation to the properties being unable to sell for sufficient value to cover the estimated development cost to be incurred. The indicative market value of the lots once subdivided would have to decrease significantly - by approximately x% in order for the sale proceeds from the lots to be insufficient to recoup the Developer's costs.

However in the unlikely event that this would arise, the Developer would still be owed its development amount, though rights of recovery would be limited to enforce its mortgage over the remaining property (being the house and remaining land) in order to recoup its costs.

You have not undertaken any other property development.

You own two other properties:

• Property 1 which you acquired in mmyyyy and have leased to unrelated third parties for at least 12 years.

• Property 2 which you acquired in mmyyyy. You initially leased this property to unrelated third parties for 5 years, when you began using it as your main residence.

• You owned and lived in another house until you sold it and moved into property 2.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5,

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

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

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

Reasons for decision

In this reasoning, please note:

• unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• all terms marked by an *asterisk are defined terms in the GST Act

• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

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

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(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.

On the facts supplied, paragraphs 9-5(a), 9-5(b) and 9-5(c) are satisfied. Further, the supply of the vacant lots in your factual situation will neither be GST-free nor input taxed.

However, we must determine whether you are required to be registered for GST.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 relevantly defines enterprise as an 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.

The ATO view on the meaning of the term 'enterprise' is explained in detail in Miscellaneous Taxation Ruling MT 2006/1 'The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' (MT 2006/1).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade.

• A business encompasses trade engaged in on a regular basis.

• An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Your activity does not amount to a business engaged in a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

• Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

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.

The property in question was a capital asset held as part of your leasing enterprise. However your turnover from this enterprise is below the GST registration threshold and you are not registered for GST.

The relevant issue in your circumstances is whether the nature of the asset has changed from a capital asset used in your leasing enterprise to a trading asset as a consequence of you engaging the Developer to subdivide and sell the Lots.

MT 2006/1 sets out a number of indicators that provide guidance as to whether an activity is undertaken in a businesslike manner. No single factor will be determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) involving subdivision and development of properties that were originally held as capital/investments assets. In these cases, the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

You intended to hold the property for a long period of time and realise the investment as a capital asset. However, when you could not sell the property as a single supply, you applied for and received subdivision approval from the council and approached a property developer to subdivide your property and sell off the subdivided lots.

You advised that your intention was always to hold the property as a long term investment asset as part of your investment portfolio and realise its value after a significant time.

• To that end you negotiated with the council to preserve the value of your investment asset when they began negotiations in 200X to turn xx% of your property into a wildlife corridor

• Between yyyy and yyyy you received a number of offers for your property however you refused them. One of those offers was to buy the complete property for a similar amount to the one you will receive for the current proposed development

• In yyyy you began negotiations with another developer to sell off your whole property however after on and off negotiations over x years the developer decided not to buy the land, and

• In your dealings with other properties, you have held them as long term investments and either realised their value or converted them to private use.

The formulae for calculating the development fee indicates that you will receive $X million plus share any profit after the developer is paid for his services. $X is a similar amount to some of the offers you had received earlier for the whole property.

You advised that your involvement in the development activities is to be minimal.

Although you will bear some risk by allowing securities to be placed against the property, you have advised that the risk in this particular property market is small.

The above factors indicate that your subdivision and sale of the Lots in the proposed manner does not constitute carrying on an enterprise of property development. The sale of the Lots will be the sale of a capital asset used in your enterprise of leasing property.

Registration

As provided in section 23-5, you are required to be registered if:

• you are carrying on an enterprise, and

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

Under section 188-10, your GST turnover is calculated with reference to your current GST turnover and your projected GST turnover.

As provided in subsection 188-10(2), your GST turnover does not exceed a particular threshold if:

• your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold, or

• your projected GST turnover is at or below the turnover threshold.

Before the sale (settlement) of the property, your current GST turnover was only derived from the lease of the mobile phone tower site, as residential rental income is input taxed in accordance with section 40-35. Accordingly, your current GST turnover is less than the threshold. However, at the time of settlement of the Lots, the sale proceeds will also be included in your current GST turnover, and will consequently exceed the registration turnover threshold.

Therefore, if your projected GST turnover also exceeds the registration turnover threshold, you will exceed the registration threshold.

Paragraph 188-25(a) provides that, in working out your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

We have already determined that your supply of the Lots will be the realisation of a capital asset. Accordingly, the proceeds of the sale will not be included in your projected GST turnover.

As a result you do not meet the registration turnover threshold and you are not required to be registered for GST.

Conclusion

As you are neither registered nor required to be registered for GST, your supplies of the lots will not be taxable supplies pursuant to section 9-5.