Edited version of your written advice

Authorisation Number: 1012857288961

Date of advice: 14 August 2015

Ruling

Subject: GST and property subdivision

Question

Will your supplies of the subdivided lots be taxable supplies?

Answer

No

Relevant facts and circumstances

You and your spouse jointly own X hectares of land located in Australia as joint tenants. Neither you nor your spouse are registered for GST and do not conduct any enterprises together or separately.

The land was originally a portion of a larger land holding of approximately XX hectares. This was used to operate a specific farm. Your parent passed away and the land passed to your other parent who leased it and ran some cattle on it. Your parent eventually subdivided the land into less than 5 roughly equal portions and gifted a portion to each of their children. You became the owner of your inherited property in mmyyyy and your spouse was added to the title in mmyyyy.

You and your spouse do not currently live on the property but return to work on the property when possible. You and your spouse intend to build a holiday home on the property. The land is currently vacant and holding costs such as rates, taxes, fire breaks, clearing and general upkeep are increasing.

Although the land was initially zoned rural it was identified as being suitable for rural residential development by the local council. This was confirmed in a policy document. Various draft and formal town planning schemes have affected the land but broadly they have generally confirmed that subject to a development application and various conditions the land was suitable for further subdivision.

To protect the value of the land you and your spouse have responded to these changes and in yyyy you received in principle support from council to rezone the land to special use subject to various conditions. In yyyy, approval was granted for a period of up to four years to develop the land. Development approval was renewed for a further four years in yyyy.

You and your spouse have obtained development approval to subdivide the land into X lots. You and your spouse do not intend to build any houses or similar on the lots that you intend to sell. You and your spouse intend to carry out the minimum works required by council to sell the vacant lots. Development costs are estimated to be $X per block.

You and your spouse intend to sell Z of the rural residential lots. Ideally, you and your spouse want to retain the largest lot to build a house on. You and your spouse intend to keep X of the lots and give one to each of your children.

You applied for and received an income tax private ruling on your proposed subdivision activities in mid-August 20AA. It was determined in that ruling that the proceeds from the sale of the subdivided lots were not assessable as ordinary income.

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 and

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

Reasons for decision

GST is payable on taxable supplies. 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 the indirect tax zone (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.

For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

In your case, you (you and your spouse) will be selling vacant lots for consideration. The property is connected with the indirect tax zone as it is located in Australia and the supply of the vacant lots in your factual situation will neither be GST-free nor input taxed.

Therefore we need to consider whether the activity of subdividing the property is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Are you conducting an 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.

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

n 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.

The activities of you and your spouse do not amount to a business engaged in on a regular basis. Therefore we will consider whether you together 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 acquired by you as an inheritance and later a half share in the property was transferred to your spouse. Therefore the relevant issue in your circumstances is whether the nature of the asset has changed from a capital/private asset to a trading asset as a consequence of developing 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 intend to live on one of the subdivided lots and give one to each of your children. The balance will be sold.

You do not intend to do anything to the property while you are preparing for subdivision and intend that the only changes to the property will be to meet council requirements.

This indicates, along with the other facts you have supplied that your subdivision and sale of the lots in the proposed manner does not constitute carrying on an enterprise of property development.

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).

As you are not carrying on an enterprise in relation to this activity, and your turnover from your other activities does not exceed $75,000 you are not required to be registered for GST.

Conclusion

As you are not carrying on an enterprise nor required to be registered for GST, your supplies of the lots will not be taxable supplies pursuant to section 9-5.