Edited version of your written advice

Authorisation Number: 1012927094351

Date of advice: 17 December 2015

Ruling

Subject: GST and sale of vacant land

Question

Is the sale of the property a taxable supply?

Answer

Yes, the sale of the property is a taxable supply.

Relevant facts and circumstances

The entity entered into contracts with several individuals to purchase their interests in a vacant land (the property). Settlement of the contracts occurred between 200X and 200X.

The entity purchased the property on behalf of other entities which, as the court confirmed in 20XX, the entity holds on trust for the other entities (the beneficiaries).

Since its acquisition, the property has not been used to generate income.

In 200X, part of the property was gazetted for resumption by a government authority.

The entity submitted that it started to undertake activities to rezone the property in order to maximise its claim for compensation in relation to the portion of the property to be resumed.

The entity applied for GST registration in late 200X with a date of effect of 1 July 200X.

In February 200X, the entity reported in its activity statements for the relevant quarterly tax periods in 200X and 200X non-capital acquisitions and claimed GST credits.

In June 200X, the entity lodged a development application for a Material Change of Use for residential and commercial development in accordance with the master plan over the property. The application involved complex process. Engineers, planners, surveyors, ecologists, acoustic engineers and lawyers were engaged as part of the application process.

In response to a questionnaire sent to the entity in relation to a refund integrity check conducted by the ATO in July 200X, the entity advised that it is carrying on a land development activity.

For the relevant quarterly tax periods in 200X and 200X, the entity reported further non-capital acquisitions and claimed GST credits.

In March 20XX, the entity's application for Material Change of Use of Premises was approved.

The entity advised that the government authority paid a specified amount in settlement of the entity's claim for compensation for the resumption of the portion of the property which was completed in May 20XX.

The entity submitted that soon after the settlement of its claim with the government authority, it entered into an agreement with a real estate agent in an attempt to sell the property. The offers received during this campaign were not considered adequate; thus the beneficiaries decided to hold the land until the market conditions improved.

While the compensation received by the entity was largely distributed among the beneficiaries, it was considered appropriate to withhold enough funds to hold the property for at least three years. The funds withheld a specified amount which would be used to service the trustee obligations and holding costs of the property.

In May 20XX, the entity lodged an application to reconfigure the property into X lots.

When the property market conditions started to improve in 20XX, the entity received unofficial inquiries to buy the property. The entity obtained agency proposals in July 20XX. While the entity has decided to sell the property prior to that time, it was still trying to determine how much activity it should undertake to demonstrate the value of the property.

After receiving advice that the value of the property would be better demonstrated with a development approval attached, the entity decided to hold off on the sale. In September 20XX, the entity began the process of seeking development approval.

In November 20XX, the entity lodged another application to reconfigure one of the X lots into several hundred residential lots.

In January 20XX, the entity's application to reconfigure the property into three lots was approved.

The entity signed an agreement with a real estate agent in January 20XX to sell the property.

The entity entered into a contract to sell the property to another entity (the purchaser) for a specified amount.

Under the contract, the entity authorises the purchaser to continue to pursue the development application lodged in November 20XX. The entity assigns to the purchaser its rights and interests in the development application and must work cooperatively with the purchaser to progress the development application.

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

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 the *indirect tax zone; 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.

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

The entity is selling the property for a specified amount; thus, the sale is a supply for consideration. The sale is connected with the indirect tax zone as the property is located in the indirect tax zone. Paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied.

The entity is registered for GST; thus, paragraph 9-5(d) of the GST Act is satisfied. For the purpose of paragraph 9-5(d), it is not necessary to determine if the entity is required to be registered. What remains to be determined is whether the sale of the property is made by the entity in the course or furtherance of an enterprise that it carries on.

Section 9-20 of the GST Act defines 'enterprise' to include 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.

Miscellaneous Tax Ruling MT2006/1 considers the meaning of certain key words and phrases used to define an enterprise. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'enterprise' for the purpose of the GST Act.

In the form of a business

To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

Paragraph 178 of the MT 2006/1 provides some indicators of carrying on a business as follows:

• a significant commercial activity;

• a purpose or intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

There is no single test to determine whether a business is being carried on. It is a matter of weighing all the relevant indicators.

In the form of an adventure or concern in the nature of trade

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 one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Application to the entity's circumstances

In an isolated real property transaction, the issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Mere realisation of a capital asset

The GST Act does not define the term 'capital assets'. For GST purposes, Goods and Services Tax Ruling GSTR 2001/7 defines capital assets to include tangible assets such as factory, shop or office, the land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained to produce income. Capital assets can also include intangible assets, such as goodwill.

Paragraph 35 of GSTR 2001/7 further provides that, if the means by which an entity derives income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such disposal is an occasional or one-off transaction.

The entity submitted that it acquired the property as a passive investment when X entities gathered together without clear direction for the investment. The entity also submitted that there was no intention to undertake any development activities. Furthermore, the property was not used to derive rental income and remains unused at the time the entity entered into the contract with the purchaser. As such, the only means by which the entity will derive income is through the disposal of the property. Accordingly, the property is not capital asset within the definition in GSTR 2001/7; thus, the sale is not a mere realisation of capital asset.

Adventure or concern in the nature of trade

The entity submitted that the acquisition of the property is a one-off transaction; thus, what must be determined is whether it has the characteristics of a business deal.

There is often a significant overlap of the indicators mentioned in MT 2006/1; therefore, they must be considered in combination and as a whole.

The entity acquired the property in 200X and 200X. When a portion of the property was gazetted for resumption in 200X, the entity decided to have the property rezoned to increase the value of the property and maximise the compensation claimed for the resumed portion of the property. Engineers, planners, surveyors, ecologists, acoustic engineers and lawyers were engaged as part of the complex and lengthy development application. In 200X, the entity lodged an application to rezone the property. The approval was obtained in March 20XX. From 200X until 200X, the entity has reported non-capital acquisitions for which it claimed input tax credits.

After receiving the compensation for the resumed portion of the property in 20XX, the entity entered into an agreement with an agent to sell the property. Acting on the condition of the property market at the time, the entity decided to hold the property for at least three years. As the market improved in 20XX, the entity continued to determine how the value of the property can be best demonstrated.

In May 20XX, the entity lodged an application to reconfigure the property into X lots. The entity lodged another application to reconfigure one of the X lots into several hundred residential lots.

Our view is that the activities undertaken by the entity leading to the sale of the property is an adventure or concern in the nature of trade in as they display the characteristics of a business deal on the basis that:

• The entity intended to make a profit and therefore undertook such activities.

• While the entity submitted that it had no clear direction of what to do with the property at the time of its acquisition, the activities subsequently undertaken by the entity were planned, organised and carried on in a businesslike manner. This is evidenced by the entity engaging an agent to sell the property, obtaining advice and acting on the market conditions. Moreover, the entity engaged professionals to prepare detailed plans for the purpose of the development applications to change the use of the land and subsequently undertake further subdivisions, which when obtained would tremendously increase the saleability and the value of the property. This is evidenced by the price that the entity paid to acquire the property and the subsequent purported sale price of the property to the purchaser. The entity carried on these activities in a similar manner to that of businesses involved in property sales and property development.

• Although the entity submitted that it does not have expertise or experience in property, it sought the expertise of real estate agents, engineers, planners, surveyors, ecologists, acoustic engineers and lawyers for the purpose of carrying on its activities. The processes were complex, lengthy and costly and involved extensive consideration of town planning laws which signifies an intention to make profits from the result of these processes.

• The scale and size of the activities undertaken by the entity is not small in the sense that the proposed reconfiguration of the property into X lots and one of the lots into several hundred lots meant that the entity had to do more to satisfy the council requirements.

We consider that the sale of the property is made in the course of an enterprise that the entity carries on; thus, paragraph 9-5(d) of the GST Act. This is consistent with the entity's advice to the Commissioner in July 200X that it is carrying on a land development activity and has since registration lodged BAS to report its creditable acquisitions. Accordingly, the sale of the property is a taxable supply. There is no provision in the GST Act under which the sale of the property would be GST-free or input taxed.