Edited version of your written advice

Authorisation Number: 1012971780700

Date of advice: 23 February 2016

Ruling

Subject: GST and subdivision and sale of vacant land

Question

Were you required to register for GST when you sold the vacant land to a third party individual?

Answer

No, you were not required to register for GST when you sold the vacant land as it was not a taxable supply.

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.

You and your siblings inherited a one-third share in the original property. There is an existing residence on the original property which has been the family residence.

You applied on behalf of all the owners of the original property for a Development Application for the original property to be divided into two residential lots. One Lot contains the existing residence and the second Lot is vacant land.

You wished to keep their share of the inherited original property, but your siblings wished to sell their shares of the inherited original property. The market value was agreed among the siblings to be $X as at YYYY.

You and your siblings entered into a Deed, in which your siblings sold their shares of the inherited original property to you at the price of $Z. You borrowed to finance this acquisition cost.

You contracted a Registered Valuer, to supply you with a valuation report for the current market value for a proposed sale of the vacant land, which is the result of a re-subdivision of the original property. A third party was interested in buying the vacant land. You provided the Valuer with the subdivision plan which was going to be lodged for registration. The Valuer also advised that in most circumstances, GST will be payable on the supply of vacant land because it is not a supply of residential premises.

It is your intention to use the sales proceeds to meet the acquisition cost of $Z and provide funds towards the renovations of the existing cottage on the original property.

The contract for sale of the vacant land was exchanged on 6666. You sold the vacant land to a private individual. You did not charge GST on the sale price of $A.

You did not have an ABN and were not registered for GST at the exchange date of the vacant land but you were registered at settlement. Your accountant advised you that you were carrying on an enterprise and backdated the registration. You were advised that the sale of the vacant land is a taxable supply and you needed to register for GST so you could remit the GST paid on the sale of the vacant land. You had to use $B (applying margin scheme) from the sale proceeds to remit GST payable to the ATO.

Your accountant also claimed on your behalf all costs relating to the acquisition cost of $Z, the subdivision of the original property and the sale of the vacant land as business expenses.

Your contentions:

1. You have never been involved in property development prior to the subdivision and sale of the vacant land. You do not intend to undertake any further land subdivision. You are currently renovating the existing residence either for sale or for lease. You are registered for GST because your accountant referred to the Valuation report and advised you after the exchange of contract that the sale of the vacant land is a taxable supply.

2. You did not acquire the shares of the siblings in the original property for division and resale at a profit. You had to buy the shares because the siblings are not interested in renovating the existing residence and you needed money to renovate the existing residence to follow the deceased's wish that the existing residence on the original property not be demolished.

3. You are merely realising your asset to best advantage.

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 subsection 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(b)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5(d)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(d)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 paragraph 40-75(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

NOTE:

Where the term 'Australia' is used in this document, it refers to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Summary

We consider you are not going above and beyond what is required to merely realise the value of the property to best advantage in relation to the subdivision of the original property and the sale of the vacant land.

Hence, we consider that your property development activity would not constitute an adventure or concern in the nature of trade.

Your supply of the vacant land to third parties is not made in the course of carrying on an enterprise of property development for GST purposes. Hence the sales amount is not included in your annual turnover and you would not have been required to register for GST when you sold the vacant land.

Detailed reasoning

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the 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 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

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

NOTE:

In order to answer your question: "If you were not registered when you sold the vacant land, were you required to be registered for GST under paragraph 9-5(d) of the GST Act)?", first we need to decide whether your supply of the vacant land is a taxable supply or not.

Based on the facts provided, the vacant land is owned jointly by two individuals, thus we first need to examine whether the property will be provided by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership.

Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Therefore, the entity will be the partnership.

For further information on tax law partnerships and co-owners of property, please refer to Goods and Services Tax Ruling GSTR 2004/6: tax law partnerships and co-owners of property.

Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the vacant land.

Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act as the supply that you make is for consideration and the vacant land is located in Australia (hence your supply is connected with Australia), and you are registered for GST.

Therefore, we need to consider whether your sale of the vacant land is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act).

Are you carrying on an enterprise of property development?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

• in the form of a business

• in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

We need to discuss whether your activities on the original property will constitute an enterprise of property development.

Paragraph 9-20(1)(b) was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

…But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making:

Edwards (Inspector of Taxes) v Barnstow [1956] AC 14;

Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199;

Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344-345 per Mason CJ, Brennan and Gaudron JJ; at 351-351 per Dawson J; and at 360 per McHugh J.

In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

21. The word "enterprise" is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerproperty, was considered by the High Court in Thiel v Federal Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344:

"... an activity, as well as a framework within which such activities are engaged in, may constitute an 'enterprise' for the purposes of the agreement."

22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade:
Edwards v Bairstow (1956) AC 1;

Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135; Thiel at 352 per Dawson J; at 360 per McHugh

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

The principles outlined in the ruling and the determination, have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, and sale of real property.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in property development before and that your activities represent a one off transaction on the original property. In the absence of other facts, it is considered that your activities are not carried out in the form of a business if these activities are part of a one off transaction on the property, not the beginning of an ongoing property development business.

As your activities of development and sale of the vacant land is an isolated transaction, it is necessary to determine whether the development and sale of the vacant land will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

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

Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

• there is a change of purpose for which the land is held,

• additional land is acquired to be added to the original parcel of land,

• the parcel of land is brought into account as a business asset,

• there is a coherent plan for the subdivision of the land,

• there is a business organisation (for example, a manager, office and letterhead),

• borrowed funds financed the acquisition or subdivision,

• interest on money borrowed to defray subdivisional costs was claimed as a business expense,

• there is a level of development of the land beyond that necessary for council approval for the subdivision, and

• buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraph 122 of MT 2006/1 provides that activities done by the entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

We consider that your development of the property and the sale of the vacant land are not in the course of an enterprise and is the mere realisation of a capital asset because:

• The vacant land is part of the subdivision of the original property which is a private asset.

• You borrowed $$$$ to funds the acquisition costs of your siblings because the siblings are not interested in the renovation of the existing residence.

• The development of the original property is not beyond that necessary for council approval of the property, and the development cost of the vacant land is not substantial. You want to use the sales proceeds from the vacant land to meet the acquisition costs of the shares of your siblings and to renovate the existing residence on the original property.

There is case law which is in support of your contention that your activities on the property is not in connection with a profit making undertaking.

McCorkell v FCT 98 ATC 2199

In that case, the taxpayer was 81 years old and had no family to continue his orchard business. He therefore subdivided his 15 hectare orchard into 37 allotments. The taxpayer did minimal work himself. The AAT held he was not carrying on a business of property development.

The AAT said:

• 'In addition a growing number of residential properties were abutting his land with growing concerns and complaints about spraying the orchard which was, in some instances, within 15 metres of homes.' [paragraph 4]

• 'Mr McCorkell had initially contemplated selling the land as one parcel but had not been able to attract a satisfactory offer.' [paragraph 13]

• 'It may well have been that, if Mr McCorkell had chosen an option involving partners or substantial borrowings, there may have been some indicia of business activities. But he did not.' [paragraph 13]

Casimaty v FCT 97 ATC 5135

The Federal Court found (at 5138):

… at no time did he [Casimaty] do any more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up levy banks on creeklines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities.

The case is similar to yours on the basis that Casimaty did minimal work, or as little as possible to ensure sale. You applied for subdivision and took no further additional steps to develop the property.

Mason J commented in relation to the factual scenario in Whitfords Beach Pty Ltd v the Commissioner of Taxation of the Commonwealth of Australia [1983] FCA 97; (1983) 67 FLR 151 WA (25 May 1983): '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.'

In your case, there was no development and improvement of the land to a marked degree such that it would not be possible to characterise what you did as the mere realisation of your capital asset.

In summary, we do not consider that the activities have the characteristics of a commercial transaction. You are not carrying out an isolated commercial transaction with a view to a profit. Hence the activities undertaken by you in the development of the vacant land for sale do not constitute an adventure or concern in the nature of trade.

Therefore, you are not considered to be carrying on an enterprise of property development as defined in section 9-20 of the GST Act, and the sale of the vacant land will not satisfy the requirement of paragraph 9-5(b) of the GST Act.

Conclusion:

The development and sale of the vacant land is not a taxable supply. You are not required to remit 1/11^th of the sale price to the Australian Taxation Office (ATO).

If you had not been registered when you sold the vacant land, would you have been required to be registered for GST in relation to the sale of the vacant land under paragraph 9-5(d) of the GST Act?

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a) supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b) supplies that are not for consideration.

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

d) supplies that are not connected with Australia.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

As discussed above, your activities of developing and selling the vacant land does not constitute the carrying on of an enterprise. At the time of the intended sale, the nature of your asset remained a capital asset. The sale of the vacant land constitutes the transfer of a capital asset and paragraph 188-25(a) of the GST Act applies.

Therefore, the sale of the vacant land is excluded from the calculation of your current and projected GST turnover. You were not required to be registered for GST when you sold the vacant land.

Additional information- the renovated existing residence

Goods and Services Tax Ruling GSTR 2003/3 provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website at www.ato.gov.au

Under section 40-65 of the GST Act, a sale of property is an input taxed supply if the property is residential premises to be used predominantly for residential accommodation unless the premises are:

a) commercial residential premises, or

b) new residential premises other than those used for residential accommodation before 2 December 1998.

New residential premises are defined in subsection 40-75(1) of the GST Act to mean premises that:

a) have not previously been sold as residential premises and have not previously been the subject of a long-term lease,

b) have been created through substantial renovation of a building, or

c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

Further, subsection 40-75(2) of the GST Act provides that premises are not new residential premises if the premises have been rented for a period of at least 5 years since the premises first became residential premises, the premises were last substantially renovated; or the premises were last built, as applicable.

Additional Information - Claiming input tax credits

Once you are registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

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

• the supply of the thing to you is a taxable supply; and

• you provide, or are liable to provide, consideration for the supply; and

• you are registered, or required to be registered.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

• the acquisition relates to making supplies that would be input taxed; or

• the acquisition is of a private or domestic nature.

Therefore, you are not entitled to claim ITCs on the GST included in the costs incurred on creditable acquisitions to the extent that relate to the sale of the vacant land.

All public rulings and publications are available on the ATO website at www.ato.gov.au