Edited version of your written advice

Authorisation Number: 1012972899722

Date of advice: 18 February 2016

Ruling

Subject: Goods and services tax (GST) and strata division and sale of allotments

Question 1

Will GST be payable on your sale of the strata lots at location X?

Answer

No.

Question 2

Will GST be payable on your sale of the remaining conservation land and existing residence at location X?

Answer

No.

Relevant facts and circumstances

Individual X and individual Y are the principal beneficiaries of the trust.

The trustee of the trust is Z.

The trust (you) carries on a primary industry business and has been registered for GST since (date).

As part of the primary industry business, you own certain rights. These rights hold significant value.

You engage contract workers to exploit those rights, and incur workers' fees and royalties which are paid to the relevant government Department.

Salaries and superannuation are paid to individual X and individual Y for their involvement in the primary industry business. Individual X and individual Y are involved in managing and directing the primary industry business and bookkeeping and administrative duties. Individual Y did not receive salary from you in respect of the year ended (date) as they had external employment.

You have borrowed money from the bank to fund the primary industry business, including the purchase of the rights.

Acquisition and use of the land at (location)

You acquired a parcel of land at (location X)(the Land) on (date) for (price). You have not acquired additional land to amalgamate with this land.

The land is approximately (number) hectares (or approximately (number) acres).

At the time of acquisition, the land was vacant land.

You acquired the Land for the purpose of constructing the main residence of individual X and individual Y.

In the lead up to acquiring the Land, you were made aware that there had been a previous unrelated third party who had entered into a contract to purchase the same parcel of land sometime around (year).

A development application was lodged by that third party on (date) with the Council.

The development application was for the construction of a dwelling and a shed.

The Council refused the application and an appeal against the refusal was heard on (date).

The Tribunal issued a decision on (date) stating that "the refusal of a permit appealed against, be set aside and that in lieu thereof a permit is granted for the construction of a residence and shed at (location) subject to the following conditions …"

The listed Conditions include condition No (number) that required that a Conservation Covenant within the meaning of the relevant Act be entered into in respect of the Land.

Condition No (number) of the decision goes on to state that the conservation covenant must include a plan for the management of the Land which shall deal with and contain a number of matters, the first of which being "the restriction of future development of the land save except for development approved by this permit".

Condition No (number) of the decision states that "the conservation covenant shall expressly provide that it may not be varied or discharged without the consent of the Crown in the right of the Commonwealth being first obtained".

Planning approval was therefore issued by the Council on (date) on the basis that a conservation covenant would be entered into and was valid for a period of (number) years.

The planning approval permit made specific reference to the requirements of the conservation covenant and the future development of the Land.

However, the unrelated third party did not proceed with the purchase of the Land. As a result, the planning permit for the construction of a residence and shed was not used and subsequently lapsed.

In (month) (year) (after acquisition of the Land) you lodged a development application.

The development application was for the construction of a residence, shed and the creation of a conservation covenant.

Planning approval was issued by the Council on (date) for the construction of a dwelling and shed.

The planning approval issued on (date) mirrored the requirements of the previous planning approval issued on (date) in that a conservation covenant was a mandatory condition for the permit to be granted.

The planning approval stated that the Council would not issue certificates of occupancy on the dwelling and shed until the instrument creating the conservation covenant had been registered under the Act.

The instrument creating the covenant was registered on (date).

The conservation covenant provided for the ongoing management of the Land in order to protect and conserve the natural values (e.g. native flora and fauna, natural wetlands, geo-conservation areas) of the Land.

Notwithstanding the terms and aims of the covenant, there has been no contact or ongoing reviews of the land by the Department.

In addition to this, despite the best efforts of individual X and individual Y to manage the property there has been trespassing and illegal dumping of waste on the Land (which began to occur a number of years after you acquired the Land), predominantly in the area to be excised.

This mistreatment of the Land is clearly not in keeping with the aims of the conservation covenant.

Construction on the Land

A private residence and shed have been constructed on the Land in accordance with the development permit issued on (date).

The area occupied by the private residence, shed and surrounding garden is approximately (number) hectares.

You have incurred all costs of construction as well as other holding costs, such as land tax, rates and insurance.

You have borrowed funds from the bank in order to fund the construction of the private residence and to cover personal expenditure of the beneficiaries.

No input tax credits have been claimed in respect of any of the costs incurred in respect of the construction of the private residence.

No income tax deductions have been claimed in respect to any of the costs you have incurred in relation to the acquisition of the Land or the construction of the private residence.

You do not treat the Land as an asset of the primary industry business.

Construction of the private residence is not yet complete. The costs of construction were initially underestimated, with actual costs being higher due to the remote location of the property.

Despite construction not being complete, individual X and individual Y moved into the private residence once construction had reached a point at which the house was habitable.

Individual X and individual Y have now lived in the private residence for approximately (number) years.

Individual X and individual Y treat the entire parcel of Land as their main residence.

You have not charged individual X and individual Y rent.

Proposed disposal of part of the land - staged strata division (excised land)

In order to help fund the completion of the private residence, you are contemplating the sale of a small part of the Land.

The intention is to excise (number) blocks via a staged strata division to sell as vacant land, subject to a development approval for the construction of a number of individual visitor accommodation dwellings.

It is expected that the selling price of each block will be over $75,000.

The size of the Land to be excised for the staged strata division is approximately (number) hectares (or (number) acres). This equates to a very small percentage of the overall parcel of land.

Given the restrictions imposed on the development of the Land by the conservation covenant, approval from the state and federal governments had to be obtained to allow for the alteration of the covenant to excise the (number) hectares.

In order to receive this approval you have obtained a Survey and Assessment (the Assessment) in respect of the Land.

The findings of the Assessment confirmed that the excision of the (number) hectares from the covenanted Land would not reduce the conservation value of the covenanted land, and instead would likely allow for the better management and control of the remaining covenanted land.

The main reasons for this conclusion being that the area to be excised currently provides the easiest access to trespassers, both on foot and in car, who dump rubbish and/or try to access a particular area through the conservation land.

The remaining parts of the Land are heavily bushed with no reasonable access.

The excision of the Land would therefore allow for the current access area to be fenced and will provide the funds to allow you to do so.

The ability for trespassers to access the Land will be significantly reduced as the only easy access point to the Land would be via the proposed holiday houses. Reducing the unauthorised access will have a positive impact on the preservation of the remaining conservation land.

Works undertaken to date in respect to the excision of the (number) hectares have included preparing all plans, reports and documentation for the excision, along with obtaining the in-principle support of both state and federal government to amend the covenant.

The Council has also approved a permit for the construction of (number) holiday villas (one villa per block) to be undertaken by the purchaser(s) of the excised Land.

The previous and current planning scheme has always required that any excision of the land be by way of a strata division and not a subdivision. In order to register a strata division, approval for dwellings was first required, which required you to include architectural plans for construction of dwellings on the excised land.

You will connect underground power and the private access road to the strata allotments. These are requirements of the Planning Permit.

You will erect fencing to prevent public access in furtherance of the overall conservation objective of the strata division.

You will only undertake the minimum activity required to realise the land, apart from erecting the fencing. The level of works undertaken is no more than those required to secure Council approval for the strata division apart from erecting fencing.

You are engaging other parties to do the work involved in bringing about the disposal, including the planning.

There will be no site/sales office maintained by you.

No letterhead will be used in relation to the strata division and sale, other than the letterhead of any third party real estate agent engaged to assist with the sale process.

No manager will be hired to manage the strata division and sales.

Your total borrowings to finance the work involved in bringing about the sale of the land are likely to be in the order of (amount).

You have not recorded the land as being a business asset of a property development business.

Possible sale of private residence & balance conservation land

Once the (number) staged strata division blocks have been disposed of, you will contemplate the disposal of the existing private residence together with the balance of the conservation land. The sale price is expected to be over $75,000.

It is intended that individual X and individual Y will continue to treat the remaining land as their main residence and will live in the private residence up until the time of any disposal.

It is likely that construction of the private residence would be completed prior to any disposal in order to maximise any sale proceeds.

No other works would be undertaken on the Land, as it is highly likely that no further amendments could be made to the conservation covenant, and therefore no further development would be permitted.

You have not claimed and you do not plan to claim any income tax deductions or input tax credits in relation to the property or activities connected with the property.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

Reasons for decision

Summary

GST will not be payable on your sale of the land because these supplies will not be made in the course or furtherance of an enterprise that you carry on.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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 indirect tax zone is Australia.

An enterprise includes:

• activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act)

• an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act)

Your contention

In order to confirm the application of GST to the disposal of:

(i) the excised land; and

(ii) the remaining conservation land and private residence,

the fundamental issue to be determined is whether you will make a supply in the course or furtherance of an enterprise that you carry on when you sell the Land.

If you are not making a supply of either the excised land or the remaining conservation land and private residence in the course or furtherance of an enterprise that you carry on, you will not meet all of the necessary requirements of section 9-5 of the GST Act.

On that basis, your disposal of the excised land and the remaining conservation land and private residence would not be subject to GST.

Your sale of the Land will be made for consideration; these supplies will be connected with the indirect tax zone (as the Land is situated within Australia) and you are registered for GST.

Accordingly, the only remaining requirement to be confirmed is whether the disposal of the Land is made in the course or furtherance of an enterprise that you carry on.

Meaning of the phrase 'in the course or furtherance of and enterprise';

The phrase 'in the course or furtherance of' is not defined in the GST Act.

This is acknowledged in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 ("Explanatory Memorandum") where paragraph 3.10 states:

In the course or furtherance is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. In the course or furtherance does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991)13 NZTC 3361.

In considering the above statement from the Explanatory Memorandum, the Commissioner considers at paragraph 9 of Goods and Services Tax Determination GSTD 2009/1 that the application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise.

Paragraph 11 of GSTD 2009/1 goes on the state that the GST Act does not require that the asset must be applied primarily or principally in carrying on the enterprise for the supply to be in the course or furtherance of an enterprise. The Commissioner contemplates that a connection between the supply of the asset and the enterprise carried on by the entity exists even if, at the time of supply, the asset is applied in carrying on the enterprise to a minor or secondary extent.

In this case, you submit that there is no application of the Land to an enterprise you carry on.

The Land is isolated within the trust and forms no part of the business that you conduct. The intention behind the acquisition of the Land as the private residence of the principal beneficiaries also supports this conclusion.

Indeed, at the time of acquisition, the strict terms of the conservation covenant meant that any future development of the Land would not be possible. Accordingly, it would be unlikely for you to have acquired the Land for any purpose other than for providing the main residence of individual X and individual Y.

It was only the misuse and mistreatment of the Land by third parties dumping waste a number of years later which provided an opportunity to obtain the excision of a small part of the Land from the conservation covenant. The predominant reason behind the approval being the possibility of better management of the Land after the excision so that the treatment and use of the balance of the Land would be in line with the aims of the covenant.

Relevant to the question of whether the supply of the Land would be in the course or furtherance of an enterprise, Example 3 of GSTD 2009/1 sets out a situation where there is a disposal of an asset that is not applied in the course or furtherance of an enterprise carried on by a discretionary trust.

The example deals with an in-specie distribution, however, it is relevant to demonstrating the circumstances in which a supply does not have the necessary connection with the enterprise carried on by the entity making the supply.

Example 3 of GSTD 2009/1 provides:

18. Jack is the trustee of Jack Family Discretionary Trust (JFDT). JFDT is carrying on an enterprise of selling furniture. JFDT also owns a boat that it makes available to selected beneficiaries of the trust. The boat does not form part of the assets of JFDT's enterprise as it is not applied in the enterprise to any extent. Later, Jack resolves to distribute, in specie, the boat to Phil who is one of the beneficiaries of JFDT. The in specie distribution of the boat is a supply made by JFDT. The in specie distribution was not made in respect of the employment of either Phil or a person to whom Phil is an associate. There are, therefore, no fringe benefits tax implications resulting from the supply.

19. The supply of the boat by JFDT does not have the necessary connection to the enterprise carried on by JFDT because the boat was not applied in the enterprise it carries on. The in specie distribution is therefore not a supply made in the course or furtherance of an enterprise for the purposes of paragraph 9-5(b).

Whether or not an acquisition is made in carrying on your enterprise is also considered by the Commissioner in Goods and Services Tax Ruling GSTR 2006/4. In addressing this point, paragraph 55 states that an acquisition is made 'in carrying on your enterprise' if it is made for the purposes of that enterprise, but not if it is made for some other purpose.

This point is demonstrated in Example 1 at paragraph 56 of GSTR 2006/4, which states:

56. Boatco Pty Ltd (Boatco) is trustee for a discretionary trust which operates a business of importing and selling luxury boats. Boatco buys a cruiser solely for the private use of Mike and his family, who are the beneficiaries of the trust. The acquisition of the boat is not made in ' carrying on' Boatco's enterprise, even though, Boatco usually makes acquisitions of boats in carrying on its enterprise.

Goods and Services Tax Ruling GSTR 2004/8 also considers this concept, as it states at paragraph 28 that for a sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise.

In considering whether something has a connection with an enterprise that you carry on, GSTR 2004/8 goes on to set out a number of characteristics which the Commissioner considers strongly indicate that the sale of the thing has a connection with the vendor's enterprise.

Paragraph 30 of that ruling states that each of the following characteristics indicate strongly that the sale of the thing has a connection with the vendor's enterprise:

• at the time of sale it formed part of the assets of the vendor's enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

• at the time of sale it was applied in carrying on the vendor's enterprise at least to some extent; and

• it is sold as a transaction of the vendor's enterprise.

Paragraph 31 goes on to state that the factors which tend to indicate that a sale is a transaction of an enterprise including the following:

• the sale is made from enterprise premises

• payment is accepted using enterprise facilities such as a cash register or credit card facility

• the proceeds of sale are deposited into an enterprise bank account, and

• enterprise book accounts are used for recording the transaction.

Goods and Services Tax Ruling GSTR 2003/6 considers the transfer of enterprise assets as a result of matrimonial property distributions.

Relevant to the question of whether an entity can hold an asset for private purposes, paragraph 53 of GSTR 2003/6 states:

53. It is our view that entities can hold assets for a private use and purpose. Assets may be owned by a registered entity but not have been acquired for a creditable purpose. These assets are not used or intended to be used in the entity's enterprise and are 'private assets' of the entity for the purposes of this Ruling. For example, a company can acquire a yacht for the private purposes of the company or its directors and shareholders. Similarly, an entity can apply enterprise assets to a private use.

In your case, you submit that the Land has never been applied in connection with the enterprise you carry on either directly or indirectly.

At all times it has been held for the purpose of being the private residence of the principal beneficiaries.

The Land has never been considered an asset of the business.

The only assets of the primary industry business are trade debtors, a small amount of depreciable office equipment and the more valuable primary industry business rights.

You submit that the Land has never been applied to any extent in the primary industry enterprise you conduct and therefore has no connection to an enterprise you carry on.

On that basis, you submit that the Land should be classified as a non-enterprise asset of the trust.

Your conclusion

It is submitted that the disposal of the Land does not have the necessary connection to the primary industry enterprise you carry on because the Land has not been applied in that enterprise and therefore has no connection with an enterprise you carry on.

On that basis, the disposal of the Land would not be made in the course or furtherance of an enterprise you carry on for the purpose of paragraph 9-5(b) of the GST Act.

Accordingly, you submit that the disposal of both the excised land and the remaining conservation land and private residence, as contemplated in the circumstances set out above, would not be subject to GST as not all of the requirements of a taxable supply under section 9-5 of the GST Act would be met on their respective disposals.

Our contention

The requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act are met in your case. This is because:

• you will sell allotments for consideration

• the sale will be connected with Australia (as the land is located in Australia), and

• you are registered for GST.

The sale of the lots will not be GST-free or input taxed.

Therefore, what remains to be determined is whether the lots will sold in the course or furtherance of an enterprise that you carry on.

You did not use the Land in your primary industry business. Therefore, your sale of the Land will not be a supply made in the course or furtherance of the primary industry business you carry on.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the concept of 'enterprise' for ABN Purposes.

Goods and Services Tax Determination GSTD 2006/6 states that MT 2006/1 can be relied on for GST purposes.

Paragraph 234 of MT 2006/1 distinguishes between a business and an adventure or concern in the nature of trade. It states:

234. 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.

Your development of the existing house and shed on the Land is not a business or adventure or concern in the nature of trade because of the lack of a commercial character. You built the residence for the private use of the beneficiaries of the trust.

In accordance with paragraphs 18 and 19 of GSTD 2009/1, paragraph 56 of GSTR 2006/4 and paragraph 53 of GSTR 2003/6, we do not consider that the arrangement in which you make available the Land and residence to your beneficiaries for their private use is an enterprise because this arrangement amounts to application of the asset for private use.

We shall now consider whether the property development activity you will conduct will be an enterprise.

Paragraphs 262 to 266 of MT 2006/1 are relevant to determining whether an isolated property subdivision project is an enterprise. They state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. 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 (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham ) and Casimaty v. FC of T (Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

• 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 to secure council approval for the subdivision; and

• buildings have been erected on the land.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

We consider that it is also reasonable to apply the factors in paragraph 265 of MT 2006/1 to determining whether a strata division is an enterprise as these factors would be relevant commercial indicators for property development activities in general.

Another factor that the Courts have considered relevant is the degree of personal involvement of the land owner in the subdivision related work. A high degree of personal involvement is an indicator that the land owner is carrying on a business or commercial activity.

Paragraph 254 of MT 2006/1 provides that an intention to resell an asset at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Paragraph 258 of MT 2006/1 distinguishes between trading and investment assets. It states:

258. United Kingdom cases categorise assets as either trading assets or 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.

You have held the Land in question for a long period of time for the enjoyment of the beneficiaries. Therefore, you have held the Land as a capital asset.

You did not have an intention to resell the Land when you purchased it.

The only factors in paragraph 265 of MT 2006/1 that are present in your case are:

• the use of borrowings, and

• you will do slightly more than what Council requires to secure the strata (by erecting fencing).

We do not consider that you have a coherent plan for the division of the whole Land because you currently only plan to subdivide and sell a small part of the Land. You will retain part of the Land after the planned division and sales and this will continue to be used as the private residence of your beneficiaries.

An important factor is that you will not develop the excised land to a level beyond that necessary to secure council approval for the subdivision, apart from erecting fencing, which is minor development. You will erect fencing to prevent public access in furtherance of the overall conservation objective of the strata division.

The previous and current planning scheme has always required that any excision of the land be a strata division and not a subdivision. In order to register a strata division, approval for dwellings was first required, which required you to include architectural plans for construction of dwellings on the excised land.

You are engaging other entities to do the work associated with bringing about the disposal of the land.

Considering all of the facts in your case and the factors in paragraphs 254 and 265 of MT 2006/1, we do not consider that your strata division activity is an enterprise. The sale of the strata allotments and the balance of the Land will be the mere realisation of a capital asset.

Therefore, the sale of the land is not a supply made in the course or furtherance of an enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is not met.

As not all of the requirements of section 9-5 of the GST Act are met, GST is not payable on your sale of the Land.