Edited version of your written advice

Authorisation Number: 1012984672524

Date of advice :6 April 2016

Ruling

Subject: GST and the subdivision of land

Question 1

Will your supply of the Land to the Developer be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will your supply of a call option or extensions of a call option over the Land to the Developer be a taxable supply under section 9-5 of the GST Act?

Answer

Yes.

Question 3

Will your supply of the Land to the Special Purpose Vehicle be a taxable supply under section 9-5 of the GST Act?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST and carry on a farming enterprise.

Your total land holdings are approximately X hectares located in Australia. In addition you lease around X hectares of farm land.

Approximately X% of your total land holding known as the 'farm' was originally acquired on or around 19XX and transferred to you soon after your incorporation in 19XX.

The land described as Property A, Property B and Property C were acquired around X years, X years and X years ago respectively. Property A and Property B each represent around X% of your holding by area whilst the Property C land is around X hectares in size.

All of your land is adjoining and apart from around X hectares, which is leased to another Entity for other purposes, all of the land is used in the conduct of a primary production business of sheep and cattle farming.

For the purposes of this ruling any reference to 'the Land' is a reference to subdivided titles, comprised in portions of former Certificates of various titles (the Land).

The Land is part of the 'farm' to the west of a specified road. The total area of the Land is around X hectares, around X% of your total land holding.

The entirety of your landholdings (excluding around X hectares leased to another entity), have only ever been used for primary production activities.

In the last few years several developers have made unsolicited offers to you to acquire the Land.

You have never initiated contact with developers.

In 20XX, A Developer contacted you with a development proposal for the Land. You have had sporadic discussions and negotiations with the Developer which formalised in late 20XX and on 10 DDMMYYYY you executed the Agreement with the Developer. You have provided a copy of the Agreement.

The main features of the proposed sale of the Land by you to the Developer, as contemplated by the Agreement, are summarised as follows:

An Option Agreement will be entered where by you grant the Developer a call option to acquire the Land.

• The original option period is X years, with rights of renewal.

• The option is exercisable in stages, referred to as 'Residential Stages'. Each Residential Stage will be an area of land to accommodate between X and X residential allotments upon subdivision. It is anticipated there will be approximately X to X Residential Stages. The average size of the allotments will not exceed X square meters and may be expected to be a standard X square metre offering. It is expected that Developer will offer house and land packages for sale and that, in the majority of cases, the Developer would be the builder.

• The option for the first Residential Stage is exercisable when zoning for residential use and development approvals have been obtained. The Developer can only exercise an option to acquire further Residential Stages if, as well as the aforementioned criteria being satisfied, the sale of the immediately preceding Residential Stage by you to the Developer has settled and the Developer has sold to ultimate purchasers at least half of the allotments in that preceding stage.

• An option fee (Option Fee) is payable by the Developer to you of $X initially and $X each time the option period is extended (if at all).

• The Developer is provided with a right of entry onto the Land and is charged with the responsibility of conducting all work necessary for rezoning and titling the Land.

• If the Developer exercises an option to acquire a Residential Stage, a land sale contract will be entered under which you agree to sell that Residential Stage to the Developer free of encumbrances for a purchase price that is calculated following a formula.

• The price is payable in instalments as the Developer subsequently sells each allotment in the relevant Residential Stage.

• The Developer will grant a mortgage to you over each Residential Stage as security for the vendor finance. You will also have a buy-back option to acquire from the Developer unsold residential allotments in a Residential Stage in certain circumstances.

• As well as residential allotments, the development of the Land will comprise other facilities acquired by a special purpose vehicle.

• You will play no active role in the development of the Land at any stage.

• During the option period you will continue your primary production activities on the Land. The Developer (at its cost):

• is allowed, on reasonable notice, access to the Land to carry out surveys and investigations.

• must obtain all relevant zoning and development approvals.

• On exercise of an option and settlement of sale of a Residential Stage by you to the Developer, you will have no role in the development. You may continue to farm such land post-settlement until the Developer needs the Land for development purposes.

• The Developer is solely responsible for obtaining all development approvals, undertaking all development works and sales of allotments.

You have never carried on a business of buying or selling land or developing property.

The supply of land to the special purpose vehicle will be at market value.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

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 ato.gov.au

To be a taxable supply, a supply must meet all of the requirements of section 9-5 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.

In your case, you will be making the following supplies:

• A supply of a Residential Stage, a section of the Land, to the Developer under a land sale contract for the price (based on gross consideration received by the Developer from third party buyers) payable in instalments as each allotment in a Residential Stage is sold.

• A supply of a call option (or an extension of a call option) for the right to acquire a Residential Stage, a section of the Land, to the Developer for the Option Fee.

• A supply of a section of the Land to a special purpose vehicle.

We will consider each supply separately.

Residential stage

You carry on an enterprise of farming. The supply of a Residential Stage, a section of the Land in Australia will be for consideration and you are registered for GST. Further in your factual circumstances the supplies will not be input taxed or GST-free. Therefore, if the supplies are made in the course of an enterprise you carry on they will be taxable supplies pursuant to section 9-5.

ATO Interpretative Decision ATO ID 2003/701 Goods and Services Tax GST and sale of an asset that was purchased for, but not used in, an entity's business (ATO ID 2003/701) states the phrase, 'in the course or furtherance of' is not defined in the GST Act. Accordingly, it is appropriate to examine the ordinary meaning of those words.

The Australian Concise Oxford Dictionary (1997) defines the phrase 'in the course of' as 'during'. The word 'furtherance' is defined to mean 'furthering or being furthered; the advancement of a scheme etc'.

The Explanatory Memorandum relating to the A New Tax System (Goods and Services Tax) Bill 1998 confirms this ordinary meaning at paragraph 3.10 which 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.

You have used the Land (with other farm land) for your farming enterprise.

You are subdividing and selling the Land, and as explained in ATO ID 2003/701, the sale is connected with your enterprise. The sale of the Land is made in the course or furtherance of your enterprise.

The supply of the Land to the Developer will be a taxable supply pursuant to section 9-5.

Call option

A 'supply' is defined in subsection 9-10 to include a creation, grant, transfer, assignment or surrender of any right.

You are making a supply of a right in Australia, a call option (or an extension of a call option) over a section of the Land for the Option Fee in the course of your farming enterprise and you are registered for GST.

ATO Interpretative Decision ATO ID 2005/182 Goods and Services Tax GST and supply of a call option over commercial property states that an entity is making a taxable supply under section 9-5 when it grants a call option that entitles the grantee to purchase real property, the supply of which is a taxable supply.

The supply of the call option (or an extension of a call option) is a supply of a right to receive a supply of land which would be a taxable supply under section 9-5 (as discussed above).

Therefore, your supply of the call option (or an extension of a call option) will be taxable.

Land

You are making a supply of Land in Australia for market value in the course of your farming enterprise and you are registered for GST. Therefore, you satisfy paragraphs 9-5 (a), (b), (c) and (d). The supply will not be input taxed or GST-free.

The supply of the Land will be a taxable supply under section 9-5.