Edited version of your written advice

Authorisation Number: 1013009380402

Date of advice: 20 May 2016

Ruling

Subject: GST and land subdivision

Question 1

Is the sale of each subdivided lot of land made in the course or furtherance of an enterprise carried on by Entity X under section 9-5 (b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the sale of each subdivided lot a taxable supply under section 9-5 of the GST Act?

Answer

Yes.

Question 3

Is Entity X required to be registered for the goods and services tax (GST)?

Answer

No.

Relevant facts and circumstances

• Entity X is currently registered for the goods and services tax (GST).

• The only assets of Entity X are land and a loan owing from a related entity.

• The land and improvements was on a single title and was acquired by Entity X before 1 July 2000.

• A small portion of the land contained commercial business premises and a small residence. The balance of the land was vacant land.

• The land has always been treated as a capital asset of Entity X.

• The business premises have been made available to a related party to conduct the business for a period of time, after which Entity X has leased the business premises and immediate land to a third party. The balance of the land was vacant paddocks which were made available for agistment purposes for a nominal charge.

• Several years ago, Entity X decided to subdivide and sell the land as it was no longer required to run any business, and in order to fund other investments.

• The subdivision of the land commenced several years ago. The land on which the business premises were situated was subdivided and this land lot with the improvements was sold off to a third party.

• The rest of the land is in the process of being subdivided into a number of blocks or lots, to be sold in various stages. This land subdivision is at an advanced stage:

• P blocks have been sold to date;

• Q blocks are currently on the market for sale; and

• the subdivision of the remaining R blocks is yet to be completed.

• The initial phase of this subdivision project was funded by entities that were associated with Entity X. There has been no external borrowing to finance any land subdivision or development costs to date. The land is not used as a security for any bank mortgages. Aside from the early stages of the subdivision, Entity X has funded the development costs with proceeds from the sale of the blocks.

• GST has been charged on the disposal of the P blocks. Entity X has lodged the relevant Business Activity Statements. GST has been paid to the ATO in respect of the land lots sold and input tax credits have been claimed for the GST paid on the land subdivision costs.

• Entity X has no prior history of large scale subdivision and sale activity. Entity X does not have any knowledge or skills in property development. Entity X has not previously been involved in a property development business or a large scale subdivision project either directly or indirectly via another entity.

• Entity X has engaged professionals such as engineers and a professional project manager, to provide assistance with management and oversight of key aspects of the land subdivision as and when required. A local real estate agent was engaged to market and sell the lots.

• The subdivision of the land required the construction of roads and other infrastructure as per Council's requirements. Entity X engaged subcontractors to carry out the required works. The development works were limited to what was required to obtain Council approval for subdivision and did not include construction of buildings or any other work beyond what was required to obtain Council approval.

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

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

Reasons for decision

Taxable supply

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.

The asterisked terms are defined at section 195-1 of the GST Act.

An enterprise that you carry on

Under section 9-5(b) of the GST Act, the supply must be made in the course or furtherance of an enterprise that you carry on. The Dictionary at section 195-1 of the GST Act provides that 'carrying on' an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'. Therefore, activities done in the course of termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term 'enterprise' for GST purposes.

Paragraphs 140 to 148 of MT2006/1 discuss the ATO view on 'termination of an enterprise'. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

The question of whether the activities are done in terminating the enterprise or at some later point (and do not have a connection with the termination activities) is one of fact and degree depending on the circumstances of each particular case.

In this case, prior to the subdivision and sale of the land, Entity X has leased the business premises and immediate land to a third party. The balance of the land consisting of vacant paddocks was made available to a farmer for agistment purposes for a nominal charge. Therefore, the disposal of the land by way of sale has a connection with the termination of the leasing activities. As such, it would constitute an activity done in the course of the termination of the leasing enterprise and would be made in the course or furtherance of the leasing enterprise carried on by Entity X.

Disposal of a capital asset

Generally, if you are registered or required to be registered for GST, the sale of a capital asset in Australia, in the course of carrying on your enterprise, is a taxable supply and you are required to account for GST on that sale. If you are carrying on an enterprise, you may be registered for GST under section 23-10 of the GST Act, even if your GST turnover is below the registration turnover threshold.

As Entity X is registered for GST, the sale of each subdivided lot is a taxable supply as all the other requirements for a taxable supply under section 9-5 of the GST Act are met. This is regardless of whether the sale is of a capital or revenue asset.

Is Entity X required to be registered for GST?

Section 23-5 of the GST Act provides that you are required to be registered if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

The applicable GST registration turnover threshold is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

In calculating your GST turnover under Division 188 of the GST Act, certain supplies are excluded. Section 188-25 of the GST provides that in working out your projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset

of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The sale of the property in respect of which Entity X has previously carried on a leasing enterprise, would be the transfer of ownership of a capital asset. As such, the sale of the property would be excluded from the calculation of Entity X's projected GST turnover.

However, as stated above, carrying on an enterprise also includes doing anything in the course of the commencement of the enterprise. Activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. Therefore, it is relevant to have regard to those activities in determining whether the activities of an entity amount to an enterprise.

Notwithstanding that the GST Act provides that carrying on an enterprise includes doing anything in the course of the commencement of an enterprise, it is still a question of fact and degree in each case as to whether or not an enterprise is being carried on.

The issue to be considered now is whether the land subdivision and sale activities undertaken by Entity X also constitute an enterprise, separate from the leasing enterprise. Section 9-20 of the GST Act which provides the definition of enterprise for GST purposes includes 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.

Based on the facts provided, we are satisfied that Entity X is not in the business of land development. However, the term 'enterprise' also includes an activity or series of activities carried on 'in the form of an adventure or concern in the nature of trade'. An adventure or concern in the nature of trade may include isolated transactions, that do not amount to a business, but which have the characteristics of a business deal.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT2006/1 details a list of factors that provide assistance in determining whether activities are an adventure or concern in the nature of trade. If several of the following factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on. The factors are:

• 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

• buildings have been erected on the land.

In addition, paragraph 266 of MT 2006/1 states:

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.

Although it has been submitted that the land was not originally acquired by Entity X for the purpose of resale, Entity X has decided to subdivide and sell the subdivided land lots. Professionals have been engaged to provide assistance with management and oversight of key aspects of the land subdivision as and when required. The subdivision of the land required the construction of roads and other infrastructure as per Council's requirements. Entity X engaged subcontractors to carry out the required works. A local real estate agent was engaged to market and sell the lots.

The scale of the activities undertaken suggests that the subdivision and development of the land for sale may have a commercial character. However, the activities carried out do not go beyond what was required by council's regulations.

The fact that Entity X has not been involved in any other land subdivision or property development activities in the past is also a relevant factor.

We acknowledge that the sale of the subdivided lots may be more profitable than the sale of the property as one large block. However, this fact alone is not detrimental to the conclusion that the sale may still be a mere realisation of a capital asset.

Having applied all the principles listed above to the circumstances of Entity X, we have concluded that the subdivision and development of the land for sale does not amount to an enterprise of property development for GST purposes. The development of the property and the subsequent sale of the subdivided land as vacant blocks are regarded as a mere realisation of a capital asset. Therefore, the proceeds from the sale of the subdivided lots would be excluded from the calculation of Entity X's projected GST turnover and would not form part of the sum of its projected GST turnover.

Accordingly, Entity X's GST turnover would not meet the registration turnover threshold as a result of the sale of the subdivided lots and hence, Entity X would not be required to be registered for GST under section 23-5 of the GST Act. As Entity X is currently registered for GST, it may apply for the cancellation of its registration in the approved form. However, Entity X may choose to remain registered under section 23-10 of the GST Act until all the subdivided lots are sold.

Where Entity X is not required to be registered for GST and is not registered for GST when it sells the vacant land lots, all the requirements for a taxable supply under section 9-5 of the GST Act will not be met. Consequently, when Entity X applies for the cancellation of its GST registration and is no longer registered for GST, it will not be making a taxable supply when it sells the vacant land lots.