Edited version of your written advice

Authorisation Number: 1013016765435

Date of advice: 18 May 2016

Ruling

Subject: Goods and Services Tax - Property subdivision

Question 1

Will the sale of townhouses you construct and subdivide on your existing property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the sale of the townhouses you construct and subdivide on your existing property will be a taxable supply under section 9-5 of the GST Act.

Question 2

Are you required to be registered for GST under section 23-5 of the GST Act?

Answer

Yes, you are required to register for GST under section 23-5 of the GST Act.

Relevant facts and circumstances

You and your partner are joint owners of a property which has at all times since its date of acquisition in the 1980's been your main residence. You have not, at any time, used it to derive assessable income.

You are nearing retirement age, and are seeking to make plans for an appropriate retirement lifestyle. In its existing state, your current property is not consistent with your lifestyle plans. This is because:

• The land area of the Property is substantial (over 1,000m2). This is larger than you require (or want), and will require a large amount of maintenance and upkeep on an ongoing and recurring basis.

• The existing dwelling situated on the property is ageing. You wish to have a new residence to occupy you in your retirement.

• The nature of housing in the surrounding area has changed since you acquired the property. The prevalence of townhouses (or similar) has become common and well accepted in the neighbourhood.

Given the unsuitability of the property in its existing form, you are considering the following transactions in relation to the property:

• The existing dwelling will be demolished, during which you will live in rented accommodation.

• A number of townhouses will be constructed on the property. You will be required to borrow money from a bank in order to fund the construction of the townhouses.

• When completed, the townhouses will be subdivided such that each townhouse can be separately owned.

• As soon as practicable after construction is completed, you will commence occupying one of the townhouses as your main residence.

• A number of the townhouses will be sold to clear debts associated with the construction and development.

• You will retain ownership over two townhouses - one to keep as your main residence and another to lease it to unrelated third parties as an ongoing rental income source for you.

• You will identify the particular townhouses that will be retained (i.e. main residence and rental property) prior to proceeding with the development.

In order to proceed with the above transactions, you will need to obtain development and subdivision approval from the relevant Government authorities. You will continue to reside in the existing dwelling until approval consent is obtained. After receiving approval, you will vacate the dwelling and proceed with demolition and construction.

You are not currently registered for goods and services tax (GST).

For the remainder of this ruling request, the different townhouses will be referred to using the following terms:

• Residence Townhouse - the townhouse that will become your main residence after construction is completed.

• Rental Townhouse - the townhouse that you will retain and use to derive rental income.

• Sale Townhouses - the townhouses that you will sell in order to clear the debt associated with the construction.

You have assigned the services of a professional to design and manage the project. You will borrow the funds to finance the project and have an agreed fee structure in place for the professional to manage the scope of services, including design of the buildings (interior/exterior) and management of the construction project including administration and tender for selection of the builder.

The professional will also manage the completion and submission of the development approval including, but not limited to, town planning applications, demolition plan, landscape plans, detailed and dimensional plans. They will prepare the documentation and attend meetings to facilitate the process.

Your involvement will be limited to the design and styling of the townhouses. You will continue to provide input to the professional in relation to layout and design on the premises, as well as budgetary constraints.

To date you have had regular meetings with the professional as plans progress. You wish the townhouses to reflect your chosen style whilst still be attractive to prospective buyers and renters.

You intend borrowing 100% of the funds needed to fund the development.

You have consulted with a real estate agent during the design phase of your project that provided advice regarding the most appropriate way to market the townhouses for sale when completed. You have advised this same real estate agent will likely be engaged to sell the two townhouses you will sell.

You do not intend on undertaking any similar developments in the future.

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 Paragraph 9-5(a)

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

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

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(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 Section 23-5

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

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

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

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

Reasons for decision

Detailed in these Reasons for decision, 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 the ATO website ato.gov.au

You must pay the GST payable on any taxable supply that you make.

Section 9-5 states that you make a taxable supply if:

(a) you make the supply for *consideration; and

(a) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(b) the supply is *connected with the indirect tax zone, and

(c) you are *registered for GST, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is GST-free or input taxed.

You currently reside in your existing dwelling on a large suburban block that you intend to demolish and construct four townhouse residences which will be subdivided so that each townhouse can be separately owned. You will retain two of the townhouses, one that will become your new primary residence and another which you will lease for rental income (Rental Townhouse). The remaining townhouses, you will sell (Sale Townhouses).

Sale Townhouses

Upon the sale of the Sale Townhouses, you will make a supply in Australia for consideration, hence satisfying paragraphs 9-5(a) and (c). Further, the GST-free and input tax provisions will not apply in these circumstances.

However, it is necessary to determine if the supplies will be made in the course or furtherance of an enterprise that you are carrying on and if so, if you are required to be registered for GST.

Where it is found that the sale is not in the course of an enterprise, you will not be required to register for GST and the sale of the two Sale Townhouses will not be a taxable supply.

Enterprise

Subsection 9-20(1) provides that an enterprise 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;

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of carrying on an enterprise.

Goods and Services Tax Determination 2006/6 Goods and Services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GSTD 2006/6) provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraphs 262 and 263 of MT 2006/1 state:

Isolated transactions and sales of real property

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 and undertaking or scheme) as opposed to the mere realisation of a capital asset…

Your proposed subdivision and sale of the property will be a 'one-off' or isolated real property transaction.

Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade' and state:

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… 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.

…

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience…

In looking at the above factors in consideration of your circumstances, we find the following are determinative:

• You have changed the purpose for which the land is held from a single residential property from which you reside to a number of subdivided lots of land for which buildings (townhouse residences) will be constructed.

• You have a coherent plan for the construction of the townhouses/subdivision but as you have not undertaken a project of this type before you have engaged the services of an professional to design and manage the project on your behalf, including design of the buildings (interior/exterior) and management of the construction project including administration and tender for selection of the builder.

The professional will also manage the completion and submission of the development approval including, but not limited to, detailed and dimensional plans, town planning applications, demolition plan, landscape plans etc. They will prepare the documentation and attend meetings to facilitate the process.

• You will be involved in the design and styling of the townhouses.

• You will borrow funds from a bank to finance the construction of the townhouses and subsequent subdivision and have an agreed fee structure in place with the professional for the supply of their services.

• You have consulted with a real estate agent during the design phase of your project, who also provided advice regarding the most appropriate way to market the townhouses for sale when completed. You have advised this same real estate agent will likely be engaged to sell the two townhouses you will sell.

We consider that these factors indicate that the construction and subdivision of the townhouses for sale is in the form of an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Your activities to construct townhouses and subdivide go further than a mere realisation of a private asset. By incurring expenses to subdivide and obtain council approval for building plans including the proposed scope of services detailed by the professional you have engaged, the purpose goes further than a mere disposal. That is, you wish to obtain enough revenue in which to pay off any debts incurred in undertaking the project whilst also retaining a residence for yourself and one for income producing means.

Therefore, it is considered your activities amount to carrying on a property development enterprise. This view is supported by example 31 at paragraphs 284 through 287 of MT 2006/1 which provides for subdivisions of land that are enterprises.

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

• their house to be demolished;

• the land to be subdivided;

• a builder to be engaged;

• two houses to be built;

• water meters, telephone and electricity to be supplied to the new houses; and

• a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

As such, when the townhouses are sold, they will be sold in the course of a property development enterprise that you carry on under paragraph 9-5(b).

Furthermore, paragraph 47 of Goods and Services Tax Ruling GSTR 2001/7 Goods and Services Tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) provides the disposal of a single asset or the completion of that isolated transaction is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Accordingly, the sale of two Sale Townhouses you construct at the property will be a taxable supply under section 9-5 of GST Act.

GST registration

Under section 23-5, you are required to be registered if:

a) you are *carrying on an *enterprise, and

b) your *GST turnover meets the *registration turnover threshold (currently $75,000).

Under sections 188-15 and 188-20, GST turnover refers both to 'current annual turnover' and 'projected turnover'. Current annual turnover is turnover for a particular month and the preceding 11 months and projected turnover is turnover for a particular month and the next 11 months. In both cases, the calculation is based on the GST exclusive value of supplies made.

Section 188-10 provides guidance on how to determine when an annual turnover meets or exceeds the registration threshold.

Under section 188-25, when calculating your projected annual turnover, you do not include any supplies made or likely to be made by transfer of ownership of capital assets, or as a result of ceasing to carry on an enterprise or substantially and permanently reducing the size and scale of an enterprise.

You contend the property is a capital asset and as such proceeds from the two Sale Townhouses should not be included in your projected turnover.

GSTR 2001/7 discusses the meaning of 'capital asset' at paragraphs 31 to 36.

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Whilst the property may have been purchased as, and treated for many years as a capital asset, for the purposes of section 188-25, we must determine the character of the asset at the time of supply.

In your case, the character of the asset will change. That is upon the construction of the residences the character of your original asset will change from an investment asset to a trading asset. At the time of the supply of the Sale Townhouses, we consider their supply to be of a revenue nature.

Consequently, these sales of your Sale Townhouses are not capital assets for the purposes of section 188-25.

In summary:

• It is considered you are carrying on a property development enterprise.

• The sale of the two Sale Townhouses is disposal of trading stock and not a capital asset, meaning the sale price is included when calculating the current and projected GST annual turnover.

• As the sale price of each townhouse is presumed to be above $75,000, the GST annual turnover would be above the GST registration threshold.

Accordingly, you will be required to be registered for GST under section 23-5.