Edited version of your written advice

Authorisation Number: 1013034292360

Date of advice: 25 July 2016

Ruling

Subject: GST and the subdivision of land

Question 1

Is the sale of subdivided lots of land created from the Property by Entity A and Entity B to unrelated third parties subject to GST?

Answer

No.

Question 2

Is the sale of the Property from Entity A and Entity B to Entity C subject to GST?

Answer

No.

Question 3

Is the sale of subdivided lots of land created from the Property by Entity C to unrelated third parties subject to GST?

Answer

Yes.

Relevant facts and circumstances

Entity A and Entity B (You) are not registered for GST.

On DDMMYYYY you entered into a contract to purchase the Property. Settlement occurred on DDMMYYYY.

The Property was X ha in size.

It was your intention to build your main residence on the Property in the future.

From DDMMYYYY, costs were incurred for building plans, council fees, earthworks, headworks and the construction of a garage.

On DDMMYYYY you sold your main residence to fund the building of a new main residence on the Property.

On DDMMYYYY construction on the Property was put on hold due to a medical condition for Entity B.

You commissioned a feasibility investigation into utilising the unused land on the Property not required for the proposed main residence.

It was decided the Property would be subdivided into multiple lots.

A development application has been lodged to subdivide the Property into X lots over X stages, with each lot being approximately X in size.

The requirements of the Development Approval sought from the Council include:

• an internal road through the centre of the site

• stormwater drainage

• connection to water, electricity and telephone.

Development Approval was granted on DDMMYYYY.

The level of development on the land will be the minimum necessary to secure Council approval for the subdivision.

In order to keep debt funding to a minimum, the subdivision will be completed in stages and the sale of subdivided blocks will be undertaken over a number of years.

You will borrow money to fund the subdivision. You will not claim any interest on money borrowed as a business expense.

No buildings will be constructed on the Property.

You have not been involved in the buying and selling of land in the past and do not have any intention to undertake any similar activities in the future.

You will engage the services of a real estate agent to sell the subdivided lots.

You will sell X lots and retain ownership of a one lot on which you will build a main residence.

To reduce potential risk associated with the subdivision, the entire Property may be sold at market value to Entity C. Entity C would then undertake the subdivision. Entity C is not registered for GST.

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 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 Division 188.

Reasons for decision

In this reasoning:

• 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

Question 1

Is the sale of subdivided lots of land created from the Property by Entity A and Entity B to unrelated third parties subject to GST?

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

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

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (Australia), and

(d) 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.

If you sell the subdivided vacant lots you will make a supply of land in Australia for consideration, satisfying paragraphs 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in your circumstances.

The primary issue here is whether the supply of the subdivided lots is made in the course or furtherance of an enterprise you carry on.

Enterprise

Subsection 9-20(1) provides that an enterprise relevantly 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.

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

We consider your activities in the subdivision and sale of the subdivided lots will be a 'one-off' or isolated real property transaction, and we need to consider whether the activities are the carrying on of a business or an adventure or concern in the nature of trade.

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 a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience…

Your original purpose for the Property was to build a new main residence. You have decided to subdivide the Property into X lots and retain one lot to build your main residence. In doing so:

• You have a coherent plan for the subdivision including engaging experts to assist with the planning and undertaking of the subdivision and sale of the subdivided lots.

• You will borrow funds to finance the subdivision. However, you will not claim the interest as a business expense.

• You will only complete the minimum requirements requested by the Council in the subdivision approval and will not construct any buildings on the subdivided lots for sale.

We have taken into account the above factors and consider that the subdivision will not amount to an enterprise in the form of a business or in the form of an adventure or concern in the nature of trade. The activity is the mere realisation of a capital asset.

Therefore, you do not satisfy paragraph 9-5(b) as you are not carrying on an enterprise.

As we have concluded that your activities of subdividing and selling the vacant lots of land do not amount to an enterprise you do not satisfy the requirements of a taxable supply under section 9-5. The supply of the subdivided vacant lots of land will not be subject to GST.

Question 2

Is the sale of the Property from Entity A and Entity B to Entity C subject to GST?

You may decide not to complete the subdivision and sell the entire Property to Entity C (an associate) at market value.

The primary issue here is whether your activities are in the course or furtherance of an enterprise that you carry on.

Enterprise

You have conducted a series of activities that need to be considered in determining whether they amount to being 'in the course or furtherance of an enterprise that you carry on' including:

• the purchase of the original Property

• the construction of the garage and other site works

• commissioning of a feasibility study to realise the value of the excess land

• lodgment of a development application for subdivision.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Your activities do not amount to a business engaged in on a regular basis. Therefore we will consider whether you were carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 states 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

In this case, we consider the series of activities you conducted above are in connection to the proposed establishment/construction of a private residence (a private asset) and do not amount to the carrying on of an enterprise.

As you are not carrying on an enterprise your sale of the Property to Entity C will not satisfy the requirements of a taxable supply under section 9-5 and will not be subject to GST.

Question 3

Is the sale of subdivided lots of land created from the Property by Entity C to unrelated third parties subject to GST?

When Entity C sells the subdivided vacant lots it will make a supply of land in Australia for consideration, satisfying paragraphs 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in its circumstances.

The primary issue here is whether the supply of the subdivided lots is made in the course or furtherance of an enterprise Entity C is carrying on and if it is required to be registered for GST.

Enterprise

Paragraph 270 of MT 2006/1 considers the meaning of carrying on an enterprise in the context of land purchased with the intention of resale and states:

Land bought with the intention of resale

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

To minimise your risk in the development the Property will be transferred to Entity C at market value.

As outlined in Paragraph 270 of MT 2006/1 we consider Entity C is carrying on an enterprise as it has purchased the Property for the purpose of subdividing the land for sale to third parties at a profit.

Therefore, Entity C satisfies paragraph 9-5(b) as it is carrying on an enterprise.

Registration

Section 23-5 provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise, and

(b) your GST turnover meets the registration turnover threshold.

The registration turnover threshold is currently $75,000.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

(b) your projected GST turnover is at or above the turnover threshold.

Section 188-20 provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than input taxed supplies.

Of relevance here is the projected GST turnover of Entity C. We have already established that Entity C is carrying on an enterprise. In undertaking the sale of the subdivided blocks Entity C will be required to be registered when its projected GST turnover is at or above $75 000, satisfying paragraph 9-5(d).

If Entity C proceeds with the sale of subdivided land as outlined above, the sales will satisfy all the requirements of a taxable supply under section 9-5 and will be subject to GST.