Edited version of your written advice

Authorisation Number: 1013081170360

Date of advice: 30 August 2016

Ruling

Subject: GST and real property sale

Section 7-1 of the A New Tax System (Goods and Services Act) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Supply is defined in subsection 9-10(1) of the GST Act to mean 'any form of supply whatsoever'. Subsection 9-10(2) of the GST Act provides a list of things considered to be a supply including a grant, assignment or surrender of real property and a creation, grant, transfer, assignment or surrender of any right.

Real property is defined in section 195-1 of the GST Act to include any interest in or right over land.

Therefore, the sale of the vacant land and the right to demolish a house falls within the meaning of supply as defined in subsection 9-10(2) of the GST Act and will be subject to GST if it is a taxable supply.

Section 9-5 of the GST Act defines taxable supplies and states:

You make a taxable supply if:

a) you make the supply for consideration; and

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

c) the supply is connected with Australia; 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.

Therefore, the supply of the vacant land and the right to demolish a house will be a taxable supply if all of the requirements above are met and it is not a GST-free or input taxed supply.

Whether the rulee's supply of the vacant land and the right to demolish a house is a taxable supply would depend on all the conditions for a taxable supply, as set out in paragraphs 9-5(a) to 9-5(d) of the GST Act, being satisfied.

The supply of the vacant land by the rulee is made for consideration and is connected with Australia, therefore paragraphs 9-5(a) and (c) of the GST Act are satisfied. We therefore need to consider if that supply of the vacant land and the right to demolish a home is made in the course of furtherance of an enterprise that the rulee carries on and if the rulee is registered or required to be registered.

Section 9-20 of the GST Act explains the definition of “Enterprise” and states:

9-20 Enterprise

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease or licence or other grant of an interest in the property; or

…

Miscellaneous Taxation Ruling MT 2006/1 contains the ATO's view on what constitutes an enterprise for the purposes of eligibility for registration for an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2000/1 to GST.

Paragraphs 170 to 179 of MT 2006/1 discuss the concept of activities or a series of activities done 'in the form of a business'. This must be 'reasonably intended to be profit making'. The rulee's activities in relation to the sale of the vacant land and the rights to demolish a house do not constitute activities done in the form of business. The facts describing the transaction do not suggest that there was any level of entrepreneurial sophistication in pursuing the sale. In this respect, paragraph 178 of MT 2006/1 sets out some of the factors to determine if an activity or series of activities are indicating a business:

● a significant commercial activity;

● a purpose and intention of the taxpayer to engage in commercial activity;

● an intention to make a profit from the activity;

● the activity is or will be profitable;

● the recurrent or regular nature of the activity;

● the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

● activity is systematic, organised and carried on in a businesslike manner and records are kept;

● the activities are of a reasonable size and scale;

● a business plan exists;

● commercial sales of product; and

● the entity has relevant knowledge or skill.

The rulee acquired the original property as a personal residence and had ownership of the original property for a long period of time and the rulee's income source is salary and wages. We therefore consider paragraph 178 of MT 2006/1 does not apply to the sale because there is no evidence to indicate that the rulee is in the business of buying and selling land for profit.

Paragraphs 233 to 261 of MT 2006/1 discuss the ATO's view in relation to “in the form of an adventure or concern in the nature of trade”. The rulee's activities in relation to the sale of the vacant land and the rights to demolish a house do not constitute activities conducted in the form of an adventure or concern in the nature of trade despite this being a significant commercial venture as a one off sale. Again this factor is equivalent to an 'isolated business venture'. However, as stated above this transaction does not have the characteristics of being businesslike.

Paragraph 265 of MT 2006/1 outlines some factors which could determine whether or not the activity is done in the form of a business or in the form of an adventure or concern in the nature of trade. They are:

● purpose for which the land is held

● whether additional land is acquired

● land is brought into account as a business asset

● a coherent plan for the subdivision of the land or carrying of a business or trade

● whether there is a business organisation

● financed of the acquisition or subdivision through business loans

● interest on loans claimed as a business expense

● development of the land, and

● buildings or structures erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

The only structures put on the land were to allow both the rulee and the other joint owner to live in houses separate from their parents.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions of sales of real property. Paragraph 263 of MT 2006/1 provides that the issue to be decided is whether these activities are of a revenue nature (that is, have the characteristics of a business deal) and therefore an enterprise. Where they are not of a revenue nature, then the transaction could be a mere realisation of a capital asset. The activities which are a mere realisation of a capital/investment asset are not a business or an adventure or concern in the nature of trade and therefore no enterprise is being carried out.

Paragraphs 247 to 261 of MT 2006/1 outline some factors to determine whether the sale of an asset could be considered as a mere realisation of a capital or investment asset. The factors are:

● length of period of ownership

● frequency or number of similar transactions

● supplementary work on or in connection with the property

● circumstances that were responsible for the realisation, and

● motive

The mere disposal of an investment or private assets on its own does not amount to an adventure or concern in the nature of trade. These assets are purchased with the intention to hold for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person.

In the rulee's case, based on the factors listed in paragraph 265 of MT 2006/1 the sale of the vacant land and the rights to demolish a house does not amount to an adventure or concern in the nature of trade, as the rulee:

● purchased the original land in 19XX as a place to live and have held the original land for a reasonable period of time

● rented their house for a short period, and

● have only used the original land for private and domestic purposes.

The rulee purchased the original land with the intent of moving there to live. Since moving there in 19XX, the rulee moved some transportable houses there and lived in one of them for some years. There has been no further activity on the original land since it was acquired. As such the supply of the vacant land will not constitute an enterprise.

Therefore the sale of the vacant land will be a mere realisation of capital asset that is private and domestic in nature.

As the rulee is not carrying on an enterprise for ABN purposes and their income source is salary and wages, the rulee cannot register for GST. The sale of the vacant land and a right to demolish a house is not in the course or furtherance of an enterprise and paragraph 9-5(b) of the GST Act is not met. As the rulee is not registered for GST and not required to be registered for GST, the sale is not a taxable supply under section 9-5 of the GST Act and no GST is payable.

Question 1

Is the sale by the rulee as a joint owner of the vacant land together with the right to demolish a house on land described as Area 1 subject to GST?

Answer

No. The sale of the vacant land and the right to demolish a house is not subject to GST.

Relevant facts and circumstances

● The rulee is seeking a private ruling to cover the periods from 1/7/20YY to 30/6/20ZZ.

● In 19XX the rulee and their sibling with their parent purchased land.

● The layout of the original land and the buildings is shown in the figure submitted.

● The original land was held as tenants in common between them in equal X shares.

● The rulee had no aspirations for the land when they bought it other than living with family on the property.

● The original land is represented in figure one as the amalgam of areas 1 to 5

● At the purchase date the original land had one brick dwelling (area 3 in figure one submitted) where they all lived with their parent.

● In 19AA, two transportable houses were affixed to the land for the rulee (area 1) and their sibling (area 2) to live in.

● The parent died in the eighties and their share of the original land passed equally via inheritance to their two children. They each hold X% shares in the original land and the title was changed accordingly.

● Their parent lived in the brick dwelling until their death.

● The rulee moved out of their house in or about 20BB and it remained vacant until it was rented out on or about a year later.

● The rulee's house ceased to be rented out on in 20CC. When the property sale settled, the property was vacant for approximately X months.

● In 19DD, a government entity recognised the need to acquire additional land. Several attempts were made to acquire this land, but it was not until 20EE/20FF that all parties agreed to enter negotiations.

● The land acquired by the government entity was vacant farming land and is shown as area 4 in the figure one submitted.

● Area 1 is the rulee's house. The land was not included in the sale but the government entity bought the right to demolish the house built on the land.

● In 20FF the government entity made an offer for the house on area 1 and the land comprising area 4. The rulee's house was valued per hectare.

● The offer was conditionally accepted in 20GG.

● The contract was entered into in 20CC.

● The contract settled in 20ZZ.

● The government entity bore all costs.

● The contract had an interest on delay clause.

● The original land (areas 1 to 5) was subdivided.

● Areas 2, 3 and 5 represent the land that was subsequently transferred solely to the sibling post sale. This land is described as the residual land.

● An ancillary conveyance subject to the sale to the Council proceeding was agreed whereby the remaining land consisting of areas 2, 3 and 5 would be transferred to the sibling and all of the money received from the sale to the Council would be transferred to the rulee. The rulee transferred their interest to their sibling in return for the monetary proceeds of the sale.

● The transfer was lodged and stamp duty was paid.

● The sibling still resides on the property.

● The contract of sale to government entity provides that the sale of the land was a taxable supply, and they paid an amount of Goods and Services Tax (GST) at settlement.

● Neither the rulee nor their sibling gave a tax invoice for the sale, nor were they asked for one by the government entity.

● The rulee is not registered for GST.

● One part of the land was used by the sibling to run a hobby farm but the only income produced by the land was the rental of the rulee's home. The rulee advised that their sibling used the land to grow grain on an experimental or hobby basis for two seasons but this occurred after the rulee ceased living on the land.

Relevant legislative provisions

A New Tax System (Goods and Services Act) Act 1999 sections 7-1; 9-5; 9-20.