Edited version of your written advice

Authorisation Number: 1013104130060

Date of advice: 14 October 2016

Subject: GST and registration requirements

Question 1

Are you required to be registered for GST?

Answer

No, you are not required to be registered for GST.

Question 2

If you are required to be registered for GST, will the sale of your property constitute a taxable supply?

Answer

Not applicable as you are not required to be registered for GST.

Question 3

If the sales of the lots are deemed to be taxable at what point will the land value be determined for use under the margin scheme?

Answer

As your sale of the land is not considered to be taxable the use of the margin scheme is not available to the sale of subdivided lots of land.

Relevant facts and circumstances

You are not registered for GST.

You own a parcel of vacant land which you purchased prior to the introduction of the GST.

You used the property as a hobby farm and for residential purposes.

The property is vacant except for some minor outbuildings.

The property was never hired out or used for primary production.

You have never had a business plan in relation to the use of the property.

A developer approached an associate of yours and proposed to do everything in relation to subdividing the land for sale.

You will not actively participate in the development process.

The developer will make all decisions in relation to marketing of the individual lots.

You will receive an agreed minimum amount from the proceeds of each lot sale plus a percentage of surplus proceeds which represents your capital value of the lot sold.

You remain the registered proprietors of the land during the development.

The agreement states that no partnership or joint venture is formed by the parties by way of the agreement.

You are the beneficial owner of the land and are not involved with the provision of the project services and have entered into this agreement to realise the value of your land

You are not in the business of land acquisition or resale/development.

The developer has no beneficial interest in the land.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sections 9-20 and 23-5

Reasons for decision

Question1

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if:

● you are carrying on an enterprise; and

● your GST turnover meets the registration turnover threshold (currently $75,000 and $150,000 for non-profit bodies).

Both conditions above need to be present for an entity to be required to be registered for GST.

Carrying on an enterprise

Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition 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.

The definition of 'business' in section 195-1 of the GST Act is the same as that in section 995-1 of the Income Tax Assessment Act 1997. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. In order to be conducted 'in the form of a business' the activities would need to have the essential appearance or characteristics of a business.

In this case, you have held the land for many years. The initial property has been held for private purposes for an extended period of time and has been used in your family hobby farming activities and for residential purposes. The land is vacant except for some minor outbuildings.

Therefore, based on the facts provided, after weighing all the relevant indicators, we are satisfied that in this instance your activities would not amount to a 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 even where there may be a '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.

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.

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 factors are present it may be an indication that an adventure or concern in the nature of trade is being carried on.

In this case, you acquired the property prior to the introduction of the GST to be used for residential purposes and hobby farming and you are not in the business of land acquisition or resale/development. Consequently you did not acquire the property with the intention of resell at a profit.

The initial property has been held for private purposes for an extended period of time and has been used in your family hobby farming activities and has never been used for business purposes or primary production purposes.

An associate of yours (Owner's Representative) was approached by the developer that proposed to develop the property as a staged sub-division with the expectation to create vacant residential and commercial lots.

Further, the developer undertook to be responsible of all 'Project Services' including financing.

You will not actively participate in the development process and will receive an agreed minimum amount from the proceeds of each lot sale plus a percentage of surplus proceeds which represents your capital value of the lot sold.

Therefore, you are doing the minimal activity required to achieve your objective of subdividing and selling the subdivided lots of land.

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 subdivision and sale may not be an adventure or concern in the nature of trade.

We refer to paragraphs 270 and 244 of MT 2006/1 which state:

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.

244. 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.

Having applied the principles in MT 2006/1 to the present circumstances, we conclude that the landowner's subdivision and development of the property for sale, does not amount to an enterprise for GST purposes. The development of the property and the subsequent sale of the subdivided land as vacant lots are regarded as the mere realisation of a capital asset.

Consequently, you are not required to register for GST in relation to the subdivision of this particular property.

Question 2

Not applicable as you are not required to be registered for GST.

Question 3

Section 75-5 of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes if the supplier and the recipient have agreed in writing that the margin scheme is to apply. The sale of the subdivided lots of land will not satisfy the requirements under section 75-5 of the GST Act.