Edited version of your written advice

Authorisation Number: 1013117762101

Date of advice: 1 November 2016

Ruling

Subject: Sale of property

Question 1

Are A and B liable to account for Goods and Services Tax (GST) in respect of the sale for removal of a house situated at or the subsequent sales of the two lots of land on which the house was situated?

Answer

No.

Relevant facts and circumstances

A and B purchased a property at in 20XX. Following that purchase, A and B and their children occupied the house on the property as their family home. The property has always comprised two lots which, until recently, were included in a single Certificate of Title.

A and B intend to sell for removal the house situated on the property and then sell the each lot separately. To facilitate the separate sale of each lot A and B recently obtained a separate Certificate of Title for each lot.

A and B expect to enter into an agreement for the sale for removal of the house in late 20XY and expect the house to be removed in late 20XY or early 20YY. A and B expect to engage a real estate agent to market and sell the two lots in early 20YY.

A stated that A and B had decided sell the property in order to be able to purchase another home. A also confirmed that no additional land had been acquired to be added to the original parcel of land in order to sell the two lots.

A further confirmed that the property had not been brought to account as a business asset and that any coherent plan for the subdivision of the property merely comprised obtaining a separate Certificate of Title for each of the two lots, selling the house for removal and then selling the two lots.

A also stated that those activities did not involve a business organisation (e.g. a manager, office and letterhead) and that no funds had been borrowed to fund the costs of obtaining the two Certificates of Title or the intended sale of the two lots. As no funds had been borrowed, no interest on funds borrowed had been claimed as a business expense. A also confirmed that no development of the property had been required in order to obtain a separate Certificate of Title for each of the two lots. A stated that the property had been acquired with a house on it and no further buildings had been erected on the property.

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.

Reasons for decision

Summary

As the sale for removal of the house and the sale of the two lots will not be made in the course or furtherance of an enterprise carried on by A and B the requirements of paragraphs (b) and (d) of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) will not be met, those sales will not be taxable supplies and A and B will not be liable to account for GST in respect of those sales

Detailed reasoning

Section 7-1 of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act provides that 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.

The sale of the house for removal and the sales of the two lots by A and B will be made for consideration.

Those sales will also be connected with the indirect tax zone. 'Indirect tax zone' essentially means Australia, excluding certain External Territories. The GST Act deems a supply of real property (e.g. the two lots) to be connected with the indirect tax zone if the real property is in the indirect tax zone (subsection 9-25(4) of the GST Act). The supply of a house for removal does not fall within the definition of 'real property' in section 195-1 of the GST Act (i.e. includes 'any interest in or right over land…') and will be either a supply of goods (which is connected with the indirect tax zone if the goods are delivered or made available in the indirect tax zone (subsection 9-25(1) of the GST Act) or a supply of anything other than goods or real property (which is connected with the indirect tax zone if the thing is done in the indirect tax zone (paragraph 9-25(5)(a) of the GST Act)).

Consequently paragraphs 9-5(a) and (c) of the GST Act will be satisfied in relation to both the sale of the house for removal and the sales of the two lots.

Paragraph 9-5(c) requires that the sales of the house for removal and of the two lots are made in the course or furtherance of an enterprise carried on by A and B. Paragraph 9-5(d) requires that A and B are registered for GST or required to be so registered. Section 23-5 of the GST Act provides that an entity is required to register for GST if that entity is carrying on an enterprise and that entity's turnover meets the 'registration turnover threshold'. Consequently the issue of whether A and B are carrying on an enterprise is relevant to both paragraphs (b) and (d) of section 9-5 of the GST Act.

Section 9-20 of the GST Act states that 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…

Section 195-1 of the GST Act defines 'business' as:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 234 of Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) states that an 'adventure or concern in the nature of trade' may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. MT 2006/1 discusses the meaning of 'entity carrying on an enterprise' for the purposes of entitlement to an Australian Business Number. However paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 states that the principles stated in MT2006/1 apply equally to the term 'enterprise' as it appears in the GST Act.

Activity or series of activities:

The 'enterprise' definition refers to an 'activity, or a series of activities, done…'. Paragraph 153 of MT 2006/1 states that an activity is essentially an act or series of acts that an entity does. Paragraph 154 of MT 2006/1 states that it is necessary to identify one activity or a series of activities that amount to an enterprise. Example 15 in MT 2006/1 discusses the activities associated with the sale of real property:

Example 15 - activities associated with the sale of real property

161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise ?

162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included:

  assessing the economic viability of the project ;

  purchasing the land ;

  engaging an architect ;

  constructing a block of units on the land ;

  engaging a real estate agent and auctioneer ; and

  arranging for the sale of the units at auction.

163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise.

Example 15 indicates that where an entity engages a third party to perform a task (e.g. engaging an architect or a real estate agent) that entity is nevertheless carrying out an activity. We therefore consider that in the present case, where A and B intend to engage a real estate agent to market and sell the two lots, A and B are nevertheless taken to carry out those activities for the purpose of determining whether they are carrying on an enterprise.

Isolated real property transactions:

Paragraphs 262 to 302 of MT 2006/1 deal with whether an entity is either carrying on an enterprise (i.e. in the form of a business or in the form of an adventure or concern in the nature of trade) or merely realising a capital asset where there is a 'one-off' real property transaction. Paragraph 264 of MT 2006/1 provides that two Federal Court decisions, Statham and Another v FCT 89 ATC 4070 (Statham) and Casimaty v FCT 97 ATC 5135 Casimaty) give some guidance on when subdivision and sale of land amounts to a business or a profit-making undertaking or scheme. Paragraph 265 of MT 2006/1 states that if several of the following factors are present in relation to an isolated property transaction it may be an indication that a business or an adventure or concern in the nature of trade is being carried on:

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, 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.

Paragraph 266 of MT 2006/1 provides that determining whether activities related to isolated transactions are an enterprise or the mere realisation of a capital asset requires consideration of the factors outlined above plus any other relevant factors, that no single factor is determinative and that it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In relation to the first factor, in Casimaty Ryan J held that there had been no change in the purpose for which the land was held where part of a 988 acre farming property (Acton View) had been subdivided and sold in eight subdivisions over 18 years and where the works undertaken by the taxpayer (road works, water works, sewerage works and fencing) were limited to those required in order to obtain approvals of the subdivisions (p. 5151):

Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there is nothing to suggest a change in the purpose or object with which 'Acton View' was held.

In this respect, the present case is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change in purpose. In Whitfords Beach those circumstances were the passing of control of the landholding company from the owners of the fishing shacks to the three development companies. In Official Receiver v FCT the critical circumstance was that control of the land passed to the Official Receiver who sought the instructions of the creditors as to whether he should dispose of the land in its undeveloped state or undertake its extensive development to increase returns to creditors. In the Melbourne Trust case one critical consideration was the formation of the realization company as a distinct entity with shareholders unrelated to the failed banks or their creditors.

Ryan J's judgment indicates that whether there has been a change of purpose for which land is held is not a subjective test of the taxpayer's intention but an objective test based on the circumstances surrounding the land and the taxpayer. Applying that objective test to the present case, we consider that there was no change of purpose until A and B decided to move to another home which made it necessary to sell the property in order to be able to purchase another home.

A confirmed that the second factor in paragraph 265 of MT 2006/1 (i.e. additional land is acquired to be added to the original parcel of land) does not apply in the present case.

A also confirmed that the property had not been brought to account as a business asset.

A confirmed that there was a coherent plan for the subdivision of the property but it merely comprised obtaining a separate Certificate of Title for each of the two lots, selling the house for removal and then selling the two lots.

A stated that there was not a business organisation (e.g. a manager, office and letterhead).

Although funds were borrowed to acquire the property, the property was acquired for the purpose of occupation as the family home. A stated that no funds had been borrowed to fund obtaining the two Certificates of Title or the intended sale of the two lots.

A confirmed that, as no funds had been borrowed, no interest on funds borrowed had been claimed as a business expense.

The eighth factor in paragraph 265 of MT 2006/1 (is there a level of development of the land beyond that necessary to obtain council approval for the subdivision) reflects the facts in Casimaty where one of the factors taken into account in deciding that the taxpayer was not carrying on a business or profit-making undertaking or scheme was that the taxpayer had only undertaken the development required in order to obtain council approvals of the eight subdivisions carried out by the taxpayer. A confirmed that no development of the property had been required in order to obtain a separate Certificate of Title for each of the two lots and that no development would be required in order to sell the two lots.

A stated that the property had been acquired with a house on it and no further buildings had been erected on the property.

MT 2006/1 sets out examples of subdivisions that are enterprises (paragraphs 271 to 287) and examples of subdivisions that are not enterprises (paragraphs 288 to 302). We consider that A and B's circumstances are distinguishable from Example 31 in paragraphs 284 to 287 of MT 2006/1 (an example of a subdivision which is an enterprise) which involves demolition of an existing dwelling, subdivision of land and the construction and sale of two dwellings:

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;

  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.

In our view A and B's circumstances are closer to Example 33 in paragraphs 291 to 293 of MT 2006/1 (an example of a subdivision which does not amount to carrying on an enterprise) where the only activities undertaken are obtaining the necessary approval and selling the land:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Registration for GST:

As noted above, paragraph 9-5(d) of the GST Act provides that an entity makes a taxable supply if the entity is registered for GST or required to be so registered.

We have confirmed that A and B are not registered for GST.

As we consider that they are not carrying on an enterprise, paragraph 23-5(a) of the GST Act does not apply and A and B are not required to be registered for GST.

Conclusion:

As the sale for removal of the house and the sale of the two lots will not be made in the course or furtherance of an enterprise carried on by A and B the requirements of paragraphs (b) and (d) of section 9-5 of the GST Act will not be met, those sales will not be taxable supplies and A and B will not be liable to account for GST in respect of those sales.