Edited version of your written advice

Authorisation Number: 1013139498499

Date of advice: 16 December 2016

Ruling

Subject: GST and subdivision and sale of property

Question

Are you making a taxable supply when you subdivide property at a specified located?

Answer

No, your activities are not in the course or furtherance of an enterprise that you carry on and as such will not satisfy the definition of a taxable supply pursuant to section 9-5 of A New Tax System (Goods and Services Tax) Act 1999.

Relevant facts and circumstances

You are not registered for GST.

You purchased property at a specified location (the Property) in 201X.

The Property was purchased with an existing tenancy in place.

At the time of purchasing the Property, your intention was to occupy the Property as your principal place of residence when the existing lease expired.

In 201X the existing lease expired and you moved into the Property and occupied it as your principal place of residence.

You occupied the Property as your principal place of residence for the period between 201X and 201X.

The Property has become difficult to maintain and you are contemplating subdividing the Property in half (approximately), constructing a new residence on one lot which you will use as your principal place of residence and sell the other vacant lot.

The existing dwelling is located in the centre of the block and due to fire restrictions and council requirements, subdivision is not possible unless the existing dwelling is demolished.

No works have been carried out on the Property other than minor maintenance and bushfire prevention.

No works beyond those prescribed by the relevant Council necessary for sub development approval will be undertaken on the Property prior to sale.

Additional borrowings are not required to fund the process.

You will not appoint a project manager to carry out the process.

You will engage subcontractors to carry out the demolition of the existing dwelling.

You will engage surveyors to survey the new blocks and a solicitor to register the new titles.

You will sell the vacant block on domain.com.au without the use of an agent.

You have neither experience nor knowledge of property development.

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

Reasons for decision

Note: In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

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

Section 9-5 provides 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 for GST.

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

The question in this case is whether you are making the supply of the vacant lot in the course or furtherance of an enterprise that you carry on and if so whether you are required to be registered for GST.

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done in the form of a business or done in the form of an adventure or concern in the nature of trade. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination 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 on for GST purposes.

Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to 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.

Furthermore, paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'.

● a business encompasses trade engaged on a regular basis.

● an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 explains 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. It refers to 'the badges of trade' and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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.

The cases of Statham and Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

● 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.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

The following discussion is centred on applying the facts of this case to the above indicators of a business and the factors used in determining whether activities are a business or an adventure or concern in the nature of trade ( with reference to the indicators established in Statham and Casimaty in the context of real property transactions).

In this case the activity involves a single property containing your principal place of residence. The Property was previously used for residential purposes and it is intended to be used for this purpose following the proposed subdivision and subsequent sale of the vacant block. As such, there will be no change to the purpose for which the land is held.

Additional land has not been acquired by you during the process. Additional borrowings are not required to fund the process.

You have also advised that you will only complete works as prescribed by the relevant Council necessary for sub development approval. You will engage subcontractors to carry out the demolition of the existing dwelling, surveyors to survey the new blocks and a solicitor to register the new titles.

You will sell the vacant block on the Internet and not engage the use of an agent.

You have not previously been involved in, nor have any experience in property development.

Given the above, we consider that your activities involving the subdivision of your Property and subsequent sale of the vacant subdivided lot do not constitute 'carrying on an enterprise' for the purposes of GST. Furthermore, the construction of your primary place of residence is private in nature and not in the course of carrying on an enterprise.

Therefore the sale of the vacant subdivided lot will not satisfy the definition of a taxable supply pursuant to section 9-5.