Edited version of your written advice

Authorisation Number: 1051178097398

Date of advice: 24 January 2017

Ruling

Subject: Subdivision and sale of land

Question 1

If Lots A to D forming part of a less than 300 hectare of farming property (Property) jointly owned by T and S are re-zoned, developed, subdivided and then sold as residential lots in accordance with the Development Agreement between T and S and L Ltd (Development Agreement), will the sale of a residential lot be in the course or furtherance of an enterprise carried on by the Taxpayer for the purposes of paragraph 9-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

If Lots A to D of the Property are re-zoned, developed, subdivided and then sold as residential lots in accordance with the Development Agreement, will the sale of a residential lot be a taxable supply made by T for the purposes of section 9-5 of the GST Act?

Answer

No.

Relevant facts and circumstances

T and S jointly purchased the Property in 198X. The Property comprises less than 300 hectares spread over 12 lots.

T and S purchased the Property with the intention of using the Property for the purposes of the primary production farming business and have used the Property solely for that purpose since acquisition.

The Property was zoned for farming use when it was acquired by T and S. In 200X the Property was rezoned for farming use with an overlay Future Low Density residential use pursuant to the Inverleigh Structure Plan.

Since acquiring the Property T and S have made the following improvements to the Property:

constructed new driveway (198A);

enlarged two dams (198B);

connected the Property to town water supply (199C); and

fenced a river for environmental flow (199C).

T and S are contemplating retirement and in order to provide for their retirement they intend to sell several of the 12 lots as follows:

Lot A - approximately XX hectares

Lot B - approximately XX hectares

Lot C - approximately XX hectares

Lot D - approximately XX hectares.

L Ltd, a land developer, has expressed interest in undertaking, for a fee, the development and subdivision of those Lots into residential lots for the purpose of sale to the public on behalf of T and S.

Draft Development Agreement:

T and S (referred to as 'Owner') and L Ltd have prepared a draft Development Agreement which sets out the terms upon which L Ltd will be engaged by T and S to undertake the subdivision and development.

The recitals to the Development Agreement state (in part):

has offered its services as a professional development management company that will be engaged to attend to all matters relating to the re-zoning and subdivision of the, or any part of it, for the development fee

and that L Ltd will retain the services of R as architect, town planning consultant and urban designer.

The Development Agreement obliges R to seek the adoption of the development proposal for the land by the Council within 18 months of the date of the Development Agreement or such later time as the Owner allow (working period) and that in the event that L Ltd fails to obtain a recommendation to the Minister of Planning and Environment of a re-zoning or an amendment to the planning scheme within the working period then the Development Agreement will be of no further force or effect. L Ltd is required to apply to Council to obtain a re-zoning or amendment of the planning scheme affecting the land from 'Farming Zone FZ' to 'Low Density Residential Zone - LDRZ', using R to obtain the best zoning/amendment of planning scheme. The Owner is obliged to do all things reasonably required by L Ltd to procure the re-zoning or an amendment to the planning scheme.

Clause [ ] of the Development Agreement obliges the parties to proceed with the development if L Ltd procures a recommendation to the Minister of Planning and Environment or an amendment of the planning scheme within the working period. Clause [ ] obliges L Ltd to undertake the following Development Activities in return for the development fee:

● obtain a planning permit for the subdivision of the land;

● appoint surveyors for the development of the staged subdivision of the land;

● appoint engineers to develop construction drawings to secure council approval;

● appoint other consultants deemed necessary by L Ltd;

● appoint a civil works contractor;

● oversee the subdivision and construction stages;

● attend to all things necessary to obtain registration of the staged plan of subdivision to create separate titles to the lots;

● undertake responsibility for the appointment of licensed real estate agents for the sale of the lots;

● work with the appointed estate agents to develop sales literature and establish appropriate sale prices for the lots;

● appoint and instruct solicitors for preparation of sale documents; and

● oversee any pre-sale arrangements including scraping of roads and site preparation to provide access prior to construction.

Clause [ ] provides that the parties agree that development is to commence on Lot A and then move west to Lots B, C and D and obliges L Ltd to use reasonable endeavours to ensure that configure the development so as to maximise the undeveloped portion of any Lot so that the Owner can continue to carry on primary production activities on that undeveloped portion. Clause [ ] provides that the Owner can continue to use any of the undeveloped land without objection from L Ltd until that land is required either for development or the provision of an easement.

L Ltd is obliged to arrange funding for the completion of each stage of the subdivision and to pay development costs and clause expressly acknowledges that the Owner is not responsible for development costs other than in accordance with clause and the provisions for payment to L Ltd in clause. Clause [ ] allows L Ltd to use the Property as security for funds borrowed for development costs, but clause [ ] provides that any personal obligation of the Owner to the lender is limited to the value of the Property.

Clause [ ] provides that on settlement of the sale of the subdivided lots the proceeds of sale must be paid into a trust account maintained with an agreed Authorised Deposit-taking Institution (ADI) for distribution as follows:

First in reimbursement of principal and interest instalments on any loan obtained by L Ltd to fund development costs;

Secondly in payment of the development costs; and

Third as to the balance:

XX% to L Ltd being the development fee for L Ltd's services; and

XX% to the Owner, being the proceeds of sale

which is to be released no later than 21 days after the settlement of the final lot in any stage.

Clause [ ] provides for either party to request that a subdivided lot or lots be withheld from sale or transferred to the Owner or L Ltd and deems withheld Lots to be sold for a value either agreed between the parties or, failing that, as determined by an independent valuer.

Clause [ ]provides that the Owner acknowledges and agrees that the intent is to develop a staged development and that L Ltd will develop the stages through the development stage in compliance with market demand but not exceeding 7 years from the date of the Development Agreement or such further time as the Owner may agree. Clause [ ] also provides that L Ltd has the sole right to decide when any stage is commenced and that no second or subsequent lot will be commenced while a significant number of lots in any previous stage remain unsold. Clause [ ] provides that the Development Agreement may be varied by subsequent agreement after a period of 7 years and that if there is no agreement for its extension the parties will do everything necessary to share equally the benefits of remaining unsold lots (with provision for an independent valuer to determine the basis on which the lots are distributed between the Owner and L Ltd if the parties cannot agree).

The other clauses of the Development Agreement deal with GST, default, termination and dispute resolution.

It was stated in the ruling request that L Ltd has proposed that Lots A to D will be developed into approximately 100 residential lots and that development will not go beyond minimum council-mandated stipulations. It is expected that the planning, financing and approvals phase will be completed in early 201X and that development works, marketing and sales will commence in 201X and be completed by 202X. T and S intend to continue to use Lots A to D in connection with the Taxpayer's primary production business for some time after formally committing to the land subdivision and this may continue until development works on those Lots make such use impossible.

T and S will not be borrowing to finance the subdivision and they have no prior direct or indirect experience in land development.

T and S purchased another farm in 199X and used it to carry on their primary production business until they sold the farm in 201Y to provide funds for retirement.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(b);

A New Tax System (Goods and Services Tax) Act 1999 section 9-20;

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

Reasons for decision

Question 1

Summary

Applying of the factors listed in paragraph 265 of Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1), the sale of a residential lot will not be in the course or furtherance of an enterprise carried on by T for the purposes of paragraph 9-5(b) of the GST Act.

Detailed reasoning

Paragraph 9-5(b) of the GST Act:

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 an entity ('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 the purposes of paragraph (a) of section 9-5 the supply of any subdivided residential lot to a purchaser will be made by T and S - clause of the Development Agreement simply provides for the price paid by the purchaser for the lot to be deposited into a trust account maintained with an ADI, applied first to reimburse L Ltd for principal and interest paid on any loan taken out to fund development costs and secondly to fund development costs and then divided XX% to L Ltd as a development fee for L Ltd's services and XX% to T and S jointly as proceeds of sale.

In the course or furtherance of an enterprise:

Paragraph 9-5(b) of the GST Act requires that the relevant supply is made in the course or furtherance of an enterprise carried on by the Taxpayer. Section 9-20 of the GST Act provides 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

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

In the ruling request it was submitted that paragraph (b) of section 9-5 is not satisfied as the activities of T and S pursuant to the Development Agreement amount to the mere realisation of a capital asset.

Activity, or series of activities:

The 'enterprise' definition refers to 'an activity, or series of activities, done…'. Paragraph 153 of MT 2006/1 provides that an activity is essentially an act or series of acts that an entity (defined in subsection 184-1(1) of the GST Act to include an individual) does. Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity, or a series of activities, that amount to an enterprise. Example 15 in MT 2006/1 sets out the activities usually 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 undertake an activity (i.e. Giovanna engages an architect, a real estate agent and an auctioneer) that entity is nevertheless doing that activity.

In the present case a recital to the Development Agreement states that L Ltd will be engaged to attend to all matters relating to the re-zoning and subdivision of the Property and the Development Agreement obliges L Ltd, as a 'professional development management company' to:

seek the adoption of the development proposal for the Property by Council plus a recommendation to the Planning and Environment Minister for a re-zoning or an amendment to the relevant planning scheme (including engaging and paying R and any other specialists, consultants or professional services providers) (re-zoning phase); and

obtain a planning permit for subdivision of the land, engage surveyors, engineers, civil works contractors, supervise the works, obtain registration of a staged plan of subdivision to create separate residential lots, appoint real estate agents and solicitors for the sale of the lots, arrange funding for an pay development costs (development phase).

We therefore consider that T and S are taken to carry out all of the re-zoning phase and development phase activities for the purpose of determining whether T is carrying on an enterprise.

Isolated property transactions:

Paragraphs 262 to 302 of MT 2006/1 discuss whether an entity is either carrying on an enterprise (i.e. either in the form of a business or in the form of an adventure in the nature of trade) or merely realising a capital asset where there is a 'one off' 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) provide guidance on when the subdivision and sale of land amounts to either a business or a profit-making undertaking or scheme. Paragraph 265 provides 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 adventure 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 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.

Change of purpose for which the land is held:

In Casimaty Ryan J held that there had been no change in the purpose for which the land was held where portions of a 988 acre farming property (Acton View) had been subdivided and sold in eight subdivisions over 18 years during which period the taxpayer continued to carry on a primary production business on the balance of the property (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 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 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.

Similarly, Example 13 in paragraphs 297 to 302 of MT2006/1 involves a rural property, 30% of which is subdivided and sold in three stages while the owners (Oliver and Eloise) continue to live on the property. Paragraph 302 of MT 2006/1 states that Oliver and Eloise are not carrying on an enterprise and are merely realising a capital asset, one of the relevant factors being:

There is no change of purpose or object with which the land is held - it has remained their home.

In the ruling request it was submitted that there has been a change of the purpose for which Lots 2X to 2X are held, i.e. from use in the primary production business carried on by T and S to subdivision and development for sale.

The Development Agreement obliges L Ltd to use its reasonable endeavours to configure the development so as to maximise the undeveloped part of the Property for T and S to continue to carry on the primary production activity on that undeveloped part and clause allows T and S to continue to use any of the undeveloped part of the property until that land is required either for development or the provision of an easement. We therefore consider that the present case is similar to Casimaty and Example 13 and that there will be no change of the purpose for which T and S hold the Property and that application of this factor indicates that T will not be carrying on an enterprise.

Additional land is acquired to be added to the original piece of land:

This factor reflects a distinction made in a number of United Kingdom court decisions discussed in Casimaty (91 ATC 5139-5142). In CH Rand v The Alberni Land Co Ltd (1920) 7 TC 629 (Alberni Land Co) Rowlatt J held that the surplus arising from sale of portions of land held by the company on trust for various persons was not the profits of a trade or business because the function of the company was merely to realize the capital value of the land. Rowlatt J stated (p. 638):

Now the Company proceeded in a very enterprising way undoubtedly. It cleared the land and formed roads. It sold parts of it and kept some of the money and put it back into the land, and so on…Undoubtedly it has done very well. Under those circumstances the Attorney-General and the Revenue contend that it has gone beyond the stage of merely realising the property, and has embarked upon a business in land, which it has not in the real sense bought, but in land which has come to it. The Commissioners have held that that is not so, and I am not prepared to differ from the Commissioners.

…

If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land.

Sixteen years later in The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1936) 11 TC 232 (Alabama Coal), Rowlatt J distinguished Alberni Land Co. In Alabama Coal the State of Alabama had issued bonds to bondholders and then defaulted. The State of Alabama had then transferred lands to trustees for the benefit of the bondholders and incorporated the taxpayer company for the purpose of, inter alia, developing and realizing the lands, including 'buying new land so as to develop and nurse the lands'. In Alabama Coal Rowlatt J held that the fact that the taxpayer company bought new lands made Alabama Coal a different case from Alberni Land Co. Rowlett J referred (p.254) to the following passage in the judgment of Farwell LJ in Hudson's Bay Co Ltd v Stevens (1909) 5 TC 424 at 437:

Again, a land owner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as an owner not as a land speculator... It would be different if a land owner, an individual, entered into the business of buying and developing and selling land; but the case of the owner, whether of land, or pictures, or jewels, selling his own property, although he may have expended money on them in getting them up for sale, is entirely different; he sells as owner, not as trader.

and stated (ibid):

… in order to see clearly that the Hudson's Bay Case (1909) 5 Tax Cas 424, for instance, does not apply, there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money.

In the present case it was stated in the ruling request that T and S have not acquired additional land to be added to the original land. On that basis, application of this factor indicates that T will not be carrying on an enterprise.

The parcel of land is brought to account as a business asset:

In Casimaty Ryan J referred (97 ATC 137) to a deposition by the taxpayer that by 1983 the sheep and cattle farming activities carried on by the partnership comprising the taxpayer and S on the property had become unprofitable and had generated 'substantial carry forward losses' but that:

...acting on the view that I was doing nothing more than selling off portions of the property which had been given to me by my father I did not bring the land sales into the affairs of the partnership and no attempt was made to use up the carry forward losses available to either my wife or myself.

In the ruling request it was submitted that Lots A to D are not brought to account as a business asset.

It was stated in the ruling request that T and S carry on a primary production business on the Property. We therefore consider that this factor requires that T and S will not do anything during the term of the Development Agreement that brings the rezoning, subdivision, development and sale of Lots A to D into the affairs of the primary production business carried on by T and S. Providing that T and S adhere to that requirement, application of this factor indicates that T will not be carrying on an enterprise.

There is a coherent plan for the subdivision of the land:

In the ruling request it was conceded that there was a coherent plan for the subdivision, but is was submitted that T and S will engage L Ltd to see to all aspects of the development and sale of Lots A to D.

We note, however, that the plan relates only to Lots A to D which comprise approximately 30% of the area of the Property and that Example 35 in paragraphs 297 to 302 of MT 2006/1 suggests that there is not a coherent plan where merely a part or parts of an entire property is or are subdivided in order to meet the personal financial needs of the owner:

Example 35

297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell.

298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property.

299. A few years later Oliver and Eloise decide to sell some more land to meet their increasing debt obligations. They arrange for council approval to subdivide another part of Flat Out into four lots. Again they undertake the minimal amount of work necessary to enable the lots to be subdivided and arrange for the real estate agent to sell these lots.

300. Three years later Oliver's and Eloise's personal and financial circumstances are such that they again decide to sell some more land. They arrange for further council approval to subdivide part of their remaining property into three lots. Again they undertake the minimal amount of work necessary to enable the lots to be sold and arrange for the real estate agent to sell the lots.

301. Over the years involved Oliver and Eloise have subdivided 30 % of Flat Out. They continue to live on the remaining part of their property.

302. Oliver and Eloise are not entitled to an ABN as they are not carrying on an enterprise. They are merely realising a capital asset. In this example the following factors are relevant:

● There is no change of purpose or object with which the land is held - it has remained their home.

● There is no coherent plan for the subdivision of the land - the subdivision has been undertaken in a piecemeal fashion as circumstances change.

● A minimal amount of work has been undertaken in order to prepare the land for sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision.

Compare Example 35 to Example 30 in paragraphs 277 to 283 of MT 2006/1 (where the taxpayer is carrying on an enterprise). In Example 30 after purchasing a property, deciding to subdivide the entire property and obtaining the necessary development approval from council (subject to a number of conditions), the taxpayer and his accountant and legal adviser 'prepare a comprehensive business plan for the project' and the taxpayer 'investigates a marketing strategy that will provide the best return for his project' and then engages a project manager who arranges for the subdivisional work to be carried out.

We consider that the present case is closer to Example 35 than Example 30 and that application of the coherent plan factor indicates that T will not be carrying on an enterprise.

There is a business organisation, e.g. a manager, office and letterhead:

In Statham the Federal Court noted (89 ATC 4073) that the marketing of the subdivided lots was attended to by local real estate agents without the participation of the taxpayers and that no site office was set up to either cater for the sales of the lots or conduct the taxpayers' affairs and found (89 ATC 4076) that a significant factor which strongly suggested that the taxpayers were not conducting a business or engaging in a profit-making undertaking or scheme was that the taxpayers had no business organisation, no manager, no office, and no letterhead.

In Casimaty the taxpayer had deposed (97 ATC 5139) that all sales had been negotiated through the taxpayer's stock and station agents, that the taxpayer did not keep records of enquirers or possible purchasers and, except in the cases of persons previously known to the taxpayer, did not pass on the names of enquirers to the agents. Ryan J stated (97 ATC 5152) that if the taxpayer had set up his own sales organization or advertised or conducted sales himself instead to entrusting those activities to agents, the inference would have been more strongly available that the taxpayer had gone into business. Ryan J compared Stevenson v FCT 91 ATC 4476 (Stevenson) where the taxpayer personally dealt with prospective purchasers and 'multi-listed' the subdivided lots with a variety of agents.

In the ruling request it was submitted that T and S will engage L Ltd to see to all aspects of the development and sale of Lots A to D in return for a fee. The Development Agreement obliges L Ltd (in return for the development fee) to undertake responsibility for appointing licensed real estate agents for the sale of the lots and working with the appointed agents in developing sales literature and establishing appropriate sale prices (as agreed between L Ltd and the Taxpayer) for the lots.

We consider that the present case is closer to Casimaty and Statham rather than Stevenson and that application of the business organisation factor indicates that T will not be carrying on an enterprise.

Borrowed funds financed the acquisition or subdivision:

In the ruling request it was submitted that T and S have not borrowed funds to finance the subdivision as L Ltd is responsible for paying all Development Costs pursuant to the Development Agreement.

We note, however, that the Development Agreement provides for the Development Fee payable by the Taxpayer and S to L Ltd to be calculated in accordance with clause [ ] and that clause [ ] provides for the proceeds of sales of the subdivided lots to be applied:

first in reimbursement of principal and interest instalments on any loan obtained by L Ltd to fund development costs; and

secondly in payment of development costs (which include deeming any funds provided by L Ltd to finance the development as a loan and as if L Ltd borrowed those funds and include all costs, charges, valuation fees, legal costs and stamp duties related to funds borrowed by L Ltd to fund the development)

before XX% of the remaining balance is paid to L Ltd as the Development Fee and XX% of the remaining balance is paid to T and S.

In addition clause [ ] of the Development Agreement allows L Ltd to use the Property as security for borrowings by L Ltd that are used to fund development costs provided that the terms of any mortgage to be signed by T and S are acceptable (clause) and that the personal obligations of T and S to the lender are limited to the value of the Property.

Thus T and S benefit from any borrowing by L Ltd which is used to fund the subdivision, bear part of the costs of that borrowing and provide the Property as security for that borrowing.

In Statham Woodward, Lockhart and Hartigan JJ listed a number of 'significant factors' (89 ATC 4076), including:

No moneys were borrowed by, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee

We assume that the council required the guarantee in Statham because the council engaged contractors to undertake the subdivisional works, including roads, earthworks, sewerage and electrical works. Woodward, Lockhart and Hartigan JJ stated (ibid) that those significant factors strongly suggested that the taxpayers were not conducting a business or engaging in a profit-making undertaking or scheme. On behalf of the Commissioner it was submitted (89 ATC 4077):

…that the owners, by providing a bank bond, were prepared to risk up to $950,000, and did in fact risk in excess of $450,000. As he put it, the owners elected to go down the path of high risk and high profits rather than the path of a mere realisation of the asset as it stood. He submitted that this was an important factor in deciding whether the owner's activity fell on the same side of the line as the developer's business venture.

Woodward, Lockhart and Hartigan JJ rejected this submission (89 ATC 4077):

These considerations do not, in our opinion, have the effect of pushing a mere realisation of assets over the line into the region of a business venture or profit-making undertaking or scheme. In relation to finance, the owners merely had to provide a bond.

In our view the obligations imposed on T and S by the Development Agreement in relation to any funds borrowed by L Ltd for development costs are similar to those assumed by the owners in Statham by providing a bank guarantee to the council and which Woodward, Lockhart and Hartigan JJ held not to indicate a business or profit-making scheme. We therefore consider that application of the 'borrowed funds financed the…subdivision' factor indicates that T will not be carrying on an enterprise.

Interest on money borrowed to defray subdivisional costs was claimed as a business expense:

In Casimaty the taxpayer borrowed money secured by a first mortgage over the property and subsequently granted a second mortgage to a bank to secure an overdraft which was used to finance the taxpayer's farming operations (97 ATC 5136). In cross examination the taxpayer stated that the purpose of the subdivisions was to alleviate this debt burden and that some of the proceeds of sale of earlier subdivisions were used to finance later subdivisions.

In Casimaty Ryan J referred (97 ATC 5148) to Stevenson where the taxpayer owned and worked a farm comprising 446 acres. The taxpayer sold one portion comprising 26 acres prior to 1965 and sold another portion comprising 360 acres in 1975. At the end of 1976 the taxpayer (then aged 70) decided to subdivide and sell 35 acres and retain the remaining 55 acres. As the conditions included on the approval of the subdivision were extensive the taxpayer borrowed extensively to defray subdivision expenses before carrying out the subdivision in eight stages involving the creation of 180 lots. In Stevenson the Federal Court held that the AAT had not erred in finding that the taxpayer's activities between 1976 and 1986 constituted more than the mere realisation of a capital asset and amounted to carrying on the business of subdivision, development and sale of land. The Federal Court referred to the following factors referred to by the AAT (emphasis added):

…In particular I regard as significant the degree of his personal involvement in the planning, in the negotiations with the Shire Council and the State Rivers and Water Supply Commission, in obtaining finance, in the employment of contractors, in the marketing of the blocks and in their actual sale. The subdivision and development was substantial. The land has been subdivided into over 180 small blocks. The development has turned farmland which had been unserviced by water supply or sewerage and without a made road into fully serviced residential blocks with a sealed road and drainage. The taxpayer not only obtained finance but he risked it.

In Casimaty Ryan J referred (97 ATC 5152) to the inference drawn by the AAT in Stevenson, based on the personal involvement of the taxpayer in the relevant activities, that the taxpayer was carrying on a business and distinguished Stevenson on that basis.

In Casimaty Ryan J referred (97 ATC 5152) to the inference drawn by the AAT in Stevenson, based on the personal involvement of the taxpayer in the relevant activities, that the taxpayer was carrying on a business and distinguished Stevenson on that basis.

In Statham the Full Federal Court stated (89 ATC 4076) that one of the matters which strongly suggested that the taxpayers were not conducting a business or engaging in a profit-making undertaking or scheme was that the taxpayers had not borrowed any money, although the taxpayers did provide a guarantee to the council by way of bank guarantee (presumably because the Council engaged contractors to carry out the works required by the subdivisions (89 ATC 4073)).

In the ruling request it was pointed out that T and S have not borrowed money to fund the subdivision of Lots A to D. However, the terms of the Development Agreement include interest paid by L Ltd on borrowings plus a notional rate of interest on capital contributed by L Ltd as components of the Development Fee payable by T and S to L Ltd and allow L Ltd to use Lots A to D as security for borrowings made by L Ltd to fund development costs. Thus the Taxpayer and S will effectively bear the cost of borrowings and capital contributions used to fund the subdivision of Lots A to D and may provide security for borrowings used to fund development costs.

Nevertheless the discussion of this factor in Casimaty suggests that the fact that T will not personally borrow funds to fund development costs indicates that T will not be carrying on an enterprise and Statham suggests that the fact that T will allow L Ltd to use Lots A to D as security does not alter that conclusion.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision:

This factor is explained by comparing Casimaty to the decision of the Full High Court in FCT v Whitfords Beach Pty Ltd 82 ATC 4031 (Whitford's Beach).

In Whitford's Beach the taxpayer company was incorporated in 1954 for the purpose of acquiring 1,584 acres of land so as to ensure that the taxpayer company's original shareholders had access to fishing shacks which they owned and which were located on a beachfront reserve. After the original shareholders sold their shares in the taxpayer company to three other companies in 1967 the taxpayer company appointed a project co-ordinator, undertook a search for a water supply, negotiated with the local authority for construction of a road and procured a re-zoning from urban deferred to urban and approval of a subdivision. By 1970 the first survey plan for 272 lots was deposited and 200 residential lots had been sold. The Federal Court held, by a majority, that the sale proceeds were not taxable as the taxpayer company's activities did not go beyond the mere realisation of a capital asset in the most enterprising way. The Commissioner successfully appealed to the Full High Court which held that the taxpayer company's activities amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development (Gibbs CJ, Mason and Wilson JJ).

In Casimaty Ryan J referred to the judgment of Mason J in Whitford's Beach (97 ATC 5145):

In the course of his judgment in that case Mason J acknowledged that merely because a sale of land is preceded by a subdivision does not preclude it from being the realization of a capital asset. However His Honour was careful to point out that the surrounding circumstances of a subdivision may carry it across the line into the business of land development.

Ryan J then set out the following passage from the judgment of Mason J in Whitford's Beach 87 ATC 4047 (emphasis added):

In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

In Casimaty, on the other hand, Ryan J referred to the taxpayer carrying out works such as construction of an internal road, provision of water services, farm fencing all boundaries and extension of a water main (second subdivision), similar works plus construction of an access road (third and fourth subdivisions) and similar works plus drainage of a creek (fifth subdivision). However Ryan J accepted the taxpayer's evidence that (97 ATC 5138):

…at no time did he do any more in preparing the allotments for sale than was required by the Council apart from slashing and clearing scrub, filling in some creeks and waterholes and pushing up levy banks on creek lines to improve the presentation of certain allotments. His developmental activities never extended to the proposal or creation of public facilities.

In the ruling request it was submitted that Lots A to D will not be developed beyond minimum Council approval requirements. As we do not know what requirements will be imposed as part of either the re-zoning of the Property or amendment to the relevant planning scheme, we don't know what degree of development of Lots A to D will be required by Council (and we note the statement by Mason J in Whitford's Beach (above) that modern subdivisions require more in the way of development than was formerly the case). Nevertheless the commitment by T and S not to develop Lots A to D beyond approval requirements supports the view that T will not be carrying on an enterprise.

Buildings have been erected on the land:

In Statham (89 ATC 4070) one of the matters which the Full Federal Court held to strongly suggest that the taxpayers were not carrying on a business or engaging in a profit-making undertaking or scheme was that the taxpayers did not erect buildings on the land, not even, for example, a site office. In Casimaty Ryan J stated (97 ATC 5152) that if the taxpayer had constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to the taxpayer an intention to carry on a business of land development and improvement.

In the ruling request it was submitted that no buildings will be erected on Lots A to D. That supports the view that the Taxpayer will not be carrying on an enterprise.

Question 2

Summary

As the sale of a residential lot will not be made in the course or furtherance of an enterprise carried on by T, one of the requirements for a taxable supply in section 9-5 of the GST Act will not be met and the sale will not be a taxable supply made by T.

Detailed reasoning

Section 9-5 of the GST Act provides that an entity ('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

The supply is *connected with the indirect tax zone; 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.

For the reasons set out in Question 1 we consider that, provided the Development Agreement is adhered to, the sale of a subdivided residential lot will not be made in the course or furtherance of an enterprise carried on by T. Consequently the requirement in paragraph 9-5(b) of the GST Act will not be met and the sale of the lot will not be a taxable supply made by T.