Edited version of your written advice

Authorisation Number: 1051185117065

Date of advice: 30 January 2017

Ruling

Subject: GST and sale of subdivided vacant lot

Question

Are you making a taxable supply when you subdivide your property situated at a specified location and sell the vacant block?

Answer

No.

Relevant facts and circumstances

You are registered for GST and carry on an enterprise of providing business administration services.

You acquired property situated at a specified location in 20XX (the Property).

The Property has been used as your principal place of residence for the past five years.

You have subdivided the Property resulting in two separately registered lots of Lot 1 and Lot 2.

You will continue to reside on Lot 1 and use as your principal place of residence.

Lot 2 will be sold as a vacant block.

No additional land has been purchased or added to the Property for the subdivision process.

In order to fund the subdivision, you utilised the redraw facility on your existing mortgage and also increased the mortgage loan amount. You will also borrow a further amount from your partner.

You will not carry out any works other than those required under the conditions of the development approval.

In accordance with the requirements of the relevant local Council, you have engaged the following persons:

● Landscape designer (to landscape garden along the driveway).

● Bushfire Assessment Officer (as a bushfire report was required by council due to the tip of the block on the council stripbeing in a bushfire zone).

● Water Services Co-Ordinator.

● Surveyor and Engineer for driveway access.

You have recently engaged an agent to list the vacant lot and at this stage if sold, will be sold as an unregistered block of land. If a purchaser is identified, the sale will settle once the title/s has been registered.

You have never had any experience or been involved in any property development in the past.

The Property is not an asset of your business or included in any account or books of your existing business.

The sale of Lot 2 will not be reported as a transaction of your existing business being the provision of business administration services.

The proceeds from the sale of Lot 2 will not be deposited into your business bank account.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-40

Section 9-5

Section 9-20

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.

As you are registered for GST, 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.

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'. This paragraph provides that:

● a business encompasses trade engaged in, on a regular or continuous 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.

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 which can be used to determine 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 to determine whether your activities will constitute a business or, an adventure or concern in the nature of trade.

In this case the activity involves a single property being Xm² in area containing your principal place of residence. The Property is currently 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.

You have also advised that you will only complete works as prescribed by the relevant Council necessary for subdivision approval. You have engaged a number of professionals (such as surveyor, Bushfire Assessment Officer, Bushfire Assessment Officer) as required by Council for the subdivision process.

You have recently engaged an agent to list the vacant lot and at this stage if sold, will be sold as an unregistered block of land. If a purchaser is identified, the sale will settle once the title/s has been registered.

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

Additionally, Goods and Services Tax Ruling GSTR 2004/8 Goods and services tax: when does an entity have a decreasing adjustment under Division 132?(GSTR 2004/8) states that for the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances.

Paragraphs 30 and 31 of GSTR 2004/8 contain a list of characteristics or factors that indicate a sale may have a connection to an enterprise or be considered a transaction of the enterprise including:

● at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

● at the time of sale it was applied in carrying on your enterprise to at least some extent;

● it is sold as a transaction of your enterprise;

● the sale is made from enterprise premises;

● payment is accepted using enterprise facilities such as a cash register or a credit card facility;

● the proceeds of sale are deposited into an enterprise bank account; and

● enterprise book accounts are used to record the transaction.

The above list is not exhaustive or conclusive. All the facts and circumstances must be considered and balanced.

In this case The Property is not an asset of your business or included in any account or books of your existing business.

The sale of Lot 2 will not be reported as a transaction of your existing business being the provision of business administration services.

The proceeds from the sale of Lot 2 will not be deposited into your business bank account.

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 and do not form a part of carrying on your enterprise of providing business administration services.

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