Edited version of your written advice

Authorisation Number: 1051188145596

Date of advice: 10 February 2017

Ruling

Subject: GST and disposal of subdivided land as capital assets

Question 1

Can you treat the remaining unsold land as a capital asset when you cease your business of property development?

Answer:

No. The remaining unsold land will not be considered as capital assets when you cease your business of property development for GST purposes.

Question 2

Is GST payable on the sale of the remaining land, if sold as a capital asset?

Answer

Yes, GST is payable on the sale of the remaining land, if sold as a capital asset. Please refer to the reasons for decision.

Question 3

Are you entitled to an ABN and can you cancel your ABN and GST registrations when you are no longer in business?

Answer

You may cancel your ABN and/or the GST registration when you are no longer in business. Please refer to ATO website for “Cancelling your GST Registration” for more details.

Relevant facts and circumstances

● You have been carrying on an enterprise of property development and registered for goods and services tax (GST).

● You purchased the land in the 19xxs and have conducted farming activities on the land.

● You commenced a property development project in early 200x.

● Your initial intention was to develop the land over four stages.

● Stage one and two of the development have been completed and most of the subdivided lots have been sold or gifted to family members.

● X lots were gifted to family members for no consideration in mid 20XX. These lots have been reported as taxable supply and you have paid GST to the ATO.

● All the other lots have been sold as taxable supply.

● Currently, X lots from stage 2 have not been sold and listed for sale.

● Council approval was obtained for all the four stages of development and due to the long delay in completing the development, approval for stage three and four has been expired.

● You have no intention of continuing with the remaining development of stage three and four.

● You intend to sell the land under stage three and four and wish to terminate the property development enterprise and cancel your GST registration.

● You are not anticipating profit from the sale of the land under stage three and four.

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 25-5

A New Tax System (Goods and Services tax) Act 1999 - Section 72-5

A New Tax System (Goods and Services tax) Act 1999 - Section 72-10

A New Tax System (Goods and Services tax) Act 1999 - Section 195-1

Reasons for decision

Question 1

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if you make the supply for consideration; and 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 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.

The term 'enterprise' is considered by the Miscellaneous Taxation Ruling MT 2006/1.

Section 195-1 of the GST Act defines 'carrying on' an enterprise and includes doing anything in the course or furtherance of an enterprise. A transaction is a supply in the course or furtherance of an enterprise that is carried on where the supplies can be considered to be connected to the entity's enterprise.

The term in the course or furtherance is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise or achieving its goals is a furtherance of an enterprise although it may not always be in the course of that enterprise.

You have been carrying on an enterprise of property development and the land under stage three and four were used as trading stocks. The council approval was obtained to carry on the property development including the land under stage three and four. Therefore, the land under stage three and four is considered as trading stock rather than capital asset. And the sale of this land would be taxable supplies as the sale will satisfy the requirements of section 9-5 of the GST Act.

Furthermore, section 195-1 of the GST Act also defines 'carrying on” an enterprise as including doing anything in the course or the commencement or termination of the enterprise. Based on the facts provided, you are considering terminating your enterprise of property development after the sale of the X remaining lots of land under the stage two. The sale of the land under stage three and four will be considered as part of the termination of the property development enterprise. Therefore, the remaining unsold land will not be considered as capital assets.

Question 2

If you are registered or required to be registered for GST, the disposal of a capital asset in Australia, in the course of carrying on your business, is a taxable supply and you are required to account for GST on that sale. This applies even if the asset was purchased before 1 July 2000 or the asset is sold to an individual who is not in business (a private sale). If you receive any payment (or other form of consideration) when you dispose of a capital asset, you must report the sale on your activity statement for the relevant tax period.

The fact sheet on “GST and the disposal of capital assets” explains that if you cancel your GST registration and you still hold capital assets on which you have claimed or are entitled to claim GST credits, the amount of GST you are liable to pay is subject to an increasing adjustment. The increasing adjustment takes in to account the market value and percentage of business use of the assets at the time your GST registration is cancelled.

In this case, you used the land under stage three and four to carry on your enterprise of property development. As explained in question 1, the land under stage three and four would be considered as trading stock rather than capital assets. Furthermore, the sale of capital assets during the course of carrying on an enterprise would be a taxable supply. If you have decided to sell the land under the stage three and four after cancelling your GST registration, then you are required to make an increasing adjustment as explained above.

The GST should be paid in the final activity statement you lodge. Please refer to example 4 in the fact sheet for the calculation of the increasing adjustment.

Question 3

Section 25-50 of the GST Act provides that if you are registered and are not carrying on any enterprise you must apply to the Commissioner in the approved form to cancel your registration. You must lodge your application within 21 days after the day on which you ceased to be carrying on any enterprise.

You may consider cancelling your GST registration if you have decided to terminate your enterprise of property development. However, as explained in question 2 you will be required to make an increasing adjustments under section 138-5 of the GST Act to account for any assets for which you were entitled to claim an input tax credit.

The reason for the adjustment is that the assets are being taken out of the GST system. No GST credits are available in respect of things outside of, or taken out of, the GST system. As the land under stage three and four is no longer being used in the GST system, you should no longer have a GST credit in respect of those assets. The adjustment operates to enable the ATO to recoup GST credits the entity has had.

Additional Information

Division 72 of the GST Act ensures that supplies to, and acquisitions from, your associates without consideration are brought into the GST system, and that supplies to your associates for inadequate consideration are properly valued for GST purposes. Under the GST legislation consideration is any payment, or any act or forbearance, in connection with a supply of anything.

Section 72-5 of the GST Act provides that the fact that supply to your associate is without consideration does not stop the supply being a taxable supply if:

● your associate is not registered or required to be registered or

● your associate acquires the thing supplied otherwise than solely for a creditable purpose.

Furthermore, section 72-10 of the GST Act states that if a supply to your associate without consideration is a taxable supply, its value is the GST exclusive market value of the supply.

Based on the facts provided, you have gifted X lots of land to your family members and you are required to report the disposal of the X lots of land as taxable supplies using the GST exclusive market value of the supply.