Edited version of your written advice

Authorisation Number: 1051204410830

Date of advice: 22 March 2017

Ruling

Subject: GST and subdivision and sale of property

Question 1

Will you make a taxable supply when you sell your subdivided lots situated at a specified location?

Answer

No

Question 2

Are you entitled to an input tax credit in regard to expenses incurred during the subdivision process?

Answer

No

Relevant facts and circumstances

You are registered for GST and carry on an enterprise of providing computer software design services (CSD).

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

The Property contains a X bedroom dwelling and a 12m x 8m shed.

The Property is approximately 4ha and has been recently rezoned.

The Property zoning was changed from 'Farming' to 'General Residential'.

The Property has been used as your principal place of residence since you acquired the Property.

From the time you acquired the Property you have carried out conservation planting of vegetation and erected electric fencing for stock management of vegetation on the Property.

You have also carried out the following improvements to your residence:

● new floor coverings;

● installation of evaporative air-conditioning;

● installation of solar panels and solar hot water system;

● construction of double carport;

● interior painting;

● installation of rain water tank;

● construction of a pergola and paving; and improved surface runoff drainage

You have applied to subdivide the Property into X allotments. One of the allotments (Lot X) will contain your existing residence.

You propose to place all X lots on the market for sale.

Where Lot X is sold before Lot X and Lot X, you will construct a new residence on either Lot X or Lot X and use as your principal place of residence.

You will continue to use Lot X as your principal place of residence in the situation Lots X and X and sold prior to Lot X being sold.

You will not carry out any works on the Property other than works required under the approved subdivision/development application.

You do not intend to construct new dwellings on the vacant Lots. Your intention is to sell the Lots as vacant land apart from Lot X (which contains your existing residence).

The Property is not included in the financial accounts of CSD.

Expenses related to the Property (such as council rates, etc) were not claimed as an expense of CSD.

The rezoning and subdivision process was financed by accessing funds via your existing personal home loan redraw function. The interest expense was not claimed as an expense of CSD.

You have engaged a number of professionals (surveyors/engineers and planning consultants) during the rezoning/subdivision process. Any fees charged by the professionals will not be claimed as an expense of CSD.

You have not been involved in any previous subdivision or development activities.

Relevant legislative provisions

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

Section 9-40

Section 9-5

Section 9-20

Subsection 11-15(1)

Section 11-20.

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

Question 1

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 Property 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.

The definition of 'enterprise' in section 9-20 excludes activities done as a private recreational pursuit or hobby.

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 would encompass 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. 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.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing the following:

● Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

● Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

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 factors 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 being approximately 4ha in area containing the principal place of residence of you and your spouse. The Property has only been used for private purposes and is intended to be used for this purpose following the proposed subdivision and subsequent sale of any vacant blocks. As such, there will be no change to the purpose for which the land is held whilst conducting this activity.

Additional land has not been acquired by you during the rezoning and subdivision process nor was the Property brought into account as an asset of your computer software design business.

You personally financed the rezoning and subdivision process by accessing funds via your existing personal home loan redraw function. The interest expense was not claimed as an expense of your business.

You have also advised that you will only complete works as required under the local structure plan and conditional subdivision approval pursuant to the terms of those approvals and will not be constructing premises on the subdivided lots you intend to sell. Dependant on certain circumstances, you may construct premises on Lot X for use as your principal place of residence.

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 circumstances¹.

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.

You currently carry on an enterprise of providing computer software design services.

As discussed above, the Property is not included in the accounts as an asset of your computer software design business. Furthermore expenses related to the Property, such as council rates, have not been claimed as an expense in the books of accounts of your existing business.

Also as discussed above, the rezoning and subdivision process was financed by accessing funds via your existing personal home loan redraw function. The interest expense was not claimed as an expense of your business.

You have engaged a number of professionals (surveyors/engineers and planning consultants) during the rezoning/subdivision process. Any fees charged by the professionals will not be claimed as an expense of your business.

Given the above, we consider that your activities involving the subdivision of your Property and subsequent sale of the vacant subdivided lots do not constitute 'carrying on an enterprise' for the purposes of GST and do not have a connection or form a part of carrying on your existing enterprise of providing computer software design services.

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

Question 2

Section 11-20 states that you are entitled to an input tax credit for any creditable acquisitions that you make.

One of the requirements of making a creditable acquisition is that you acquire the thing for a 'creditable purpose'. Subsection 11-15(1) states that you will acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

As discussed above, your activities related to the rezoning and subdivision of your Property are not carried out in the course of an enterprise that you carry on. As such you have not acquired things related to the rezoning and subdivision process for a creditable purpose.

Consequently, such expenses do not satisfy the definition of a creditable acquisition and therefore you are not entitled to an ITC in respect to such acquisitions.