Edited version of your written advice

Authorisation Number: 1051209476541

Date of advice: 4 April 2017

Ruling

Subject: GST and sale of subdivided land

Question

Is the sale of the subdivided land (the Land) by you subject to goods and services tax (GST)?

Answer

No, the sale of the Land is not subject to GST as you are not carrying on an enterprise and are not required to be registered for GST. The disposal of the land is a realisation of a capital asset.

Relevant facts and circumstances

You, the taxpayer, are not registered for GST.

The taxpayer’s father was in the business of primary production. He acquired the Land to conduct his primary production business. In addition to the primary production business, there are also residential houses located on the Land. The portion of land occupied by these houses is less than 5 percent of the entire parcel.

One of the residential houses was used by the taxpayer’s family as their main residence.

The other two residential houses on the Land are much smaller in size and have been rented to third parties for nominal rent over the years.

The taxpayer’s father conducted the primary production business on the Land until he became ill.

At this time the taxpayer’s father leased the Land to third parties for various other primary production purposes.

The taxpayer’s mother and father passed away. The Land was inherited by the taxpayer.

The taxpayer leased the Land to a large primary producer. The larger primary producer leased the Land for a nominal annual rent since this time.

Two of the residential properties are currently let to unrelated parties for nominal rental.

The taxpayer obtained an Australian Business Number as a sole trader and registered for GST because of this lease. GST registration was later cancelled on the basis that the taxpayer’s turnover did not exceed the GST registration turnover threshold.

The taxpayer has no development or construction experience whatsoever.

Property Status – Urban Zone

A Precinct Structure Plan (PSP) applied to the Land from the mid 2010’s. As a result, the Land is now within an ‘Urban Zone’ for land tax purposes.

Prior to the rezoning of the Land, the taxpayer claimed and received a land tax exemption in relation to the majority of the Land on the basis that it was Primary Production Land (PPL) pursuant to section 66 of the Land Tax Act 2005 (Vic) (LTA).

However, as the Land is now within an Urban Zone, section 67 of the LTA now applies and requires that the taxpayer personally is engaged in a substantially full-time capacity in the business of primary production carried out on the Land. As a result of these requirements, the taxpayer no longer qualifies for the PPL land tax exemption as the taxpayer is not personally involved in the primary production activity on the Land.

According to the council rates notices, the site value attributed to the Land is substantial.

On that basis, the taxpayer would be liable to large amounts of land tax.

Council rates have also increased dramatically in line with the change in zoning.

Disposal of the Land – Decision to sell

The taxpayer only formed an intention to dispose of the Land when it became clear that the costs of holding the Land as a result of the rezoning would become a significant burden and cause financial distress.

The taxpayer has been approached by a number of third parties over the years with offers to buy the Land as a whole. These offers were made prior to the change in zoning and were relatively small in value. At this time the taxpayer had no inclination to sell the Land. It held sentimental value and the taxpayer was not under any financial burden with respect to the holding costs of the Land.

Within the last few years, the approaches to sell came in the forms of offers to develop the Land.

The taxpayer has been approached by a number of property development companies. These approaches reached various stages, some only reached initial talks whilst others proceeded to a proposal however the companies withdrew in late stages in order to take advantage of other development opportunities.

The taxpayer did not approach any development companies as part of this process. Despite the taxpayer’s lack of property development and construction experience, the taxpayer soon realised through discussions with the development companies that he would generate the highest sale price by subdividing the Land and disposing of individual lots as opposed to a sale of the property as a whole.

Development of the Land

One of the main property development companies had approached the taxpayer with an offer to develop the Land for sale on her behalf (the Developer).

Having agreed to the terms offered by the Developer, the taxpayer entered into a Project Management Agreement (PMA) with the Developer. The taxpayer’s intention on entering the PMA was to achieve the highest selling price on the disposal of the Land.

The overall development is a significant project. A permit plan for the development currently makes provisions for lots, active open spaces and passive open spaces. The development of the lots is expected to occur over a number of stages.

Project Management Agreement

The PMA provides that the taxpayer has appointed the Developer to manage all aspects of the Project to achieve the objective of maximising the Land’s value. The PMA provides that apart from providing access to the Land and executing various documents, the taxpayer is not involved in any aspect of the development activities taking place on the Land.

The Developer is required to obtain all Project Funding, to ensure that all Works are paid for and that all Contractors and Consultants are paid, when due.

The Developer is responsible for all Project Costs, including outgoings in relation to the Land i.e. council rates and land tax, and they are to be funded from the Finance Facility.

The Developer may register a caveat over the Land noting its interest under the PMA.

The Project Management Fee for the services provided by the Developer is included in the PMA.

Primary Production activities may continue on any part of the Land not immediately undergoing development works.

Relevant legislative provisions

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

Section 9-5

Subsection 9-20(1)

Section 23-5

Section 188-10

Section 188-25

Reasons for decision

GST is payable on taxable supplies. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

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 (Australia); 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.

The sale of the Land will be neither GST-free nor input taxed. For the sale of the Land to be a taxable supply it must meet all the requirements listed in section 9-5 of the GST Act.

In your case, you will be selling the Land for consideration. The sale will be connected with the indirect tax zone as your property is located in Australia. Hence, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act will be met.

The issues that now need to be addressed are whether the sale of the Land will be made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) and whether you will be required to be registered for GST (paragraph 9-5(d)).

Carrying on an enterprise

Section 9-20 of the GST Act defines what constitutes an enterprise and states in part:

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

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or …

Miscellaneous Taxation Ruling MT 2006/1 clarifies what the Tax Office considers is an enterprise for the purposes of an entitlement to an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 operates to apply these views equally for the purposes of the GST Act.

For GST purposes, the term 'enterprise' is very broad. It includes the term 'business' which would ordinarily encompass a trade that is engaged in, on a regular or continuous basis, while 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. Isolated transactions with a commercial flavour are considered to be an adventure or concern in the nature of trade.

Moreover, the term 'enterprise' also includes, amongst other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

1. Leasing enterprise

You have been and are supplying on a regular and continuous basis, a right to use the Land in your leasing enterprise. Accordingly you are carrying on a leasing enterprise under paragraph 9-20(1)(c) of the GST Act. As such, the sale of the Land will satisfy the requirement of paragraph 9-5(b) of the GST Act.

As mentioned above, the requirement of paragraph 9-5(d) of the GST Act is that you are either registered or required to be registered for GST. As you are not currently registered for GST, the question at issue is whether you will be required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your annual turnover meets the registration turnover threshold. The registration turnover threshold applicable to you is $75,000.

You are carrying on a leasing enterprise so we need to determine if your annual turnover is $75,000 or more.

Section 188-10 of the GST Act provides that your annual turnover meets the registration turnover threshold if:

● your current annual turnover is $75,000 or more, and the Commissioner is not satisfied that your projected annual turnover is below $75,000, or

● your projected annual turnover is $75,000 or more.

Your current annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Your projected annual turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

Section 188-25 of the GST Act provides that when calculating your projected annual turnover, you do not include any supplies made or likely to be made:

● by way of transfer of ownership of capital assets or

● solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

In your case, you are ceasing your leasing enterprise and selling the Land which was used for this purpose. The annual turnover from the lease is less than $75,000. The Land is also a capital asset of your leasing enterprise. As such, the proceeds from the sale of the Land are excluded from the calculation of your projected annual turnover.

Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

2. Property development enterprise

Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity or series of activities done in the form of adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) refers to the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 (GSTD 2006/6) considers whether MT 2006/1 has equal application to the meaning of ‘entity’ and ‘enterprise’ for the purposes of the GST Act.

Paragraph 1 of GSTD 2006/6 provides that MT 2006/1 considers the meaning of the terms ‘entity’ and ‘enterprise’ for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definitions of these terms that are contained in the GST Act. The principles in MT 2006/1 apply equally to the terms ‘entity’ and ‘enterprise’ and can be relied upon for GST purposes.

Paragraphs 262 – 302 of MT 2006/1 refer to isolated transactions and sale of real property. The following paragraphs are relevant in determining whether the sale of your subdivided blocks will be made in the course or furtherance of an enterprise carried on by you.

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities 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……..

264. The cases of Statham & Anor v. Federal Commissioner of Taxation ¹⁰⁵ ( Statham ) and Casimaty v. FC of T ¹⁰⁶ ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

·   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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

268. The case of Marson (H M Inspector of Taxes) v. Morton and Others ¹⁰⁸ describes the process of reaching a conclusion in cases involving isolated transactions. After listing the factors that have been taken into account by courts in other cases, including the badges of trade, Sir Nicolas Browne-Wilkinson V-C stated:¹⁰⁹

I emphasise again that the matters I have mentioned are not a comprehensive list and no single item is in any way decisive. I believe that in order to reach a proper factual assessment in each case it is necessary to stand back, having looked at those matters, and look at the whole picture and ask the question - and for this purpose it is no bad thing to go back to the words of the statute - was this an adventure in the nature of trade?

Similarly, Foster J in AB v. FC of T observed:¹¹⁰

It is clear in my view, that before the label 'adventure in the nature of trade' can be applied it is necessary to isolate with clarity the particular matters which are the subject of its application...Accepting as I do, that the phrase means 'an isolated business venture' questions must be asked as to what was the venture and what gave it its commercial character.

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience. If an entity is experiencing practical difficulty reaching a decision they can seek guidance from the Tax Office……

Example 30

277. Steven buys a 100 hectare property. He believes that the property may be suitable to be developed as a resort. After investigation he decides that it would be more profitable to subdivide and sell the property. He decides to subdivide the property into one hectare lots and sell these.

278. He engages a town planner and a surveyor to survey the 100 hectare property and to establish how many hectare lots it can be subdivided into. Steven then approaches the local shire council and is advised that he may subdivide his property into 65 one hectare lots.

279. However, Steven must satisfy various shire council conditions if he wishes to obtain development approval. They are :

·   the making of new sealed roads with kerbing and channelling within the subdivision ;

·   the provision of water, electricity and telephone services to the new lots ;

·   the provision of culverts and other storm water drainage works ; and

·   the transfer of certain areas of land to the shire council for parks, environmental and

other public purposes.

280. Steven consults his accountant and legal advisers. Together they prepare a comprehensive business plan for the project. They approach a commercial lender to arrange a substantial loan, secured by the property, to cover all development costs and related expenses.

281. After gaining development approval from the council, Steven then engages a project manager who arranges for all the survey and subdivisional works to be carried out. Contractors are engaged to put in the roads, complete all the necessary drainage works and install the water, electricity and telephone services.

282. Steven also investigates a marketing strategy that will provide the best return for his project. Sales agents are retained to carry out the marketing program which involves a comprehensive advertising campaign using a promotional estate name , ' Bush Turkey Hill'.

283. Steven is entitled to an ABN on the basis that the subdivision is an enterprise and it is more than a mere realisation of a capital asset. Significant factors that are relevant which lead to this conclusion are as follows :

·   there is a change of purpose for which the whole property is held ;

·   there is a comprehensive plan for the development of the property ;

·   the subdivision is developed in a businesslike manner for example there is a

project manager, significant development costs, a comprehensive marketing

campaign including an estate name for the land ; and

·   a substantial loan has been taken out to finance the development.

In your case, you were under financial pressure to keep the Land for sentimental reasons given the financial burden it became for you. The zoning change enabled you to obtain more for its sale and the subdivision into the X lots maximised the sale proceeds of the Land. You did not proactively seek developers for the Land, rather, you were approached by others.

You appointed Y to manage all aspects of the project to obtain the Land’s ultimate value. Your role has been merely to providing access to the Land and executing various documents to facilitate the sale of the Land. Y:

● must carry out the project management services,

● has absolute discretion in carrying out the project,

● is required to obtain all project funding, and to ensure that parties associated with the development are paid,

● is responsible for all costs, including outgoings in relation to the Land i.e. council rates and land tax, and

● may register a caveat over the Land noting its interest.

There is no opportunity for you or your representatives to have any input into the conduct of the development. Y retains ultimate and absolute control over all decisions in respect of the development.

Based on the above information and having regard to the factors set out in paragraph 265 MT 2006/1 above, we consider that the subdivision and sale of your Land will not be in the form of an adventure or concern in the nature of trade but will be a mere realisation of a capital asset. As such, the proceeds from the sale of the Land will not be included in your projected annual turnover pursuant to section 188-25 of the GST Act and you are not required to be registered for GST.

You are not making the supply of the Land in the course or furtherance of the leasing enterprise or any other enterprise so paragraph 9-5(b) of the GST Act is not met. Therefore, the supply will not be a taxable supply as it does not meet all the requirements of section 9-5 of the GST Act and the supply of the Land will be outside the scope of the GST Act.