Edited version of your written advice

Authorisation Number: 1051290045158

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Date of advice: 25 October 2017

Ruling

Subject: GST and sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of the lots that has resulted from the subdivision of a residential property (the Lots) located in Australia (the Property)?

Answer

Yes.

Relevant facts and circumstances

X and Y (you) provided information in the following correspondence:

● application for private ruling submitted on your behalf by your accountant

● emails (with various attachments) from your accountant, and

● email (with various attachments) from your accountant.

You are not registered for GST prior to the sale of the Lots as you have no joint enterprise at the time of subdivision.

You purchased the Property, zoned general residential, before 1985. It contains a heritage homestead, built in 1900s. You purchased the Property for use as your principal place of residence and have used it for that purpose for the duration of your ownership.

You decided that you would like to realise your asset by developing and selling the large garden around your residence. You have not put the land on the market for sale as a whole.

You obtained relevant local permissions and tax planning advice was discussed pre-project.

Planning Permit was issued by the Council authorising subdivision into a number of lots and alterations of access to a road. The Planning Permit requires you to, among other things, undertake and complete the following:

● construction of a road and public footpath

● removal of vehicular access to the Highway

● landscaping plan including retention and protection of trees

● erection of tree protection fence

● provision of lighting of roads and pedestrian/cycle paths

● drainage and sewerage works

● provision of water, electricity and telecommunication supply to each lot, and

● provision of street number markers.

The Plan of Subdivision was certified by Council. You provided a copy of the plan.

You engaged the services of ABC Pty Ltd (ABC) to manage the subdivision process. You are directors of ABC, which is the trustee of your family trust.

You state that you personally have not undertaken any activities in relation to the subdivision. ABC was engaged to conduct the development activities.

You advised that under your arrangement, ABC pays for all the development costs and you will repay these costs by means of management fees payable to ABC.

The subdivision activities started in the financial year A and were completed by financial year B.

You provided copies of Progress Payment Certificates issued by Consulting Company to ABC for work done by the contractor Construction Company. The first Progress Payment Certificate shows the contract sum and subsequent progress payment certificates show variations (additions).

ABC took out a loan to finance the development. You provided a copy of ABC’s Loan statement. A zero opening balance was shown on a certain date and a zero closing balance was shown on a certain date. During that period various debits for Progress Payments were recorded. Repayments via funds transfer were made.

You state that the development costs include permits, provision of road, power, water and sewerage which were minimal activities needed to subdivide the land.

You pay management fees to ABC for its services in managing the subdivision. You stated that as ABC pays the development costs, you pay for these costs via the management fees.

You provided copies of tax invoices issued by ABC to you. The description states “management fees“ relating to a particular quarter.

An Agreement pursuant to the Planning and Environment Act was made between you and the Council. This Agreement was entered into in order to, among others, comply with a condition of the Planning Permit which prohibits, restricts or regulates the use or development of the land.

You engaged a real estate agent to market and sell the Lots.

You provided a spreadsheet with heading “Business Transaction” which shows that proceeds of Lot sales are credited into this account. You also provided a spreadsheet titled “Loan Reconciliation” which shows that the proceeds of Lot sales are distributed to the Loan and also to another loan account and to a transaction account.

You provided copies of ABC’s financial report which contain the following information:

● The non-current assets – plant and equipment shows particular amounts. The Notes to the financial statements lists these as capitalised costs on ABC development.

● The Non-current liabilities include Funds - Unsecured Loan.

● The Profit and Loss Statement shows in the Expenditure side “Development Costs Paid*” with a notation “*Capital; not deductible”.

● The Profit and Loss Statement do not show any management fees in the Income side.

● In his email you accountant states that the financials will need to be revised to include the ABC management fees.

You retained Lot X which contains the homestead and continues to be your principal place of residence.

You provided copies of the Contract of Sale of Real Estate for all the lots.

Some of the settlements were received in the current financial year.

Some of the contracts provide that the parties agree that the margin scheme applies to this contract.

You provided a copy of the Title Search which shows that the Land is encumbered by a mortgage in which the Bank is named as mortgagee.

You state that the subdivision of the Property is a one-off activity. You have not previously undertaken any subdivision activities nor will you undertake any future developments.

Reasons for decision

Summary

You are making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the Lots.

Detailed reasoning

GST is payable on the sale of the Lots if you are making a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it 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; 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.

(* denotes a term defined in section 195-1 of the GST Act.)

All of the requirements of section 9-5 of the GST Act must be satisfied for the sale of the Lots to be a taxable supply.

Who is the entity making the supply of the Lots?

The title of the Property is registered to two owners. Therefore, we first need to determine whether the sale of the Lots is made by each individual separately or by a partnership for GST purposes.

The term 'you' applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (among others) an individual and a partnership.

The term 'partnership' is defined in the GST Act by reference to the definition of 'partnership' in the Income Tax Assessment Act 1997. That definition states:

partnership means:

(a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly…

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) in receipt of ordinary income or statutory income jointly. We refer to this type of a partnership as a tax law partnership, which exists for tax purposes only.

At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of the property result in a partnership under general law.

However, the GST Act has adopted the income tax concept of tax law partnerships as a means of dealing with the GST obligations and entitlements arising from the common situation of co-ownership of property and its exploitation for income producing purposes.

Goods and Services Tax Ruling GSTR 2004/6 explains how GST applies to transactions involving tax law partnerships and co-owners of property.

As explained in paragraph 49 of GSTR 2004/6 we take the view that if a co-owned property is converted from a non-income producing use to an income producing use, a tax law partnership is formed when the co-owners enter into the agreement to convert the property. In these cases, the property becomes an asset of the partnership when the partnership is formed and the asset commences to be used for the purposes of the enterprise of the partnership. Any subsequent supply of the property or an interest in the property is a supply by the partnership.

In applying the principles contained in GSTR 2004/6 to the facts provided, we consider that a tax law partnership exists in your circumstances.

This is because there is an association (existence of a mutual or common purpose) between the co-owners who have an entitlement to receive income jointly (as one entity) from the sale of the Lots.

Therefore, the application of section 9-5 of the GST Act applies from the perspective of the partnership of X and Y, who is the supplier of the Lots.

Taxable supply

Based on the information provided, the sale of the Lots satisfies the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you supply the Lots for consideration and the supply is connected with Australia as the Lots are located in Australia. Furthermore, the sale of the Lots in the circumstances described is neither GST-free nor input taxed.

It remains to be determined whether the sale of the Lots is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Whether the sale is made in the course or furtherance of an enterprise that you on

Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done:

● in the form of a business (paragraph 9-20(1)(b) of GST Act), or

● in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of GST Act).

Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. 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.

MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Paragraph 264 of MT 2006/1 discusses two court cases, Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (Casimaty), involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

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. Paragraph 265 of MT 2006/1 provides the following list of factors:

● 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

● buildings have been erected on the land.

Examples 28 to 31 in MT 2006/1 are examples of subdivisions of land that are not enterprises and Examples 32 to 35 are examples of subdivisions of land that are not enterprises.

Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this case. This requires 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 is determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities.

You advised that you acquired the Property before 1985 with the intention of using it as your primary residence. Since, your acquisition of the Property you have used it as your primary residence.

You decided that you would like to realise your asset by developing and selling the large garden around your residence.

You obtained council approval to develop the land and subdivide it into a number of lots.

You appointed ABC to manage the development. Under your arrangement, ABC pays for all the development costs and you will repay these costs by means of management fees payable to ABC.

Based on the information provided, it is considered that ABC is undertaking the development on your behalf. As office holders of ABC, you, either jointly or one of you on behalf of the other, have control or significant influence over the management of the development activities.

As legal owners of the Property you have 100% beneficial interest in the Property and any profit from the development ultimately benefits you. When undertaking this subdivision, you agree to undertake certain things, including associated risks in pursuit of profit or gain whilst undertaking the development activities.

You advised that you have not taken steps to sell the excess land as a single lot. You sought advice for the subdivision of the excess land into a number of lots. These activities show there is a plan and one that was undertaken in a commercial business-like manner.

We consider there has been a change in purpose of the excess land. The character and nature of the excess land, that is subject to development, subdivision and sale has changed from capital in nature to revenue in nature.

You state that the activities undertaken are necessary to meet council requirements to secure council approval for the subdivision.

The phrase used in the court cases of ‘undertaking only the development of the land required to secure council approval for the subdivision’ must be taken in the context of:

● the level of activity in the relevant development

● the commerciality of the project and

● the complexity of the work required to be completed for the subdivision to take place

and not limited to the fact that you complied with what council required.

The Planning Permit provides for extensive activities to be carried out including:

● construction of a road and public footpath

● removal of the existing vehicular access

● landscaping plan including retention and protection of trees

● erection of tree protection fence

● provision of lighting of roads and pedestrian/cycle paths

● drainage and sewerage works

● provision of water, electricity and telecommunication supply to each lot, and

● provision of street number markers.

You have not merely divided the excess land into several allotments and sold. The level of development activity you undertook is similar to what would be undertaken by a property developer.

The lots were advertised for sale through a local real estate agent. There is short timing from the completion of the development to advertisement and sale of the Lots.

ABC took out a loan to finance the development. By incurring considerable expenses to develop the land the purposes went further than a mere disposal; it was clearly to increase return on disposal by developing the land so as to get a better price for it. The effort, borrowing and expenses were more than would reasonably be expected for a mere realisation of an asset.

You consider that your situation is similar to Example 33 at paragraphs 291 to 293 of Miscellaneous Taxation Ruling MT 2006/1 which states:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

We do not consider your case to be similar to Example 33 because in that example the only thing done to effect the subdivision into two lots is to survey the land. You have done more than just surveying the land and subdividing into two lots.

We acknowledge that your advancing age may have been a factor in deciding to undertake the development. However, after weighing up all the factors, it is our view that on balance, your age is not a determinative factor.

While the activities you undertook are a one-off transaction, they include factors listed in paragraph 265 of MT 2006/1 which on balance indicates that an adventure or concern in the nature of trade is being carried on in relation to subdividing and selling the Lots. These activities go beyond the mere realisation of a capital asset. Therefore, you are considered to be carrying on an enterprise as defined in section 9-20 of the GST Act.

Based on the information provided, the sale of the Lots is made in the course or furtherance of an enterprise that you carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Whether you are required to be registered for GST?

As you are not registered for GST, it needs to be determined whether you are required to be registered for GST.

Section 23-5 of the GST Act provides that you are required to be registered if:

● you are carrying on an enterprise, and

● your GST turnover meets the registration turnover threshold of $75,000.

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

● your current GST turnover is at or above $75,000, and the Commissioner is not satisfied that your projected GST turnover is below $75,000 or

● your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the projected value of all supplies expected to be made in the next 11 months.

In working out both your current and projected GST turnover, you disregard certain supplies including:

● supplies that are input taxed and

● supplies that are not made in connection with an enterprise that you carry on.

None of these exclusions apply to your case.

However, 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 you:

● by way of transfer of ownership of a capital asset, or

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

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

The GST Act does not define the term capital assets. Generally, the term 'capital assets' refers to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. That is, if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital nature even if such a disposal is an occasional or one-off transaction.

The supplies in your enterprise are the sales of the Lots which resulted from converting your land, which was originally a capital asset, into a revenue asset. At the time of sale, the Lots are not capital assets.

Furthermore, the sale of the Lots is not a transfer solely as a consequence of ceasing to carry on an enterprise. We consider that your enterprise of property development ceases as a consequence of the disposal of the Lots, rather than them being disposed of in consequence of ceasing to carry on your enterprise. Hence, the value of the sale of the Lots is included in your projected turnover.

As such, when you sell the Lots, both your current and projected GST turnovers are above $75,000. Hence, your GST turnover meets the registration turnover threshold and you are required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act is satisfied.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the sale of the Lots is a taxable supply.

Additional information

Generally, the amount of GST payable on the sale of real property is equal to one-eleventh of the sale price. If eligible, you may be able to use the margin scheme on the sale of the Lots. Under the margin scheme the amount of GST payable on the sale is one-eleventh of the margin for the sale.

The guide GST and the margin scheme will assist you in working out your eligibility to use the margin scheme. You can also refer to Goods and Services Tax Ruling GSTR 2006/7 which outlines how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

You are entitled to input tax credits for acquisitions relating to the subdivision of the Property if the requirements of section 11-5 of the GST Act are satisfied. Refer to information on our website on Claiming GST credits.

All publications referred to above are available on our website www.ato.gov.au