Edited version of your written advice

Authorisation Number: 1051317104630

Date of advice: 8 December 2017

Ruling

Subject: Goods and services tax and property subdivision

Question

Are you required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the property development?

Answer

No, you are not required to be registered for GST pursuant to section 23-5 of the GST Act in relation to the property development.

Relevant facts and circumstances

You purchased a property in mid-2013 for $X as joint tenants.

From mid-2013 to mid-2014 you rented the house to an unrelated third party.

In mid-2014 you demolished part of the house and began to rebuild. The work was finished in mid-2015. You spent $X on the rebuilding.

You were approached by your Council to consider rezoning the property to general residential in 2014. This would have increased the number of lots the property could be subdivided into and consequently the value. After initially attending consultation, you opted not to participate, and retained the low density zoning.

In late 2014, while the rebuilding was underway, you moved into the house as your main residence. You incurred further costs in fencing, landscaping and constructing a shed after the work on the house was completed.

You had no intention at all to subdivide the property at the time of property purchase.

The property was purchased with an existing residence located on it, which was under a lease agreement. This lease agreement was extended for an additional 12 months, within this time your previous residence was sold.

You started planning extension and renovations for the existing residence at the property during the period it was tenanted. The lease agreement ceased in mid-2014 and construction of the extension and renovation commenced in mid-late 2014

During the renovations, much of the existing residence was demolished, however several components were incorporated into the renovated premises, including the slab, certain walls, and assorted utility connections.

The proceeds from the sale of the prior main residence were used to partially fund the new construction. You also obtained a Home Loan on terms of 30 years to fund the remainder of the renovations. All transactions have been carried out privately, with no business interests being involved.

You have considered all options for disposing of the property and intend to proceed with the option that allows you to realise the maximum capital value of the asset. The expected sale value of the property ‘as is’, proceeding with a subdivision and sale appears to be the best realisable value.

No project management agreement has been prepared as yet, as the transaction is still in the planning stage. You have not at any stage sought Council approvals. These tasks will be carried out by the project manager once appointed.

From mid-late 2016 you have stated that you became engaged in a series of disputes with your neighbour which continued until mid-2017.

You received no offers to purchase the property as a whole.

You moved out in mid-2017 and rented the property to an unrelated party.

You now live in a different property that is owned by A in equal shares with a colleague, and pay partial rent to the other owner. A and a colleague previously subdivided the rear part of this property, and sold the vacant land in mid-late 2017.

You have previously invested a third share in a small property development with your relatives. You have retained ownership of two (one third) of the townhouses in this development as long term rental investments.

You are intending to subdivide your X.X ha block into a number of smaller blocks. You intend to build an access road along one boundary to provide access to each of the blocks. One block will contain the existing house.

The remaining blocks will have power, communications, water and sewerage connected. There will be excavation of drainage works.

You will engage a project manager to undertake the subdivision and associated activities, and will not be personally involved in supervision of the project. As well as using your savings, you will borrow money to help finance the project.

You will not be involved with marketing or selling the blocks personally.

The market value of the property, including the house, before subdivision is between $X and $X. Projected costs for the subdivision are around $X.

You expect to sell the block with the house on it for around $X and the remaining blocks for around $X each. Total proceeds are projected to be approximately $X.

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 Paragraph 9-5(a)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25

Reasons for decision

In the reasoning for your question unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Requirement to register for GST

Under section 23-5 GST Act you are required to be registered for GST if you are carrying on an enterprise (and your GST turnover meets the registration threshold).

Section 23-5 of the GST Act requires you to be registered for GST if:

a) you are carrying on an enterprise, and

b) your GST turnover meets or exceeds the registration turnover threshold. (The current registration turnover threshold is $75,000)

Section 9-20 GST Act relevantly defines enterprise as an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

Paragraph 234 of Miscellaneous Taxation Ruling MT 2006/1 ‘The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number’ 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 as:

A business encompasses trade engaged in on a regular or continuous basis; and

● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 247 of MT 2006/1 states that “...lf the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset...”. For example, if a property was purchased to serve as the main residence of the taxpayers for their personal enjoyment.

Paragraphs 258 and 259 of MT 2006/1 further provide that:

● 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.

Indicators of carrying on a business are listed in paragraph 178 MT 2006/1 and factors examining whether activities are an adventure or concern in the nature of trade are listed in paragraph 265 MT 2006/1. Paragraph 266 notes that no single factor will be determinative; rather it is a combination of factors that leads to a conclusion about the character of the activities.

Will your supplies of the seven subdivided lots be taxable supplies pursuant to section 9-5 of the GST Act?

You are an entity for the purposes of the GST Act and will be liable for GST on any taxable supplies you make.

Section 9-5 GST Act provides that 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 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.

For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

In your case you will be supplying a number of subdivided lots for consideration and the lots are connected with Australia as they are located in the indirect tax zone (Australia).

Once you made the decision to sell, you received no offers to purchase the property as a whole. You will subdivide your X.X ha block into a number of smaller blocks. You will build an access road along one boundary to provide access to each of the blocks. One X ha block will contain the existing house.

The remaining blocks will have power, communications, water and sewerage connected. There will be excavation of drainage works.

You will engage a project manager to undertake the subdivision and associated activities, and will not be personally involved in supervision of the project. As well as using your savings, you will borrow money to help finance the project.

Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied.

Accordingly, we must determine whether:

a) Your sales of the lots are in the course or furtherance of an enterprise that you are carrying on; and

b) If so, whether you are required to be registered for GST.

Enterprise

The term ‘carrying on an enterprise’ is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines enterprise to include an activity, or series of activities, done:

● In the form of a business

● In the form of an adventure or concern in the nature of trade or

● On a regular or continuous basis, in the form of a lease, license or other grant of interest in property

The ATO view on the meaning of the term ‘enterprise’ is explained in detail in MT 2006/1.

MT 2006/1 at paragraph 154 provides:

154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise.

You are currently registered for GST for other reasons. Based on the information provided in your ruling application, we have assumed that your planned subdivision and sale of the subdivided lots will exceed the GST turnover threshold of $75,000.

It is necessary to consider whether your subdivision activities are in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. The issue is whether the property used in your licensing activities, (excluding your home) has been changed to a revenue asset as a result of your decision to undertake development activities on your land.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of ‘an adventure or concern in the nature of trade’ where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

Paragraph 237 of MT 2006/1 provides that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

There are number of cases that point to indicative factors that are relevant for consideration.

● Statham & Anor v. Federal Commissioner of Taxation; (89 ATC 4070); (20 ATR 228) (Statham)

● Casimaty v. FC of T;; (1997) 151 ALR 242 (Casimaty)

● Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (82 ATC 4031) (Whitfords Beach);

● McCorkell v. Federal Commissioner of Taxation - (28 July 1998) (28 July 1998) (McCorkell);

● FCT v The Myer Emporium Ltd (1987) 61 ALJR 270 (Myer)

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. 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.

Gibbs CJ in Whitfords Beach says in his opening statement:

A profit made on the sale of an asset may be treated as assessable income within the Income Tax Assessment Act 1936 (Cth.) as amended (``the Act'') for one of a number of reasons. In the first place, if the profit should be regarded as income in accordance with the ordinary usages and concepts of mankind, it will be assessable income within sec. 25(1) of the Act. When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas. 159, at p. 166, that have so frequently been quoted, ``what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business''.

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’, as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations.

The following factors are considered important in determining whether your development activities conducted on your property, previously used in your licensing activities, are an adventure or concern in the nature of trade and therefore an enterprise for GST purposes:

● The level of pre-planning and development activity on the land including that activity necessary to meet Council requirements

● Has there been a change in use or purpose of the land?

● Are the activities systematic, organised and carried on in a business-like and commercial manner?

● Size and scale, involvement, and risk; and

● Relevant knowledge or skill.

Initially, you may have been conducting a leasing enterprise, since the original property had an existing lease at the time of your property purchase which was extended by 12 months: Refer to Goods and Services Tax Determination GSTD 2000/9 Goods and services tax: if you let out residential premises do you need to get an ABN for PAYG purposes or register for GST? In late 2014, you moved into the property and used it as a private residence. However, you no longer reside at the property.

The level of development in your case is to be contrasted with that undertaken in Statham and Casimaty where it was said:

Statham case

The following matters are significant:

(a) the owners were at first content to sell the land as one parcel, but were unable to do so;

(b) no moneys were borrowed by them, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee;

(c) only very limited clearing and earthworks were involved;

(d) the owners relied upon the Kingaroy Shire Council to itself carry out road works, kerbing, electricity and sewerage works which were required to be done

Casimaty case

…The applicant deposes that the only works carried out to prepare the land for sale were the construction of an internal road, Opus Drive; the provision of water services, farm fencing all boundaries and the extension of the water main from Seven Mile Beach Road to the area of the subdivision.

Application to your situation

You purchased the property with the intent of making it your main residence and living on it. You spent a considerable amount of time and money in rebuilding the cottage that was on the land when you purchased it into a house that you wished to live in. You moved into the house in late 2014, and lived there until mid-2017.

At the time that you purchased the land, the planning rules would have allowed a subdivision of the X.X ha property into up to a number of blocks. It is likely that you were aware of this potential for subdivision at the time of purchase, but it was not your primary motivation for the purchase. Shortly after your purchase, the state planning rules were changed to allow subdivision of low density residential land into blocks greater than X ha, potentially allowing you to subdivide into up to a number of blocks.

You rejected the opportunity to rezone the land general residential in 2014. This is evidence that you intended to continue to live on the land and were not attempting to maximise its resale value at that time.

Once you made the decision to sell, you engaged a project engineer to investigate subdivision. They have drawn up plans to divide the property into a number of lots. The majority of the blocks are to be around X hectares, including the front block that contains the house, with two of the rear blocks somewhat larger. This is at the low end of the scale for property development. You will be conducting the development in your own names rather than through a commercial structure. You are spending a little over half the value of the land on the development. All of these factors do not indicate a commercial undertaking.

While the scheme to subdivide is undoubtedly an attempt to maximise the return on the sale of the property, it is clear that your intention at purchase was to treat the property as your main residence. You passed up the opportunity to rezone the land to a more valuable zoning in 2014.

Your intention in holding the land changed in mid 2017 when you moved out and began to investigate your options to sell, however given the scale of the development and the particular circumstances that lead to the change of intention, we consider that you will continue to hold the land on the capital account.

The capital nature of the development is relevant only to this particular scheme of subdivision. If you were to engage in further land purchase, subdivision and sale in future, it is likely that it would be considered to be on revenue account.

ATO view documents

Miscellaneous Taxation Ruling MT 2006/1 ‘The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number’

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover