Edited version of your written advice

Authorisation Number: 1051405635908

Date of advice: 26 July 2018

Ruling

Subject: Subdivision and development of farmland

Question

Is Lot X located at X Street, X developed and subdivided into X lots known as ‘X’ for sale, an enterprise or a ‘mere realisation’?

Answer

Not an enterprise for GST purposes

Relevant facts and circumstances

You are not, nor have you been, registered for GST in your personal capacity. Your Family trust (ABN X) was registered for GST at all material times.

You acquired land covering X acres by way of an intergenerational transfer in X. The land comprised a number of titles some adjoining, and some near X.

You leased some of the land you acquired to your family trust which operated a farm which produces X.

In January X you were approached by a local real estate agent to sell the Lot X being X acres in size located on the edge of the rural village of X (“the Project Land”) to a developer to be developed into residential blocks.

The real estate agent advised you that she had a developer who was interested in purchasing the Project Land. The real estate agent continued to facilitate the relationship between you and the Developer.

After discussions you entered into an agreement called an Open Agency Selling Agreement (“Agency Agreement”) dated X which allowed the agent to market the X acres for an estimated sale price for the Project Land of $X.

● This agreement at Part X, item X included an estimated remuneration fee set X%.

● You received a tax invoice from the X Real Estate dated X in the amount of $X. This was in relation to the final agreed case price of $X with vendor to receive X lots.

● X Real Estate invoiced X for commissions and marketing for the sale of subdivided lots. Lot X is an illustration of this practice.

● On 11 X you began negotiations with X who was a director of a development company called X (ABN: X) (“the Developer”). The purpose of the discussions were around developing the Project Land and selling of the developed lots. Under the negotiations under the Agency Agreement you advised that you wanted $X out of the proceeds comprising:

● A deposit of $X to be paid on signing of the contract (10% of cash payable);

● X identified blocks from the subdivision in lieu of consideration; and

● The balance in cash of $X.

At the time this deal was struck the Certificate of Title for the Project Land showed you, in your personal capacity, to be the registered owner.

Development Deed

On X you entered into the Development deed (“Development Deed”) with X who acted in the following different capacities:

● as the sole director of the Developer;

● as trustee for the X Superannuation Fund (“the Option Holder”); and

● as the Guarantor (“the Guarantor”)

The Development Deed covered the Project Land. The Recitals in the Development Deed were as follows:

A. The Owner is the registered Proprietor of the Project Land.

B. The Owner has agreed to grant the Option Holder options to Purchase the Land.

C. Subject to the terms and conditions set out in this Deed:

a) the Owner has agreed to seel and the Developer has agreed to purchase the Unsold Land;

b) the Developer has agreed to carry out the Development.

The Guarantor has agreed to guarantee the obligations of the Developer and the Option Holder.

Clause X of the Development Deed states:

X.1 Agreement to Purchase

X.1.1 Subject to clause X the Owner agrees to sell and the Developer agrees to purchase the Unsold Lots for the Purchase Price.

X.1.2 The Developer must pay the Purchase Price to the Owner within X after registration of the Deposited plan.

X.1.3 In accordance with the requirements of the Conveyancing Act and Regulations under such Act, the following documents are annexed to this Deed:

a) a Certificate pursuant to section 149 of the Environmental Planning and Assessment Act;

b) a copy of the current Folio Identifier in respect of the Project Land;

c) a copy of the deposited plan in respect of the Project Land (DP X).

Clause X of the Development Deed sets out the responsibilities of the Developer:

X. Responsibilities of the Developer

X.1 The Developer is responsible for and will control, co-ordinate, manage, supervise, administer, arrange and direct all activities necessary for the completion of the Development including, without limitation:

a) the appointment, procurement, liaison with and removal of builders, development managers, subcontractors, quantity surveyors, engineers, architects, leasing agents and all other principal consultants;

b) the progressive obtaining of all necessary approvals and consents of governments, statutory or other competent authorities in relation to the Development;

c) the supervision, control and direction of any contracts relating to the Development; and

d) the supervision and promotion of the sale of the Project Land.

Clause X of the Development Deed deals with GST:

X. GST

X.1 If any goods and services tax (GST) is payable on any supply made by a party (supplier) to another party (recipient) under or in connection with this Deed, then the recipient must pay to the supplier, on demand, the amount of such GST (to the extent that it is not already specifically included) in addition to the consideration otherwise payable for the supply.

X.2 The supplier must provide the recipient with a tax invoice in such form as will permit the recipient to claim an input tax credit for the amount of such GST should it be so entitled.

Clause X.1(a) of the Development Deed provides:

The Owner agrees that the Developer may use the Project Land as security for the financing of the Subdivision Costs associated with the Development.

Clause X.1 of the Development Deed required you to allow the Developer to use the Project Land as security for project financing so that the Developer had funds to commence works. This occurred, with X ATF the X Superannuation Fund (ABN X) (“X Super”) providing finance to the Developer. X Super held a mortgage over the Project Land.

Clause X.1 provides that “the Owner Grants to the Option Holder an option exercisable during the Call Option Period for the Option Holder to purchase one or more of the Lots.” This provision allowed options over individual lots for the Project Land, and was intended to cover possible forward sales of lots prior to the final transfer of the Project Land to the Developer (clause X.2). Specifically, clause X.1 states:

X.1 In consideration of the payment by the Option Holder to the Owner of an option fee of X Dollars ($X) on the date of this agreement (the receipt of which the Owner acknowledges) and a further option fee of X Dollars ($X) within 14 days after the Developer receives the Development Consent (subject to clause X), the Owner grants to the Option Holder an option exercisable during the Call Option Period for the Option Holder to purchase one or more of the Lots subject to the terms and conditions of this agreement.

Clause X.10 specifies how any proceeds arising as a result of exercising an option for a sale of a lot are to be split pending the full settlement of the sale of all the subdivided lots.

An additional deposit amount of $X was paid to you by the Developer on X.

On X the Developer provided you with a cheque (naming you as the payee) for the amount of $X.

There were some Deeds of variation executed during the course of the project.

Sales

By letter dated X your lawyer wrote to the Developer’s lawyer advising him that the X sales contracts prepared at that time had incorrectly treated the supply of the lots as ‘taxable in full’.

By letter dated X the Developer’s lawyer provided copies of the sales contracts for X lots which had settled. Those contracts showed you as the vendor.

In the period up to X there were X sales of the subdivided lots being made and you were presented with contracts to be signed. Those contracts also showed your name as the Vendor, albeit c/- X.

Your signature appeared on the sales contracts.

As at X, X of the lots have been sold. The Project is not fully complete and there are X lots left to sell.

You have been paid the $X as originally contemplated. As a term of a Deed of Final Settlement executed on X you were paid the sum of $X as part payment towards the yet unpaid balance of the original sale. You also received your X lots on that date. Those blocks were part of the original sale price.

You were reimbursed by the Developer for expenses you incurred during the period the developer was enduring some financial stress.

At the time of this ruling, you have not constructed any buildings on your X lots you retained from the venture.

At your insistence, the Developer has accepted responsibility for any GST liability arising from the sales of the lots.

At no point did title to the lots transfer to the Developer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 – subsection 9-20(1)

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

Reasons for decision

Summary

The activities undertaken by you with respect to Project Land are considered a mere realisation of a capital asset, and not an enterprise for GST purposes

The issue for determination is whether the activities amount to carrying on an enterprise.

Detailed reasoning

Enterprise

Section 9-20 of the GST Act provides that the term ‘enterprise’ includes, among other things, 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. The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 (MT 2006/1) provides guidance on what activities will amount to an enterprise.

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’. In particular:

● A business encompasses trade engaged in on a regular or continuous basis.

● 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 266 of MT 2006/1 provides when 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 in paragraph 265 of the ruling, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Mere realisation v disposal in the course of business or profit making undertaking

Generally, when you enter into an arrangement to develop and sell your land, the key question to be determined is whether the ultimate sale is a ‘mere realisation’, or whether it is a disposal either in the course of business or as part of a profit-making undertaking or scheme.

Where activities resulting in the supply of land is considered a ‘mere realisation’ of a capital asset, then the activities will not be considered to be an enterprise for GST purposes under s 9-20.

The resulting supplies of land by you will not be taxable supplies as s 9-5(b) of the GST Act.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme. Where the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction, then the activities would satisfy the definition of an enterprise for GST purposes, even though the you did not have a profit-making purpose at the time of acquiring the asset.

Case Law

In McClelland v FC of T 70 ATC 4115, the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Lord Justice Clark, in distinguishing between proceeds that is mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

…What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being – is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

A leading authority on ‘mere realisation’ of a capital asset is the case of Scottish Australian Mining Co. Limited v FCT (1950) 81 CLR 188 (Scottish Australian Mining). In this case, the taxpayer was formed for the purpose of mining coal and purchased land in 1863 to carry on that business. After mining operations ceased in 1924, the taxpayer subdivided the land; built roads and a railway station; made sites available for schools, churches and parks; and sold the subdivided parcels at a considerable profit. The court held that the profits should not be included in assessable income as the taxpayer had not acquired the land for the purpose of profit-making by sale, nor was it engaged in the business of selling land. It had merely taken ‘the necessary steps to realise the land to the best advantage’.

In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ said (at p.4034) that:

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 California Copper …'what is done in not merely a realisation or charge of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.

In Statham & Anor v FC of T 89 ATC 4070; (1988) 20 ATR 228 (Statham), the Court held that the sale by subdivision of farming land constituted a mere realisation of the asset and not proceeds of a business. The Court said (at ATC pp 4076-4077; ATR pp 235-236) that:

The questions which the Tribunal had to determine were whether the subdivision of the land in question amounted, on the one hand, merely to the advantageous and enterprising realisation of a capital asset or, on the other hand, to a business of land development carried on by the owners (sec 25(1)) or to an undertaking or scheme in which an essential element was the purpose of profit-making (sec 26(a)).

Application to your circumstances

Having regard to the cases highlighted above, the Commissioner is of the view that you are merely realising a capital asset.

Taking into consideration your intent under the Development Deed and your conduct, the Commissioner considers that the circumstances surrounding the subdivision and sale of the Project Land, on balance, indicate that there was no intention or purpose on your part to carry on a business of development and sale, or to enter into activities in the form of an adventure or concern in the nature of trade, including a ‘one off’.

This position is primarily supported by the following facts:

● The Project Land was not originally acquired for the purpose of subdivision; it was acquired as a consequence of an inheritance in X.

● The Project Land has been used for farming activities.

● You entered into this arrangement to receive $X plus X blocks of residential land in return for the supply of the X acres of land to the Developer.

● This is supported by the:

● draft document provided that discussions with the Developer in X;

● open agency selling agreement you entered into with the Real estate Agent to sell the X acres as a single Lot;

● the charge by X Real Estate of $X for commissions; and

● you entered into a Deed of Final Payment for the remaining funds in relation to what was originally intended.

● You will only ever receive a fixed amount of $X from the sale of the Project Land. Any variation in proceeds is a risk borne by the Developer. In addition you will not share in any additional gain made from the sales of the subdivided lots of land.

● While the Land will be used as security for the Project Costs, it is the Developer that bears the financial risk of the Project. The Developer sought town finance and provided the Project Land as security for the finance.

● You did not actively participate in the development process and will not be involved in with the provision of the Project Services. Where you have paid costs at certain stages, due to the Developer being under financial strain, you have been reimbursed in full.

● You have not previously been involved in the subdivision and sale of land or activities that would otherwise amount to property development activities.

● You were passive in the rezoning of the Land to residential.

● You have no previous experience or skill in property development and did not actively seek to sell the Project Land.

● No buildings have been erected on the lots you retained from the Project Land.

While you engaged the Developer to undertake the development of the Project Land, it is the Developer who assumed the financial risk, with all financing and costs to be borne by the Developer. Any upside in the profit from the project is to be enjoyed by Developer. You will derive a fixed amount of $X, plus X developed lots irrespective of the actual cost or final selling price of the lots.

Therefore the Commissioner considers that your proposed endeavour to sell the land will not be carrying on an enterprise for GST purposes, but rather a mere realisation of your asset.

As we consider that the sales of the subdivided lots of land are not in the course of an enterprise, your supplies will not satisfy s 9-5(b), and you are not required to be registered for GST in relation to this undertaking.