Edited version of your written advice

Authorisation Number: 1051415599626

Date of advice: 23 August 2018

Ruling

Subject: Goods and Services Tax (GST) and property subdivision.

Question

Will your supplies of the 3 properties Property 1, Property 2 and Property located in Australia be considered taxable supplies pursuant to sections 9-5 and 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The sale of existing residential premises that being Property 1 and Property 2 to be used predominantly for residential accommodation is input taxed and therefore is not taxable pursuant to section 9-5 and subsection 40-65(1) of the GST Act.

The development and supply of Property 3 is a mere realisation of a capital asset and is not in the course of an enterprise. On this basis, there is no enterprise pursuant to paragraph 9-5(b) and section 9-20 of the GST Act and hence, the sale or supply of Property 3 will not be a taxable supply under section 9-5.

Relevant facts and circumstances

Entity A and Entity B (you) do not have any experience in property development or activities of a similar kind. Your usual occupation is not related to property development.

Property 1

You purchased a Property in XXXX year and lived there from that time. This property was your main residence until late XXXX. The size of this property is Xm².

Property 1 was used for a hobby of competitive sports.

You sold all of the horses and slowly moved your personal property from your home to the apartment during the year. However, you have chosen to keep this property as a main residence.

Property 2

You purchased Property 2 in XXXX year. This property was adjacent to your main residence and was purchased to increase the land available for sport activities. The size of this property is Xm².

When the property was purchased, there was a house towards the back of the property. You contemplated demolishing this house to allow the entire property to be used for horses, however the ability to rent the house presented an opportunity to assist paying off the mortgage on the property. The property has been rented since XXXX.

Property 3

In XX month XXXX year, you had the opportunity to purchase Property 3. The size of this property is Xm².

This land was purchased with the intention of creating additional animal paddocks.

The paddocks located on the other 2 properties were struggling to rejuvenate grass owing to the number of horses located there.

Your child was still heavily involved in competitive sport. You were also contemplating commencing a breeding program to allow your child better pedigree horses to compete on in the future.

However, the plan to improve this property did not eventuate. The property remained vacant.

All three properties share a private road which connects them to the main road of the suburb. There are another two properties that can access this private road.

Proposed subdivision and sale

In late XXXX year, you found the contact details of Entity C, a property consultant. With the children growing up and only one remaining at home at that time, you were curious about the potential value of the properties, so decided to contact Entity C.

After a few discussions with Entity C, you engaged them as a consultant to assist to prepare a preliminary review. Entity C was involved in the following tasks:

● Engaging a consultant to prepare a feasibility report;

● Engaging Entity D to prepare a Site Investigation Report Highest and Best Use Assessment;

● Engaging lawyers to revisit the titles of the properties and any potential issues/restrictions on the properties.

You, in consultation with Entity C, agreed that:

● The land will be subdivided into lots and sold.

● The consultant will act as a consultant only, driving the whole process and charging consulting fees.

● The consultant will be responsible for engaging any contractors

● You will not be involved in the day to day subdivision or sales process. You will continue to run your usual business not related to property development.

● Although the consultant will oversee the whole process, the sale of land will be completed by a carefully selected real estate agent.

● Property 1 (your previous main residence) will not be demolished. Instead it will be kept and sold as an existing property, although with much less land than the previous Xm².

● You will use your own funds and bank loans to support the funding requirement. The estimated costs of the subdivision are around X$, plus selling costs of X$.

● You have also engaged professional advisors to communicate with the bank in order to facilitate funding. You will most likely contribute at least X% of the projected costs from your own funds.

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(b)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

Reasons for decision

Summary

The supplies of Property 1 and Property 2 by you are not considered to be taxable supplies pursuant to section 9-5 of the GST Act.

Your supply of Property 3 is considered not to be a taxable supply pursuant to sections 9-5 and 9-20 of the GST Act since we consider that the supply of the property does not form part of you carrying on of an enterprise for GST purposes.

Detailed reasoning

In the reasoning 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

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 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

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.

One of the key requirements for making a taxable supply is under paragraph 9-5(b) which requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

If the supply of property is GST-free or input taxed, then the supply will not be taxable under section 9-5.

Subsection 40-65(1) states:

A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

For the supply of the 3 properties, that being Property 1, Property 2 and Property 3 to be taxable supplies, all of the requirements in section 9-5 must be satisfied.

In your case, you will supply Property 1 which is residential premises used by you as a private residence. You will also supply Property 2 which is leased residential premises used to derive rental income. Pursuant to subsection 40-65(1), the sale or supply of residential premises is input taxed.

You also propose to supply or sell vacant land at Property 3 to a third party.

The 3 properties are connected with Australia and they are located in the indirect tax zone.

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 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 an interest in property

The ATO view on the meaning of the term ‘enterprise’ is explained in detail in 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).

Based on the information provided in your ruling application, we have assumed that the sale of Property 3 will exceed the GST turnover threshold of $75,000.

It is necessary to consider whether your activities are in the form of a business or an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. The issue is whether the vacant land at Property 3 that you initially purchased has been changed to a revenue asset as a result of your decision to undertake development activities on your land.

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 encompasses trade engaged on a regular 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 to 261 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.

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 & 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 the factors used 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 your case, you are not carrying on a business of property development. However, we need to consider if you are carrying on an adventure or concern in the nature of trade which has a flavour of enterprise.

Paragraph 288 of MT 2006/1 provides an example of subdivisions of land that are not enterprises and states:

Example 32

288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live.

289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house.

290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter.

Emphasis added

Requirement to register for GST

Under section 23-5 you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold of $75,000.

Application to your situation

From the information you provided, you had no experience in property development. You are not actively involved in the daily business of property development and instead engaged a property consultant to manage your affairs.

Our GST view in relation to the 3 properties is per below.

Property 1: The sale of existing residential premises to be used predominantly for residential accommodation is input taxed which means no GST is applicable on the supply or sale of Property 1 by you (refer to sections 9-5, 40-65 and subsection 40-65(1)). The supply of Property 1 used by you as a private residence would also be considered as a domestic and private transaction and therefore is not taxable pursuant to section 9-5.

Property 2: The sale of existing residential premises (which was leased) to be used predominantly for residential accommodation is input taxed which means no GST is applicable on the supply or sale of Property 2 by you (refer to sections 9-5, 40-65 and subsection 40-65(1)).

Property 3:

You acquired Property 3 with the intention of creating additional horse paddocks and Property 3 was to be used for sport. You have also kept Property 3 since January 2012. We considered the factors for carrying on an ‘enterprise’ under MT 2006/1 and section 9-20 to the facts and information you provided. We concluded that the development and supply of Property 3 to be a mere realisation of a capital asset and is not in the course of an enterprise.

On this basis, there is no enterprise pursuant to paragraph 9-5(b) and section 9-20 and hence, the sale or supply of Property 3 will not be a taxable supply under section 9-5.