Edited version of your written advice

Authorisation Number: 1051417360154

Date of advice: 20 August 2018

Ruling

Subject: GST and sale of subdivided lots of land.

Question

Will the sale of the subdivided lots of land be a taxable supply for GST purposes?

Answer

No.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

● Several years ago, you and your former spouse purchased a number of lots of rural land (original land) as joint tenants.

● The original land was recorded on one certificate of title and not separated by fences and was treated as one parcel of land by you.

● The original land was zoned as rural and allowed for only one dwelling, which was located on a lot not subject to this subdivision.

● You resided in the dwelling located on that lot for a few years until you sold that lot and moved overseas.

● The remaining land was used for rural purposes after you returned to Australia and you undertook primary production activity on the property for couple of years.

● As part of a property settlement with your former spouse, you have become the owner of Lot L, M, N and P. (the current Lots). Separate titles were issued for each lot.

● The current lots were rezoned from rural to residential low density and as a result of the rezoning; a dwelling could be built on each lot.

● You built a dwelling on Lot P and it became your main residence.

● You attempted to sell Lot M and N by engaging real estate agents and neither lot were sold and were taken off the market.

● Later, you obtained advice from your relatives who carry on a business of planning and construction.

● Based on the advice provided, you decided to keep Lot P as your main residence and subdivide Lot L. And eventually you will subdivide and sell Lot M and N.

● You used the services of the business of your relatives to lodge a development application (DA) with the council and to carry out the subdivision works.

● You subdivided the Lot L in two stages (subdivided lots):

● Stage 1: subdivided Lot L into 2 new lots.

● Stage 2: One of the new lots was subdivided into a number of lots.

● You sold couple of subdivided lots off the plan and couple of lots have not yet been placed on the market.

● You have not borrowed funds to finance the subdivision.

● You are considering carrying out similar subdivision activities on Lots M and N for sale over the next few years’ time.

● You have confirmed the following in relation to the property development activities:

● you never been involved in a subdivision in the past;

● you have not made any improvements other than what was required to satisfy the conditions of the DA;

● you do not have a written business plan;

● you do not have an office, stationary, letterhead;

● you have not purchased additional land to carry out the subdivision;

● you are not erecting any buildings on any of the lots that you are intending to sell; and

● you have contracted with a real estate agent to sell the subdivided lots.

● You were registered for GST for couple of years and cancelled the GST registration by backdating the cancellation from the registration date.

● You did not claim any input tax credits nor reported any taxable supplies.

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 Subsection 9-20(1)

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

You are liable to remit GST on any taxable supplies you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if you make the supply for consideration; the supply is made in the course or furtherance of an enterprise that you carry on; 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.

The supply of subdivided lots of vacant land is not GST-free or input taxed under any provision of the GST Act.

You will make the supply of subdivided lots of vacant land for consideration and the supply is connected with the Indirect Tax Zone. However, it is necessary to ascertain whether your supply will be made in the course or furtherance of an enterprise and whether you will be required to be registered for GST.

Carrying on an enterprise

Enterprise is defined in subsection 9-20(1) of the GST Act, which states;

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

(d) ……………………………

Miscellaneous Taxation Ruling MT 2006/1: The New Tax System: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the meaning of ‘an entity’ and ‘enterprise’ for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 provides that the principles in MT 2006/1 have equal application to the meaning of ‘entity’ and ‘enterprise’ for the purposes of the GST Act.

You were not carrying on any enterprise by using the current lots of land except you grew garlic on the land for couple of years. You never engaged in any property development activities in the past. However, it is relevant to determine whether your activities in relation to subdividing the Lot L would amount to carrying on an enterprise for the purpose of the GST Act.

Isolated transactions and sales of real property

Paragraphs 262-302 of MT 2006/1 refer to isolated transactions and sales of real property. Paragraphs 262 and 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are ‘one-off’ 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.

Paragraphs 264 and 265 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty V.v. FC of T (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……….If several of these factors are present, it may be an indication that a business or an adventure or concern in the of trade is being carried on. These factors are as follow:

● 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.

Paragraph 266 of MT 2006/1 states:

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of capital assets, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlines 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.

Application of the ATO view to the property development activities carried out by you.

In relation to the subdivided lots of land, we note the following:

● The original property was used by you as your main residence before you moved overseas. The current lots were zoned from rural to residential by the council and you built a dwelling on Lot P and it became your residence. Although the remaining lots were used by you for primary production activity for a short period of time, there is no change of purpose for which the property was held.

● Additional land was not acquired to add to the subdivided lots of land.

● You attempted to sell Lot M and N by using a real estate agent and taken off from the market as you could not sell them. You obtained the services of a company owned by your relatives in relation to the subdivision of Lot L. You intend to carry out similar subdivision of Lot M and N over the next few years’ time. There is no coherent plan for the subdivision of Lot P.

● You have confirmed that you have not undertaken any improvements on the land other than what was required to satisfy the requirements of DA.

● You have not borrowed any funds to finance the subdivision and will continue to live on the remaining land.

The above analysis indicates that your activities would not amount to an enterprise of property development. There is a need for you to dispose part of your properties as the circumstances have changed in holding your properties. You could not sell Lot M and N without subdividing or developing them and you intend to sell them in the future. Based on the facts provided, it is our view that you are not carrying on an enterprise of property development in relation to the activities carried out in subdividing Lot 1 for sale.

Required to be registered for GST

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The GST registration turnover threshold is $75,000. You were registered for GST for couple years and have cancelled your GST registration backdating the cancelation as you were not required to be registered for GST.

You meet the GST registration turnover threshold if you exceed your current GST turnover or projected GST turnover. In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital asset is excluded from projected GST turnover. Paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7 discuss the meaning of ‘capital asset’. Capital assets are generally those assets that make up the profit yielding subject of an enterprise.

In this case, the current lots were used for primary production activity for a short period of time and Lot L was not acquired for the purpose of subdivision and sale. Based on the facts provided, there were no other enterprises carried out on the subdivided Lots and the property was held for a number of years before it was subdivided. As such the subdivided Lots are considered as capital assets. Therefore, the sales proceeds of subdivided Lots will be excluded from the calculation of your projected GST turnover and you are not required to be registered for GST under section 23-5 of the GST Act.

Since you are not carrying on an enterprise of property development and not required to be registered for GST, the sale of subdivided Lots of land would not satisfy all of the requirements of section 9-5 of the GST Act. Therefore, the sale of subdivided Lots of land will not be a taxable supply for GST purposes.