Edited version of your written advice

Authorisation Number: 1051417438986

Date of advice: 24 August 2018

Ruling

Subject: Property development – the sale of real property

Issue 1

Income tax – the sale of real property

Question 1

Is the sale of subdivided Land, excluding the Retailed Land, the mere realisation of a capital asset with any receipts from the expected sale proceeds or any profit that arises assessed as net capital gains within the meaning of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the expected sale proceeds or any profits that arise from the sale of subdivided Land, excluding the Retailed Land, assessable as income pursuant to section 6-5 of the ITAA 1997?

Answer

No

Question 3

Will the capital gain be affected by section 118-20 of the ITAA 1997?

Answer

No

Issue 2

GST – the sale of real property

Question 1

Are the sales of the subdivided lots taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

To the extent of the sales of the lots resulting from the subdivision of Lot 2 owned by the trustee of the ABC Trust, the sales are taxable.

To the extent of the sales of the lots resulting from the subdivision of Lot 1 owned by XY, the sales are not taxable supplies.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 January 2015

Relevant facts and circumstances

Purchase of the Property

1. XX migrated to Australia and came from a farming background.

2. The ABC Trust (the Trust) was established with ABC Pty Ltd as trustee of the Trust (the Trustee). The beneficiaries of the Trust are the family of XX.

3. The Trust registered for goods and services tax (GST) on 1 July 2000 and is still currently registered for GST.

4. The Trust carries on the following enterprises:

a. The leasing of commercial premises, being a number of warehouses located in a different suburb. The Trust has owned the warehouses for approximately 30 years and the warehouses have been continuously leased during that time.

b. The leasing of residential premises, being a number of residential properties.

5. In 19AB, the Trustee entered into a contract for the purchase a Property. At the time, the Property was a single title.

6. The Property was purchased so that XX and their family could undertake agricultural activities on the land. The Property was used for grazing cattle and sheep.

7. The Property was not purchased with the intention of resale at a profit, nor was it purchased for the intention of subdividing it for sale.

8. Until 30 October 2012, the Trust carried on an enterprise of leasing rural premises being parts of the Property.

Use of the Property

9. XX lived approximately 4 kilometres from the Property and visited the Property regularly to undertake agricultural activities.

10. As a result of personal circumstances, XX sold all the livestock in or around 1992.

11. The Property was leased between 1994 and 30 October 2012 to various third parties on nominal rents for them to undertake farming activities on the land.

12. From the date the leasing activities ceased, being 30 October 2012, the Property was used by members of XX’s family for private purposes. A vegetable grower was also permitted to use the part of the Property to grow vegetables.

13. In or about 1987, an application was made XY (XX’s child) and their spouse for a planning permit to construct a dwelling on the Property. In or about 1992, XY and their spouse constructed a dwelling on the Property and moved into that dwelling.

Transfer of land to XY

14. In or about early 2000’s, XY wanted to borrow money but did not have property as security to do so; they had built their house on land owned by the Trustee. In order to give them title to the part of the Property on which the house was built on, a plan of subdivision was drawn up splitting the Property into 2 lots; Lot 1 being XY’s land (XXXX hectares) and Lot 2 the remaining land (XXXX hectares).

15. XY leased part of Lot 1. The annual rent has been less than $75,000.

16. XY was registered for GST from early 2005 but deregistered with effect from mid - 2017. XY is not currently registered for GST.

Decision to sell the Property

17. During 2013 and 2014 a number of unsolicited offers were made by property developers to purchase the Property and the relevant Precinct Structure Plan (PSP) was approved. The Property was affected by the PSP.

18. Given XX’s advanced age, the cessation of agricultural activities and leasing activities and the approval of the PSP, in 2015 it was decided that the Property should be sold.

19. XX, XY and any related entity have no history of undertaking property development activities.

20. In 2015, a real estate consultant (the Consultant) was engaged to obtain expressions of interest for the sale of the Property except for a portion of Lot 1 to be retained by XY. The portion to be retained by XY is referred to as the ‘Retained Land’. The residence of XY is located on the Retained Land. XY has no intention of moving from their home nor does he have any intention to develop that site.

21. The Property excluding the Retained Land will henceforth be referred to as ‘the Land’.

22. At the time the Trustee and XY (the Taxpayers) tried to sell the property in the 2015 year, the Consultant valued the Land to be in the range of $XX,XXX,XXX to $YY,YYY,YYY. The Consultant provided advice to the Taxpayers that the best way to maximise the value of the Land would be to enter into a development agreement with a land developer.

23. During 2015, a number of offers from developers to develop the Land were received but none were acceptable.

24. In 2016, the Taxpayers entered into a development agreement (the Agreement) with a Developer for the development of the Land. Under this agreement, the Taxpayers will receive a fixed payment of $XX, XXX, XXX plus GST amounts.

The Development

25. The development will be the subdivision of the Land into XYZ lots undertaken in Z stages.

26. The key works to be carried out include:

● Construction and widening of roads

● Construction of stormwater drainage systems

● Clearing of the Land

● Connection to utility and telecommunication services

27. Land required for public open space as a local or district park will be transferred to or vested in the local council.

The Agreement

28. The parties to the Agreement are the Taxpayers (as the Owners), and the Developer.

29. The Agreement provides that:

● The Taxpayers have resolved to dispose of the Land in the most favourable way but with the least possible involvement and has requested the Developer to develop the Land so as to maximise the Sale Proceeds from the sale of the Land in accordance with the Agreement.

● The parties agree that the Developer will undertake the Development by performing the Development Works.

● The Taxpayers grant the Developer the exclusive right to subdivide, develop, market and sell, or to arrange the subdivision, development, marketing and sale of the Land.

● Other than its interest in the Land, the Taxpayers have no interest in the Development.

● The Owners Entitlement is $XXX, XXX,XXX plus the GST Amount.

● Given the long term nature of the Development, the Developer has agreed to advance $X,XXX,XXX to the Taxpayers by way of the Developer Loan, to provide funds to the Taxpayers in advance and in anticipation of settlement of Lots created by the Development and the Taxpayers’ receipt of the Owners Entitlement.

● The Developer will obtain finance to fund the works required to complete the Development.

● The Taxpayers will, if requested by the financier, grant a financier’s mortgage solely over the Land. The Developer will be the sole borrower but the Taxpayers will guarantee the performance of the Developer, with any recourse against the Taxpayers limited to the sum of $XX, XXX,XXX.

● The Taxpayers will continue to be responsible for all outgoings in relation to the Land.

● From the date of the Agreement, the Taxpayer must continue to manage the Land using prudent farm management practices until the Developer gives notification that the Land (or a part of it) is required to be occupied by the Developer for the purposes of the Development.

● XY will continue to reside in the residence located on the Retained Land.

● The parties acknowledge that the Land is made available for development subject to the rights of the relevant company to occupy and utilise that part of the land as described in the lease agreement between XY and the company.

● The Taxpayer’s rights to receipt of the rents and profits under the lease will continue until the end of the lease and remain unaffected by the Agreement.

● As part of the subdivision of the Land, that part of the Land that is subject to the lease is to be located wholly on one separate lot. The parties agree that this lot will be transferred to the Developer for the consideration of $1, at such time that the Developer calls for the transfer.

● The Developer shall be solely responsible for the payment of all the Development Costs, save and except those costs and expenses which under this agreement are to be the responsibility of the Taxpayers.

30. Pursuant to the Agreement, the order of distribution of Sale Proceeds from the sale of the Land will be as follows:

● First, to the financier, any amount required to discharge its mortgage and release the title to the lot sold.

● Second, to the Taxpayers, the GST Amount in respect of the Sale Proceeds where the sale of each lot is a taxable supply for GST purposes; or where the sale of each lot is not a taxable supply for GST purposes, the GST Amount that would have been collected were the Taxpayers registered for GST and the margin scheme applied.

● Third, to the Developer, $XX,XXX (or such lesser amount, where less than $XX,XXX is repayable under the Developer Loan) in repayment of the Developer Loan (where any part of the Developer Loan remains outstanding).

● Fourth, to the Taxpayers, the sum of $XX,XXX per lot sale commencing on the twenty first settlement of the sale of lots in the subdivision until the Taxpayers receive the total Owners Entitlement.

● Fifth, the balance to the Developer the Development Fee.

31. The Taxpayers will receive a fixed amount, being the Owners Entitlement of $XX,XXX,XXX plus the GST Amount. Any variation in proceeds is a risk borne by the Developer.

32. The Owners Entitlement was determined by reference to the market value of the Land.

33. Lot 2 remained an asset listed in the books of the Trust and the Trust continues to pay for the expenses and outgoings in relation to Lot 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Parts 3-1 and 3-3

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

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

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 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Issue 1

Income tax – the sale of real property

Question 1

Summary

The subdivision and sale of the Land is considered a mere realisation of a capital asset.

Detailed reasoning

The issue for determination is whether the proceeds from the subdivision and sale of the Land will be treated as:

● assessable ordinary income under section 6-5 ITAA 1997 from carrying on a business of property development, or from a profit-making undertaking or scheme, or

● the mere realisation of a capital asset, where the receipts are treated as a capital gain under Part3-1 and Part 3-3 of the ITAA 1997.

The determination of the appropriate tax treatment of the proceeds of sale of property will be a question of fact and degree determined on a case by case basis. The facts specific to each transaction must be discretely and closely examined.

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 the disposal of land is considered a ‘mere realisation’ of a capital asset, the receipts will not be considered ordinary income but will be treated as a capital gain to which the capital gains tax (CGT) rules under Part 3-1 and Part 3-3 will apply.

A sale that is more than a ‘mere realisation’ will be on revenue account and assessable under section 6-5 ITAA 1997.

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. Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

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)).

The Court considered the following factors in making the decision:

(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 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 to carry out road works, kerbing, electricity and sewerage works which were required to be done;

(e) the owners did not erect buildings on the land; not even, for example, a site office;

(f) they had no business organisation, no manager, no office, no secretary, and no letterhead;

(g) Dr Bickerton maintained their medical practice;

(h) the owners did not advertise the land for sale;

(i) apart from the Kingaroy Shire Council's activities, the owners did not engage any contractors, although they did obtain some professional advice;

(j) the books kept in relation to the sales of land were kept by Mrs Bickerton; and

(k) the land was sold simply by listing it with the local real estate agents.

The Court found the sale had a very few hallmarks of a business enterprise and held that what occurred was:

the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

In the case of Abeles and Anor v Federal Commissioner of Taxation (1991) 91 ATC 4756 (Abeles), the taxpayers embarked upon a business-like and efficient program of subdivision through their agent. The Court found that you cannot engage the services of professionals and hide behind them; they are your agent and their conduct is your conduct.

Application to your circumstances

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

Taking into consideration the Taxpayers’ intent under the Agreement and the content of the Agreement, the Commissioner considers that the circumstances surrounding the proposed sale of subdivided Land indicate that there was no intention or purpose on the part of the Taxpayers to carry on a business of development and sale of land.

This position is primarily supported by the following facts:

● The Land was not originally purchased for the purpose of subdivision; it was purchased for agricultural use.

● The Taxpayers will receive a fixed amount of $XX,XXX,XXX plus the GST Amount from the sale of the Land – an amount determined by the Developer and accepted by the Taxpayers. This amount was determined by reference to the market value of the Land.

● Any variation in sale proceeds or costs is a risk borne by the Developer.

● While the Land may be used as security by the financier to fund the Development, it is the Developer that bears the financial risk of the Project.

● The Taxpayers will not actively participate in the development process and will not be involved in with the provision of the Development Works.

● The Taxpayers and their related entities have not previously been involved in the subdivision and sale of land or activities.

While the Taxpayers will be engaging the Developer to undertake the development of the Land, the Commissioner considers the Taxpayer’s situation different from the facts in Abeles. In Abeles, the taxpayer assumed the financial risk and the arrangement that was entered into was in the nature of a joint venture where costs and expenses were shared. This can be distinguished from the Taxpayers’ case, where it is the Developer that will be assuming the financial risk, with all financing and costs to be borne by the Developer. Any upside in the profit from the project will be entirely enjoyed by Developer, with the Taxpayers expected to derive a fixed amount of $XX,XXX,XXX plus GST Amounts irrespective of the actual cost or final selling price of the lots.

The fact the Taxpayers do not bear the risk or enjoy the fruits from the Development project, would make it difficult for the Commissioner to claim (as was claimed in the case of Abeles) that the activities of the Developer, being the development of the lots and selling of the subdivided lots to third parties (that is, the business of land subdivision, development and sale) are the activities of the Taxpayer. The Agreement is not creating an agent and or joint venture relationship with the Developer. The Taxpayers’ activities in respect to this development project are not that of joint venturer, but are passive with the Agreement merely providing for the sale of the land for a predetermined price of $XX,XXX,XXX plus the GST Amount, at a future time (yet to be determined).

Therefore the Commissioner considers that the Taxpayers in their proposed endeavour to sell the land will not be carrying on, or carrying out, a business, or part of a profit-making undertaking or scheme, but will be merely realising the Land via the Agreement.

Question 2

Summary

The expected sale proceeds or any profits that arise from the subdivision and sale of the Land will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

As outlined in the detailed reasoning in question 1 above, the Commissioner does not consider that the Taxpayers’ disposal of the Land is in the course of carrying on a business of property development, nor it is part of a profit-making undertaking or scheme.

Therefore, any expected sale proceeds or profits that arise from the subdivision and sale of the Land will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 3

Summary

The capital gain from the subdivision and sale of the Land will be not be affected by section 118-20 of the ITAA 1997.

Detailed reasoning

A capital gain from a CGT event is reduced if a provision of the ITAA 1997 includes the amount in your assessable income or exempt income (paragraph 118-20(1)(a)).

As the expected sale proceeds that arise from the sale of subdivided land are not assessable under section 6-5 of the ITAA 1997, any capital gains from the disposal of Land within the meaning of Parts 3-1 and 3-3 of the ITAA 1997 will be not be affected by section 118-20 of the ITAA 1997.

Issue 2

GST – the sale of real property

Question 1

Summary

The Trustee is making taxable supplies under section 9-5 of the GST Act on the sales of the lots resulting from the subdivision of Lot 2.

XY is not making taxable supplies under section 9-5 of the GST Act on the sales of the lots resulting from the subdivision of Lot 1.

Detailed reasoning

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 sales of the subdivided lots to be a taxable supply.

The term ‘you’ in the GST Act applies to entities generally.

‘Entity’ is defined in section 184-1 of the GST Act to include an individual and a trust.

As the Land which is the subject of the subdivision is comprised of two parcels of land owned by separate entities, the GST implication of the sales will be determined separately.

The Trust

To the extent of the sales of the lots resulting from the subdivision of Lot 2, which is owned by The Trustee, the sales of the lots satisfy the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. That is, the sales are for consideration, the supplies are connected with the indirect zone as the lots are located in Australia and the Trust is registered for GST. Furthermore, the sales of the lots in the circumstances described are neither GST-free nor input taxed.

It remains to be determined whether the sales of the lots are in the course or furtherance of an enterprise that the Trust carries on.

An 'enterprise' is defined in section 9-20 of the GST Act to include, amongst other things, 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

● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

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. However, 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.

Goods and Services Tax Ruling GSTR 2004/8 which considers the meaning of 'in the course or furtherance' as required in paragraph 9-5(b) of the GST Act states at paragraphs 28 and 29:

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

Paragraph 30 of GSTR 2004/8 lists the following characteristics which indicate strongly that a sale of a thing has a connection with an enterprise:

● at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

● at the time of sale it was applied in carrying on your enterprise to at least some extent; and

● it is sold as a transaction of your enterprise.

Each of these points will indicate a connection, and not all of the points need to be satisfied.

The Property was purchased in 1979 for the purpose of conducting agricultural activities on the Land. Due to personal circumstances, all the livestock on the Property were sold around 1992. The Property was leased from 1994. Since the Property was subdivided into Lots 1 and 2 in 2002, the Trust continued to use Lot 2 in its leasing enterprise. The leasing activities ceased in or about October 2012. From that time Lot 2 was used by members of XX’s family for private purposes.

In 2016, subdivision activities commenced.

Section 195-1 of the GST Act defines the meaning of carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise.

As discussed in Issue 1 above, the Trust has not commenced a land development business. Hence, the sales of the lots resulting from the subdivision of Lot 2 are not made in the course of a land development business.

We note that leasing activities ceased in 2012.

Miscellaneous Taxation Ruling MT 2006/1 discusses termination of an enterprise as follows:

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

141. In the course of terminating an enterprise, a number of obligations may need to be finalised. These include finalising accounts, paying creditors, repaying loans, cancelling licences and business registrations.

142. A change in purpose or use of all assets could result in the termination of an enterprise. A change could occur where an asset is no longer used by the entity in the enterprise and is instead used for private purposes.

143. If some assets continue to be held by the entity because they cannot be disposed of or converted to another use and those assets are worthless or likely to be of little value, the enterprise can still be said to have terminated.

144. In circumstances where assets have been sold or where they are no longer used in the enterprise there may still be some other activities undertaken to terminate the enterprise. These activities may include the preparation of final accounts, activity statements and income tax returns and the cancellation of the ABN and GST registration.

145. An enterprise is also considered to terminate where outstanding obligations cannot be satisfied and other activities have ceased.

146. The entity is also entitled to an ABN where the only activities performed are those that it does in terminating the enterprise, for example the sale of its business premises. Those activities are done in carrying on an enterprise.

147. The question of whether the activities are done in terminating the enterprise or at some later point (and do not have a connection with the termination activities) is one of fact and degree depending on the circumstances of each particular case.

Consistent with the Commissioner’s view in paragraph 147 of MT 2006/1, whether or not an activity is done in terminating an enterprise or at some later point without a connection to termination activities is one of fact and degree depending on the circumstances of each particular case.

After the cessation of leasing activities, Lot 2 was used by members of XX’s family for private purposes. However, Lot 2 remained an asset listed in the books of the Trust and the Trust continued to pay a claim for expenses and outgoings. We do not consider that there is a change of purpose or use of the property to terminate the leasing enterprise. Neither is Lot 2 considered to be worthless or likely to be of little value to terminate the leasing enterprise.

The Development Agreement provides that Trust continue to be responsible for all outgoings in relation to the Land and that the sales are transactions of Trust.

We consider that under the circumstances, as a matter of fact and degree, the sales of the lots subdivided from Lot 2 have a sufficient connection with the leasing enterprise. The sales are natural incidents of terminating the leasing enterprise conducted on the land. Hence, as the Trust owns Lot 2 and it was held as part of its business structure, the sales of the lots subdivided from Lot 2 are supplies made in the course or furtherance of the Trust’s enterprise and the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the Trust is making taxable supplies on the sales of the lots resulting from the subdivision of Lot 2.

XY

To the extent of the sales of the lots resulting from the subdivision of Lot 1, which is owned by XY, the sales of the lots satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, the sales are for consideration and the supplies are connected with the indirect zone as the lots are located in Australia. Furthermore, XY is not registered for GST and the sales of the lots in the circumstances described are neither GST-free nor input taxed.

It remains to be determined whether the sales of the lots are in the course or furtherance of an enterprise that XY carries on and whether XY is required to be registered.

Whether the sales are in the course or furtherance of an enterprise

XY became the registered owner of Lot 1 when the Property was subdivided in 2002. XY’s residence is located in Lot 1 and is excluded in the sale of the subdivided lots. This is referred to in the development agreement as Retained Land.

Since 2004 parts of Lot 1 are leased. The rent received from these leases total less than $75,000 per annum. The development agreement provides that XY’s rights to receive rents and profits under the lease continue until the end of the lease. The development agreement also provides that as part of the subdivision, part of the land that is subject to the lease is to be located wholly on one separate lot. The parties agree that this lot will be transferred to the Developer at such time that the Developer calls for the transfer.

As discussed in Issue 1 above, XY is not carrying on a land development business. Hence, the sales of the lots resulting from the subdivision of Lot 1, which are not used in the leasing enterprise, are not made in the course or furtherance of a land development business.

However, as XY carries on a leasing enterprise on part of Lot 1, to the extent of the area that is leased, the disposal has a connection with the leasing enterprise. Hence, to this extent the sales are made in the course or furtherance of the leasing enterprise that XY carries on and the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Whether XY is required to be registered for GST

As XY is not registered for GST, it needs to be determined whether he is 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.

XY’s enterprise is the leasing of part of Lot.

We therefore need to determine if XY’s GST turnover meets the registration turnover threshold.

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, certain supplies are excluded. None of these exclusions apply to Giuseppe’s case.

However, section 188-25 of the GST Act provides that when calculating your projected GST 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 Goods and Services Tax Ruling GSTR 2001/7. Paragraphs 31 and 32 of GSTR 2001/7 state:

31. 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'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

To the extent of that part of Lot 1 that is leased, it is a capital asset of the leasing enterprise. Hence, the value of the sale of this area is excluded in calculating XY’s projected GST turnover.

As such, when XY sells the area that is leased, both their current and projected GST turnovers are below $75,000. Hence, XY’s GST turnover does not meet the registration turnover threshold and is not required to be registered for GST. Accordingly, paragraph 9-5(d) of the GST Act is not satisfied.

In summary:

● The sales of the lots resulting from the subdivision of Lot 1 that are not used in the leasing enterprise satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. However, these sales to do satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act.

● To the extent that the sales relate to the area that is leased to telecommunication carriers, the requirements of paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act are satisfied. However, these sales to do satisfy the requirement of paragraphs 9-5(d).

Therefore, as not all the requirements of section 9-5 of the GST Act are satisfied, XY is not making taxable supplies on the sales of the lots resulting from the subdivision of Lot 1.