Edited version of your written advice

Authorisation Number: 1051439359364

Date of advice: 11 October 2018

Ruling

Subject: Sale of subdivided land as a taxable supply.

Question

Will the sale of subdivided lot from the vacant land, be a taxable supply under section 9-5 of the GST Act?

Answer

Yes.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

● You are a Self- Managed Superannuation Fund (Superfund) and not registered for goods and services tax (GST).

● The Superfund does not conduct an enterprise but is an investor in assets which are considered to be stable and reasonably priced which are likely to provide good returns to Superfund members’ retirement.

● The Superfund has acquired a vacant land (Property) in 20XX.

● The Property was acquired as it was considered to be at good value and was purchased from an entity in liquidation.

● The intention of purchasing the Property was to hold it on a long term investment basis.

● The Property was purchased with cash in the Superfund.

● The Property was acquired in partnership with another unrelated entity and eventually subdivided into the current portion.

● The current portion of the Property has been subdivided into two parcels and no improvements had been made to the property.

● The Superfund is in the process of selling one parcel of land and the remaining parcel of land will be sold once a buyer is found.

● The Superfund has previously purchased similar property, subdivided it into two parcels of land and sold them. No improvements were made on the property other than subdividing into two parcels

● The members of the Superfund have conducted property development activities in their own names in partnership and paid GST on the sale of subdivided properties.

● The subdivided land will not be developed in to small lots of land for sale.

● The following details are provided in relation to the development of the Property:

● Additional land was not acquired to be added to the vacant land.

● The vacant land was not brought into account as a business asset of the Superfund.

● There is no coherent plan for the subdivision of the vacant land.

● The purchase of the vacant land was financed by the Superfund.

● The development activities were not carried out beyond that necessary to secure council approval for the subdivision.

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 – 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

Section 9-5 of the GST Act provides that you make a taxable supply if:

a) you make the supply for consideration;

b) the supply is made in the course or furtherance of an enterprise that you carry on;

c) the supply is connected with the indirect tax zone;

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.

For the supply of subdivided land by the Superfund to be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

In this case, the Superfund will be selling the vacant lot for consideration and the property is connected with the indirect tax zone. Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. In addition the supply of the subdivided lot will neither be GST-free nor input taxed.

Accordingly, we must determine whether the sale of subdivided lot is made in the course or furtherance of an enterprise that the Superfund carries on and if so whether the Superfund is 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 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.

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

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 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.

The Superfund has carried out a similar development activity in the past. Therefore, it is necessary to consider whether the subdivision activities carried out by the Superfund on the vacant land (Property) are in the form of a business or an adventure or concern in the nature of trade and carried out in a business-like and commercial manner.

The Property was acquired by the Superfund to hold it on a long term investment basis. However, 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.

In this case, the Superfund had acquired the Property as investment asset. The Property was not used to generate income for the Superfund such as leasing rather it was used to subdivide for sale with an intention of making profit. It is considered that when the Property was subdivided for sale, it had changed its characteristics of capital/investment to trading/revenue assets.

The intention and the nature of the activities carried out by the Superfund indicate that it has been conducted in a business-like and commercial manner.

Indicators of carrying on a business

Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are:

● 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.

In addition it is relevant to consider:

● the length of time the property had been held and to what purpose it had been put to in that time; and

● the personal involvement in the development activity.

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. This may require a consideration of the factors outlined 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 indicators to the activities of the Superfund

● The Superfund has been engaged in commercial activities as they have purchased properties, subdivided them and sold. The Superfund has purchased the Property in partnership with another entity and acquired their portion of the land.

● The Property in question was purchased with an intention of making profit as it was acquired from an entity in liquidation and for a good value.

● The Superfund subdivided the Property rather than selling it in its entirety as it will generate more profit.

● The Superfund has been carrying out similar activities regularly or recurrently in order to provide good returns to the Superfund members’ retirement.

● This activity is systematically organised and carried on in a businesslike manner. Systematic steps have been taken including, planning the subdivision, determining the profitability of the subdivision and engaging service providers. These are the types of activities routinely undertaken by a person engaged in property development.

● The activities carried out by the Superfund are of a reasonable size although the scale of subdivision has been minimised to two lots. However, the size of the subdivided lots is large in size.

● The members of the fund have conducted property development activities in their own names in partnership and have the relevant knowledge and skills. The Superfund has used the knowledge and skills of its members to the property development.

The nature of the activities of the Superfund in relation to the property development activities are not an isolated or one-off transaction. The above analysis, based on the facts provided, indicates that the activities have the characteristics of a business deal.

The intention of the Superfund at the time of acquiring the Property was to make profit by subdividing and selling the vacant land. Although the intention of carrying on the property development is to provide good returns to the Superfund, the activities carried out by the Superfund have the essence of carrying on an enterprise.

There have been no attempts to dispose of the vacant land in its entirety, either to another party or developer, rather the Superfund has carried out the development of the land and baring the associated risk.

The financial risk involved in the development rests directly with the Superfund as legal owner and due to the fact that the Superfund used its own cash to purchase the property. While the Superfund stands to profit from the overall development activities, in the event the development fails, the Superfund will be subject to losses or resulting liabilities. Ultimately, the Superfund will bare all the profit and loss risk in relation to the property development.

Taking all of the facts into consideration, and weighing the various factors as analysed above, it is our view that the Superfund is carrying on an enterprise of property development in relation to the subdivision of the Property.

Registration

Section 23-5 of the GST Act provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise, and

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

Your GST turnover does not include the supply of capital assets as per subsection 188-25 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of a ‘capital asset’ at paragraphs 31 to 36.

Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

We have considered section 188-25 of the GST Act and this section does not apply to the sale of the subdivided land. As explained above, the subdivided lots have the character of a revenue asset, rather than a realisation of a capital asset.

As the sale proceeds from the sale of the subdivided lot will exceed the registration turnover threshold, the Superfund will be required to be registered for GST.

Therefore, the supply of subdivided lot from the vacant land satisfies all of the requirements of a taxable supply under section 9-5 of the GST Act and the sale will be subject to GST.