Edited version of your written advice

Authorisation Number: 1051439407423

Date of advice: 24 October 2018

Ruling

Subject: Requirement to register for GST

Question

Is the Partnership required to be registered for GST?

Answer

No.

Question

Are Person A & Person B, as the owners of the Property subject to the H Development Agreement, required to register for GST?

Answer

Yes

Relevant facts and circumstances

Person A and Person B (A and B) are married and own the property.

The Property has been held within the family for multiple generations for primary production use. A and B inherited the Property from a relative that passed away and the legal title to the property was transferred to A and B.

A and B live on the Property. A and B do not carry on any enterprise in their personal capacity and are not registered for GST.

B had previously registered an Australian Business Number (ABN) in relation to a business.

Prior to inheriting the Property, A and B established a partnership (C Partnership), to carry on a primary production business (Primary Production Business). After A and B inherited the Property, the C Partnership has carried on the Primary Production Business on the Property.

The C Partnership is not currently registered for GST. The C Partnership was previously registered for GST.

The Property is a number of hectares in size and the Primary Production Business carried on by the C Partnership primarily involves maintaining cattle for the purposes of selling them, their offspring and their bodily produce. The cattle on the Property being used for primary production were X female cattle and X male cattle.

The Property also contains farming equipment and facilities ordinarily used in a business of primary production.

The gross income derived by the C Partnership from carrying on the Primary Production Business for the three completed financial years has been provided.

It is projected that the gross income of the C Partnership from carrying on the Primary Production Business will be below $75,000 for any 12 month period going forward.

The Property is currently within the gazetted D incorporated into the E.

A and B have been approached by a number of professional property developers over the years who have offered to develop their Property once the E was gazetted. Initially A and B did not entertain these offers because the C Partnership was still operating the Primary Production Business on the Property.

A and B and the C Partnership have no property development experience and have never undertaken a property development project before. They have also never undertaken any planning or development activities in respect of the Property and were not actively involved in the E process.

In the past few years the C Partnership has been scaling down its Primary Production Business and A and B are considering retirement and how to realise their Property in the most profitable manner. At the same time, Council rates on the Property have increased significantly in the past few years.

The Property is currently encumbered with a mortgage in favour of G securing a facility up to $X in the name of A and B.

In 20XX, A and B were approached by Y for Y to develop and sell the Property. A and B engaged in a number of discussions with Y around the terms under which Y could develop and sell the Property.

During 20XX, Y introduced another developer, Z, to A and B. Z also offered to develop and sell the Property in conjunction with Y.

Following these discussions, A and B determined that the best way to realise the value of their Property (as part of their desire to retire) was to grant rights for Z to develop and sell the Property, instead of simply selling the Property in its current form to Z (or another developer).

Consistent with this desire, A and B entered into a Development Agreement with Q (Developer), an entity associated with and controlled by Z, to grant the Developer the rights to develop and sell the Property. A copy of the Development Agreement (H Development Agreement) is attached and marked as Attachment X.

The Developer also plans to undertake the development of a separate piece of land also situated within the D. The C Partnership has no ownership interest in the D Land, however A and B control a discretionary trust which has a 50% interest in a partnership (G Partnership) which will own the D Land and will be registered for GST purposes.

Presently the D Land is under contract of sale. In anticipation of this settlement, the G Partnership has entered into a development agreement with the Developer to develop the D.

The D Development Agreement is separate from the H Development Agreement given the different land ownership profiles.

The “Project” to be undertaken under the H Development Agreement is also separate from the “Project” to be undertaken under the D Development Agreement. In this regard, there will be separate planning approvals obtained for each “Project” and discrete stages that will be developed by the Developer on each respective property.

Clause X of the H Development Agreement does however provide for some connection between the two “Projects” in the way Project Costs will be apportioned and Gross Sales Proceeds shared. Clause X was required in the H Development Agreement because some costs (especially civil costs) in pursuing the Project on the Property will benefit the D Project.

A, B and the C Partnership are not associates or related parties of the Developer and dealt with the Developer on arm’s length terms at all times in negotiating the H Development Agreement.

Under the terms of the H Development Agreement, the Developer has been engaged to develop the Property into lots (Lots) for sale in accordance with a development plan and budget (Project).

The project to be undertaken by the Developer on the Property includes:

● obtaining a planning permit for the Project;

● subdividing and developing the Property in a staged manner;

● marketing and selling the Lots in accordance with agreed price lists; and

● procuring Development finance for the Project with the Developer as the relevant borrower.

The Project does not involve the construction of dwellings, shops or any amenities.

Under the H Development Agreement, the Developer is responsible for undertaking all aspects of the Project and is responsible for financing and paying all costs and engaging all consultants relating to the Project.

The Developer will obtain debt funding as the borrower to funds the costs of the Project. A and B have consented to providing the Property as a mortgage to secure debt funding taken out by the Developer.

The Developer is responsible for taking out and maintaining all insurances required to undertake the Project.

The Developer is entitled to register a caveat and later a mortgage over the Property to secure its rights and Development Feed under the H Development Agreement once certain conditions set out in the H Development Agreement are satisfied.

The C Partnership will continue to use the Property for the Primary Production Business throughout the course of the Project on parts of the Property not required for the Project from time to time.

A and B are entitled to appoint a representative to attend project control group (PCG) meetings with representatives of the Developer for the purpose of being informed on the progress of the Project and to make key decisions referred to in the paragraph two below.

A and B will however otherwise be very passive during the course of the Project, and will grant a power of attorney to the Developer to allow the Developer to undertake the Project in accordance with the Development Agreement.

Consistent with their passive role in the Project, the decisions required of A and B in respect of the Project will be made by their representative (which is currently T) and are limited to key decisions. The key decisions are limited to A and B approving the matters defined in clause X of the H Development Agreement.

A and B will also receive quarterly reports on the progress of the Project prepared by the Developer.

A and B are entitled to retain a “Landowner Entitlement” from the Project and the Developer is entitled to the “Development Fee” for undertaking the Project. The “Landowner Entitlement” is an agreed amount of at least a specified amount, which is reflective of the approximate market value of the Property.

The amount of the “Development Fee” and the agreed distribution of proceeds from the sale of Lots to satisfy the payment of the “Development Fee” and “Landowner Entitlement” is set out in a specific clause of the H Development Agreement.

The Developer is also obliged to make loan advances to A and B over the course of the Project which will be repaid via the receipt of proceeds from the sale of Lots.

The developer is responsible for financing and paying all costs and engaging all consultants relating to the Project.

A and B are entitled to retain a minimum Agreed Value of the specified amount irrespective of the cost of the Project.

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 188-10

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

Summary

The Partnership is not required to be registered for GST. The current and projected turnover is not and will not be in excess of the threshold.

However, the sale by A and B (you) of subdivided lots of land satisfies all of the requirements of a taxable supply under section 9-5 of the GST Act, and is hence a taxable supply. Therefore, your sale of subdivided lots of land is subject to GST.

Reasons for decision

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST where you are carrying on an enterprise and your GST turnover meets the registration turnover threshold. In your instance the threshold is $75,000 as you are not a not-for-profit entity, which has a threshold of $XXX.

GST turnover is based on the current GST turnover and the projected GST turnover as defined by section 188-10 of the GST Act. Your current and projected GST turnover as per section 188-15 and 188-20 of the GST Act are below the threshold.

Based on the above, the Partnership are not required to register for GST.

GST is payable on a taxable supply. You are making a taxable supply under section 9-5 of the GST Act if:

a) the supply is for consideration; and

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

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

d) the supplier is registered or required to be register for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the information that you have provided, the supply of subdivided land will be for consideration and is connected with the indirect tax zone as the property is located in Australia. Therefore, the supply satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act.

Therefore, we need to consider whether:

● your sale of subdivided lots of land is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

● you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Are you carrying on an enterprise?

The definition of an enterprise in section 9-20 of the GST Act includes (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, or

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

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999. The principles outlined in these rulings have been applied in this case.

Based on the facts provided, the Landowner has operated an enterprise. Paragraph 178 of MT 2006/1 discusses the main indicators of carrying on a business which were covered under Taxation Ruling TR 97/11. Some of the indicators being:

● 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 your instance you have decided to undertake a significant commercial activity through the subdivision of X hectares of land.

Though you stated that you did not approach any developers and were approached numerous times over the years by different parties, you have undertaken a commercial activity. A high degree of planning and consideration was given as a number of discussions were held with Y for Y to develop and sell the Property. Additional discussions were held in 20XX with Y who introduced another developer, Z. An offer was made by Z to develop and sell the Property in conjunction with Y. In late 20XX the Development Agreement was entered into.

An intention exists to make a profit. This is not only evident with the length of time taken to enter into the Development Agreement but also with the decision to engage the services of the developer, Z, instead of selling the property in its current form. It was stated that the

The “Landowner Entitlement” is an agreed amount of at least $X, which is reflective of the approximate market value of the Property. The Landowners will however be able to retain a minimum Agreed Value of $X irrespective of the cost of the Project. Where land is generally sold it is at the market value. The $X was stated as being the market value of the land; however regardless of what happens an amount of at least $X will be received, which is indicative of a profit making intention, as well as a business condition.

The above ties in with that the activity is or will be profitable. The intention of the subdivision was to maximise the value of the property.

The Landowner engaged the Developer to carry out the activity. The activity is systematic, organised and carried on in a businesslike manner and records are kept. The contract set rules that each party must abide by. With a subdivision the owner generally funds all facets of the subdivision and the Developer pays for their own costs incurred. In this instance there is an agreement in place with the Landowner to receive a ‘Landowner Entitlement’, while the Developer is to receive a ‘Development Fee’. Costs of the undertaking are also broken down into categories such as ‘Development Cost’. This business venture has stipulations that the Developer will reimburse obligations encompassed under Clause X. The Landowner is required to pay any Rates and Taxes not encompassed under clause X as per clause X. Further to this point is the fact that quarterly reports as per clause X will be prepared by the Developer and provided to the Landowner as well as project control meetings as per clause X. As per clause X these meetings must be attended by:

(1) In the case of the Developer, two directors or two development managers or one of each; and

(2) In the case of the Landowner, the Landowner’s Representative.

a) The Developer may arrange for other officers or employees of the Developer and its consultants and contractors to attend Project Control Meetings when appropriate.

b) The representatives of the Developer at Project Control Meetings shall be Q and R.

In addition to the requirements of the meetings at clause X, there is a quorum clause at X and voting at clause X. This is indicative of carrying on something far more than a mere realisation of an asset.

Attachment X provides a summary of project returns, performance indicators, returns on funds invested as well as a list of sales summary, a cash flow statement and cash flow title. The aforementioned in conjunction with the projected income and number of lots formed from the subdivision demonstrate that the activities being undertaken are of a reasonable size and scale.

A business plan exists as part of the Development Agreement (H Development Agreement). There are clear objectives as per clause X. The business activity allows for the subdivision and development of the Land to be in a staged manner in accordance with the Development Plan and the Budget. So that profitability outcomes are maximised the Land will be subdivided first prior to that of G. In addition to this a core objective is to maximise the profitability of the undertaking and return profit to the Developer and the Landowner in the shortest time possible. There is also the aim of a profit on cost hurdle of X%. The business plan and development plan are worked around the profit making objective.

A commercial sale of product exists as the blocks of land will be sold for a profit. Further to this there is a mention of commission owing to the Developer if a lot is sold by the Developer. This was covered as part of the contract at clause X.

The Landowner does not have the relevant knowledge or skill to undertake the business activity and has hence engaged the Developer.

Based on the facts provided, the Landowner have been carrying on a business of subdividing and selling land. You advised us that the subdivisions are the most beneficial means of realising the value of the land; however due to the means, scale, method, frequency and intention, you are carrying on an enterprise.

Therefore, we consider that you have been carrying on an enterprise of leasing the property as defined in section 9-20 of the GST Act. Accordingly, the sale of the subdivided lots of land is in the course of your enterprise, and paragraph 9-5(b) of the GST Act is satisfied.

We now need to consider if you are required to be registered for GST.

Are you required to be registered for GST?

As the Landowner are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the subdivided lots of land.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The registration turnover threshold for entities other than non-profit entities is $75,000.

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 next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

● supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises)

● supplies that are not for consideration

● supplies that are not made in connection with an enterprise that you carry on

● supplies that are not connected with the indirect tax zone.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Capital asset or revenue (trading) asset

Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 provides that a capital asset is generally 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’. This is different from a revenue or trading asset, which is described in paragraph 34 of GSTR 2001/7 as an asset ‘whose realisation is inherent in, or incidental to, the carrying on of a business’.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

On the basis of facts, it is considered that your subdivision and sale of the subdivided lots of land is more than the mere realisation of a capital asset. The sale of the subdivided lots of land is not a part of the disposal of a capital asset. Hence, the sale of the subdivided lots of land is included in the calculation of your current and projected GST turnovers.

As you are not currently required to be registered for GST, you will be required to be registered for GST as there will be an increase in your GST turnover as a result of the sale of subdivided lots of the land. You will meet the registration turnover threshold, and you are required to be registered for GST under section 23-5 of the GST Act. Accordingly, you satisfy the requirement under paragraph

9-5(d) of the GST Act, and required to be registered for GST.

Clause X states that if GST applies that the margin scheme will be utilised and the Developer must obtain a valuation which complies with the GST Act. If the margin scheme does not apply, the Developer as the agent of the Landowner and in the Landowner’s name, must prepare the tax invoice under the GST Act for the sale of each Lot and give a copy of it to the Landowner and Clause X applies, relating to limited recourse.

As per Clause X of the contract, which deals with calculating Landowner Entitlement and GST amounts. It states:

“The Developer must calculate the Landowner Entitlement and the GST payable by the Landowner on each Disposal and notify the Landowner and the Developer’s Solicitor in writing of the relevant amount promptly after the Gross Sale Proceeds for a lot are ascertainable, and must carry out a further calculation and notification if any additional Gross Sale Proceeds become payable for a Lot after the initial calculation…”

Each lot is also required to have a withholding obligation in line with GST at settlement. A purchaser will have a withholding obligation if they are the recipient of a taxable supply, by sale or long term lease and they provide any consideration (other than a deposit) on or after 1 July 2018, of either:

● a new residential premises

● potential residential land included on a property subdivision plan.

Potential residential land is land that it is permissible to be used for residential purposes but does not contain any buildings that are residential premises (for example houses and strata units).

As per paragraph 19 of Law Companion Ruling LCR 2018/4 a purchaser may have a GST withholding obligation under section 14-250 of the GST Act if each of the following requirements are satisfied:

● the property is 'potential residential land'

● the property is included in a 'property subdivision plan'

● the property does not contain any building that is in use for a commercial purpose, and

● the purchaser is not registered for GST, or is registered but does not purchase the property for a creditable purpose.