Edited version of your written advice

Authorisation Number: 1051446636478

Date of advice: 26 October 2018

Ruling

Subject: Goods and services tax property subdivisions

Question 1

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

Answer

Yes.

This ruling applies for the following period(s)

1 October 20YY to 30 June 20YY

The scheme commences on

26 February 20YY

Relevant facts and circumstances

Entity

You hold an ABN effective from XX/XX/20YY.

You were registered for GST from the XX/XX/20YY to XX/XX/20YY. You cancelled your GST registration in 20YY because the GST turnover was less than $75,000 and you were not required to be registered.

You entered into a contract to acquire a property located, in Australia (‘Land’). The contract settled on XX/XX/20YY for $XX including GST. The acquisition was initially funded by a bank loan and then followed by an amount contributed by each unit holder.

The finance loan was paid out in the 20XX financial year, and any replacement funds were provided by the unit holders.

At the time of purchase the trustee of the unit trust was X Pty Ltd. The trustee was subsequently replaced in 20YY as a result of entering into liquidation. The trustee was placed by X Pty Ltd.

The objective at time of acquisition was to hold the land long term until you could take advantage of re-zoning of the area as being planned by the City of X in accordance with the their Outline Development Plan. The Land was not acquired with the intention to develop but just to sell newly zoned property. The plan was to have the Land rezoned to R30 residential in terms of the City of X ODP planning scheme, and then to sell the rezoned land to an experienced developer.

You do not own other property. Some of the unitholders of the Trust own other commercial and residential investment properties.

Neither you, nor any related entity, own adjoining property to the Land.

You have not undertaken or expect to undertake any subdivision activities or development of land, other than activities in relation to the property.

The Land is recorded as fixed asset.

You did not obtain professional advice (legal, taxation or real estate) prior to acquiring this property.

The Land, Rezoning and Subdivision

The Land is X hectares and consisted primarily of vacant land, previously used for farming.

At the time of purchase the Land was being considered by the City of X to be rezoned from Urban Deferred General Rural to Residential Development R30, and the land would be affected by this re-zoning.

The Land has not been used since the time of acquisition for any purpose other than the stated objective.

City of X commenced rezoning the Land as per there OPP in 20YY.

You did not make any enquiries and/or applications to the City of X prior to or soon after acquisition of the Land about re-zoning and sub-division of the land. At the time of acquisition, in relation to the Councils future re-zoning plans, the real estate agent provided general information about;

● Design

● Soil composition

● Roadworks required,

● Progress of the ODP through the Commission, and

● Design of roads and lots to blend in with neighbouring blocks of land

You engaged a real estate agent in 20YY to assist with the re-zoning.

The real estate agent on your behalf, liaised with the Commission and City of X regarding the progress of the overall development plan and the proposed design of the subdivision plan to blend in with neighbouring properties, and assist with geo technical information and design plans to ensure the development would be acceptable to the authorities and be of assistance in selling the land to developers.

You did not initiate or enter into correspondence with the City of X in relation to the subdivision.

To obtain rezoning of the land to R30, unrelated parties submitted an initial application for re-zoning in 20YY (Commission document number). This was followed by an amended application submitted by X Pty Ltd atf for XTrust, (Commission document number) in 20YY – the Developer.

X Pty Ltd initiated the subdivision of the Land in 20YY. The subdivision application and any approvals were submitted and received by X Pty Ltd. The City of X advised X the Land had been rezoned from Urban Deferred General Rural to Residential Development R30.

The City of X advised X Pty Ltd atf for X Trust that the land had approval for subdivision.

The City of X approved the subdivision on the land in 20YY.

The Land, being lots xx and yy, is subject to this subdivision development. There is approval for a xx lot development of your Land.

Currently, the development has progressed such that the Land has been subdivided.

Marketing and sales of the Land

After the Land was rezoned, the Trust marketed the Land by real estate agent(s) with the following outcomes:

● Advertised through real estate agent from January to June 20YY for $X without development approval – no formal offers

● Advertised through real estate agent from June 20YY to December 20YY for $X with or without development approval – no formal offers

● Advertised through real estate agent from February 20YY to April 20YY for $X without development approval.

Offer received from X Pty Ltd for $X but not accepted as the price was too low.

Upon approval for subdivision, the Trust marketed the Land with the following outcome:

● Advertised through real estate agent from February 20YY to April 20YY for $X without development approval and you received an offer from X Pty Ltd for $X.

● This offer was accepted.

● The offer was not a standard land contract as the Developer was not able to pay the price upfront.

● You entered into a development agreement with the Developer dated 6^th December 20YY.

You engaged an Agent to sell your land. Your agent entered into contracts on your behalf for the sale of land, prior to completion of development and subdivision, with third parties. X lots were sold off the plan, of which X subsequently settled.

An example of such a contract is the offer and acceptance contract for Lot No dated 31 March 20YY Settlement occurred on 22 June 20YY.

All lots are for sale and currently X lots have been sold in the 20YY financial year.

It is estimated that the sale price of the subdivided lots will be between $X and $X per lot.

You have provided a copy of a contract for sale of land representing a typical contract for these lots.

● The contract is for (vacant land) Lot X dated XX/XX/20YY.

● The seller and registered owner is X Pty Ltd.

● The purchase price is $X.

● Special Conditions Clause 2:

● GST Margin Scheme: The Seller is registered for GST. The sale price of this contract is inclusive of the goods and services tax (GST) and all sales are made under the margin scheme.

Developer and the Agreement

You provided a copy of the Development and Project Management Agreement dated XX/XX/20YY between X Pty Ltd as trustee for the Trust (Developer) and X Pty Ltd as trustee for the (Owner).

Item 1 in the Particulars, states that the Owners Fee is $X.

Item 2 in the Particulars, states that the Development and Project Management Fee is the amount equal to the Sale Proceeds less the Owners Fee.

Clause 19.1(11) defines the Owners Fee: means the amount set out in item 1 of the Particulars (which is GST inclusive).

Clause 2.1 provides the parties agree that in consideration for the Developer completing the work under Clause 1.1, the Developer shall be entitled to receive the development and management fee.

Clause 2.5 provides that the Owner must pay the Development and Project Management Fee to the Developer from the Sale Proceeds as follows;

(a) first of Sale Proceeds equal to the Owner Fee will be retained by the Owner as soon as practicable upon receipt by the Developer, and

(b) any amount from the sale proceeds in excess of the Owners Fee (i.e. the Development and Project Management Fee) is immediately payable to the Developer upon the Owner retaining the Owner fee.

Clause 19.1(14) defines Sale Proceeds’ means all of the sale proceeds (inclusive of GST) from the sale of the Developed Lots or the Property by the Developer on behalf of the Owner.

You advise that no separate account has been set up to receive the Sale Proceeds as per clause 2.6. Accordingly the full proceeds are received by You into their bank account until the Owners Fee of $X has been made in full.

The proceeds in excess of $X are payable to Developer as the Development and Project Management Fee. This is in accordance with clause 2.5.

Clause 3.1 provides the things the developer needs to do to complete the Development in accordance with the Development Plan.

You were not involved in any discussions with the City of X in relation to what actual works was required in relation to the development. You advise that you do not hold a copy of the development plan and this is held by the Developer.

You have proved a copy of the Commission approval for your Land subject to certain conditions and subdivision works being met. This document is dated XX/XX/20YY.

Clause 3.2 provides a list of services the Owner engages the Developer to undertake to complete the development.

Clause 3.3 provides the Owner appoints the Developer as agent to undertake all aspects of marketing and sales of the development lots.

You advise that Developer is funding the development independently of You.

In respect of planning documents, such as projected cash flow statements, projected financials, financial or economic modelling, budgets or business plans for the subdivision and the development, you advise that you had no involvement in preparing any of these documents for the subdivision and development of the land. They were solely the responsibility of the Developer.

Clause 7.1 provides the Owner consents to the registration of an absolute caveat over the Property by the Developer as caveator to protect the developer’s rights pursuant to this agreement

Clause 8.1 provides the parties agree that after the payment of the Owner Fee to the Owner, the Developer has the option of acquiring the balance of the Developed Lots for a consideration of $X which may be exercised at any time by written notice prior to the sale of the last of the Developed Lots.

Once development and subdivision has taken place, you will remain the registered owner of the land.

Legislation

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

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

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

Reasons for decision

In this reasoning:

● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 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 (Australia), 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.

For the supply of your subdivided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

In this case, you will be selling vacant residential lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) are satisfied. Further, the supply of the lots in your situation will neither be GST-free or input taxed.

Accordingly, we must determine whether:

(a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, are you required to be registered for GST?

Your venture

The objective at time of your acquisition of the Land was to hold the property until you could take advantage of re-zoning of the area, as being planned by the City of X in accordance with the their ODP. Upon receiving rezoning, the plan was to sell the newly zoned property, now R30 residential, to an experienced developer.

Despite offers made to sell the rezoned Land, you entered in to a Development and Project Management Agreement with a developer for your Land to be developed and subdivided in accordance with approvals provided by the City of X. The agreement also includes for the marketing and sale of the X full serviced residential developed lots.

As at June 20YY, X lots have been sold.

Your contention in relation to the development

The property consists of primarily vacant land within the City of X and your objective at the time of acquisition was to hold the land long term until you could take advantage of re-zoning of the area in accordance with the City of X Outline Development Plan.

It is your contention that is was never your plan to develop the property for the purpose of sale. The intention was always for a long term hold for sale after obtaining residential rezoning.

Further, it is your contention that the subdivision development works do not go beyond what is required by authorities and that you were not engaged in the business of developing or selling land and that this was performed by third parties.

Enterprise

Section 9-20 provides that the term ‘enterprise’ includes, among other things, 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 phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise

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 provides guidance on what activities will amount to an enterprise.

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’. In particular:

● 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.

Based on the facts and circumstances provided, it is our view you are not conducting activities that are in the form of a business.

However, MT 2006/1 at paragraph 262 explains an entity is carrying on an enterprise where there are 'one-offs' or isolated real property transactions. Paragraph 266 provides that 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.

Paragraph 270 provides, in isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased, or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 includes a list of factors from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) in relation to isolated transactions and sales of real property.

The following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction include;

● the nature of the entity undertaking the operation or transaction;

● the nature and scale of other activities undertaken by the taxpayer;

● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

● the nature, scale and complexity of the operation or transaction;

● the manner in which the operation or transaction was entered into or carried out;

● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

● if the transaction involves the acquisition and disposal of property, the nature of the property, and

● the timing of the transaction or the various steps in the transaction.

The relevant intention or purpose of the taxpayer is not the subjective intention or purpose of the taxpayer but rather it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

While holding an asset for a considerable period of time may indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition, including any subsequent change in intention or use of the asset is an important consideration.

To illustrate this further, the following cases have considered the issue of intention in the context of whether the proceeds from a venture are of a capital or revenue nature.

Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1,584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer’s activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land.

Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham’s case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the 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.

Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income.

Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 (Stevenson case) where taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970’s he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land

Your intention at the time of acquiring the land was for the purpose of sale, once rezoning was approved. Your strategy of waiting for rezoning approval over your land demonstrates a profit making motive at time of acquisition. Your subsequent actions of developing and subdividing the land for the purpose of sale is consistent with holding the property for profit making purposes, although the profit being realised is in a manner not what you had originally contemplated.

Business operation or commercial undertaking

The purpose of acquiring the property was for a profit making purpose. The following actions demonstrate the development was undertaken in a commercial and business-like manner.

● You acquired the property for $X including GST in 20YY.

● After the Land was rezoned, you marketed the Land by engaging real estate agent(s) with the following outcomes:

1. Advertised through real estate agent from January to June 20YY for $X without development approval – no formal offers,

2. Advertised through real estate agent from June 20YY to December 20YY for $X with or without development approval – no formal offers, and

3. Advertised through real estate agent from February 20YY to April 20YY for $X without development approval.

The outcome was that you received an offer from X Pty Ltd for $X but did not accept as the price was too low.

You then entered into a Development and Project Management Agreement with a Developer in 20YY to develop, subdivide and sell.

1. The entity structure established and used to conduct all dealings in relation to your Land is for a specific purpose and is an indicator of undertaking dealings in a commercial and business-like manner. It is not similar to an individual undertaking a private pursuit.

2. You were registered for GST from the XX/XX/20YY to XX/XX/20YY. You cancelled your GST registration in 20YY because your GST turnover was less than $75,000, meaning you were not required to be registered.

3. The Land you acquired settled on the XX/XX/20YY (previously farm land) was not used for any private purpose or for personal enjoyment. The Land was not put to any active income producing purpose.

4. There is a coherent plan in place to realise your objective;

a. Acquired Land zoned Urban Deferred General Rural that was to be rezoned (R30) sometime in the future, as per the City of X OPP.

b. You engaged a real-estate agent to keep you up to date with rezoning plans of the Council.

c. When rezoning was approved, the Land was marketed for sale.

d. Offers received were not to your satisfaction and so you varied your plan to include subdivision approval from the City of X.

e. After receiving approval for subdivision you marketed your Land and received an offer to your satisfaction where by you entered into a commercial arrangement with Developer to develop, subdivide and sell the resulting x number of fully serviced residential lots.

f. You entered into X ‘sale of land contracts’ with third parties as part of a ‘pre sales’ strategy to implement your plan

g. As of the XX/XX/20YY, some of these contracts have settled for which the proceeds have been deposited into your bank account. $X has been received as at XX/XX/20YY.

5. The agreement you entered into with Developer is not a standard contract for a single parcel of land. It is an agreement to reflect a commercial business undertaking specific to the development of your land.

After you have received $X from sales of lots, the contract includes a clause at 8.1, giving Developer the option of acquiring the remaining unsold lots for consideration of $X.

The agreement sets out your obligations, Developers duties and obligations, including plans and specifications.

The agreement also states that you appoint Developer as your agent to undertake all aspects of marketing and sale of the developed lots.

6. The agreement demonstrates a profit making motive with significant outgoings;

a. The anticipated proceeds from the venture is approximately $X - $X based on advised per lot prices ranging from $X - $X per lot across the number of lots.

b. The agreement requires you to pay Developer both a development and project management fee to develop the vacant land into subdividable lots. This fee is calculated by taking the difference between the gross proceeds less $X.

c. The proceeds from the sale are banked in the account of the Trust up to an amount of $X. The balance of the proceeds from the sale of the subdivided lots is payable to Developer as development and project management fees.

7. Through you agent, you have entered into contracts for the sale of individual lots with the public. The contract provides under special conditions that you are registered for GST and that the sale price of this contract is inclusive of the goods and services tax (GST) and all sales are made under the margin scheme.

8. The size and scale of the development is not small (X developed lots) and is not carried out in a piecemeal way. All of the Land is subject to the development and is not sold off in parcels in a way that would allow you to use the remaining land for any other purpose.

According to the document provided being the Commission approval dated XX/XX/20YY the following works and activities are undertaken on your land, including, but not limited to:

a. Prior to subdivision works, an urban water management plan is required to include septic sewerage pipes, soak wells and storm water drainage system.

b. Prior to subdivision works, an erosion management plan is required.

c. A Fire Management Plan is prepared and approved and implemented during the period of subdivision works.

d. Services to each lot including sewerage, power and water.

e. An area is allocated to proposed public open space and to be developed and maintained by the landowner/applicant to a minimum standard for a period of two years.

f. The land being filled, stabilised, drained and/or graded is done such that each lot can accommodate their intended purpose,

g. Road and kerbing.

h. Footpath to one side of the local access road.

i. Street Lights.

9. You have held the Land in the Trust accounts as a fixed asset.

10. At all times you have been the legal and beneficial ownership in your Land.

Consideration has been given to the length of time you held the land between buying and selling, and that you were looking for long term capital appreciation. Consideration has been given to the fact that you were unable to find a buyer without subdivision approval, and that you were not directly involved with the development activities.

With no one feature being determinative in isolation, it is our view that your activities are considered to fall within the definition of an enterprise as per sub section 9-20(1)(b) of the GST Act, namely your activities are activities done in the form of an adventure or concern in the nature of trade. What is being undertaken is more than a realisation of capital asset.

Your intention for acquiring and holding the property for sale at a later time (after rezoning) was for a profit making purpose. As discussed earlier, Paragraph 270 of MT 2006/1, the Commissioner considers these activities are an enterprise.

Furthermore, your actions to subsequently enter into development and subdivision activities for the purpose of sale, supports your profit making intention in relation to the Land, even though the profit is realised in the manner that was not initially contemplated.

The subdivision works undertaken on your land are extensive and of a sufficient size and scale to enable you to develop and subdivide the land so that each of the lots are suitable as a residential lot as part of the City of X Outline Development Plan for the area.

When considering all of the factors it is our view that your venture is such that it is well planned with a profit making motive in mind at all times and goes beyond a mere realisation. Your venture is carried out in a commercial and business-like manner to characterise the venture as an activity or series of activities done in the form of an adventure or concern in the nature of trade, and an enterprise for GST purposes.

Your supplies of the lots are in the course or furtherance of an enterprise that you are carrying on and satisfy paragraph 9-5(b).

Requirement to register for GST

Section 23-5 of the GST Act requires you to be registered for GST if:

a) you are carrying on an enterprise and

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

As set out above we consider that you are carrying on an enterprise of property development. You have contended that you are merely realising a capital asset

Paragraph 31 of GSTR 2001/7 provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’, as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations.

We consider that your land is a revenue asset bought and now sold in the course of your trading operations.

As set out above we consider that:

● you are carrying on a property development enterprise, and

● your supplies in this enterprise will be supplies of the 42 Lots of land.

These assets are not for personal use or enjoyment and are not to be retained for investment purposes. These assets are revenue assets and therefore the value of the supply of the lots will be included in your turnover threshold. As the sale value exceeds $75,000 you are required to be registered for GST.

You satisfy the requirements of paragraph 9-5(d).

The supply of all 42 lots will be taxable supplies as per subsection 9-5 of the GST Act.