Edited version of your written advice

Authorisation Number: 1051500739989

Date of advice: 1 April 2019

Ruling

Subject: GST and land subdivision

Question

Is the activity of subdividing your property deemed to be an enterprise and subject to GST?

Answer

Yes.

The scheme commences on:

Xx yy zzzz

Relevant facts and circumstances

● You have resided on a large parcel of land for several years.

● In recent years the local authority has reclassified the property and you intend to subdivide the block into numerous lots.

● One of the lots will remain as your main residence and the remaining lots will be sold.

● Prior to the subdivision no business activity has been conducted in relation to the land.

● The lots will be sold vacant.

● Roads and kerbs will be constructed.

● Landscaping will be done on the land and electricity, gas, water, telephone connections will be provided in relation to the subdivided lots.

● A surveyor will be engaged in relation to the subdivision.

● A valuer will be used to decide about how much the lots will sell for.

● It will cost a considerable amount to prepare the numerous lots of land for sale and subdivision.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 sections 9-5, 9-20, 23-5 &195-1

Reasons for decision

Are you carrying on a business?

According to the information provided you reside on the land and prior to the subdivision no business activity has been conducted in relation to the land.

Further, you informed us that you have not purchased and sold/subdivided land and have never been involved in any business of land subdivision in the past.

We consider that at this point in time you are not carrying on a property development business as you do not seem to be engaged in developing properties on a regular or continuous basis.

Carrying on an enterprise

However, the term ‘enterprise’ also includes an activity or series of activities carried on ‘in the form of an adventure or concern in the nature of trade’. An adventure or concern in the nature of trade may include isolated transactions that do not amount to a business, but which have the characteristics of a business deal.

Paragraphs 262 to 302 of MT 2006/1, deal with isolated transaction and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

● there is a change of purpose for which the land is held;

● additional land is acquired to be added to the original parcel of land;

● the parcel of land is brought into account as a business asset;

● there is a coherent plan for the subdivision of the land;

● there is a business organisation for example a manager, office and letterhead;

● borrowed funds financed the acquisition or subdivision;

● interest on money borrowed to defray subdivisional costs was claimed as a business expense;

● there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

● buildings have been erected on the land.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

There is a change of purpose for which the land is held

You informed us that:

● you have the necessary skill set to project manage the subdivision and will also be using your company to conduct the necessary earthworks on the subdivision;

● roads and kerbs will be constructed;

● landscaping will be done on the land and electricity, gas, water, telephone connections will be provided in relation to the subdivided lots;

● you will contract with a real estate agent and conveyancers in relation to marketing and selling of the subdivided land;

● a surveyor will be engaged in relation to the subdivision;

● a valuer will be used to decide about how much the lots will sell for;

● it will cost a considerable amount to prepare the numerous lots of land for sale and subdivision.

We are of the view that there has been a change of purpose for which the land is held when you started the one-off activity or isolated real property subdivision transaction that do not amount to a business, but which has the characteristics of a business deal.

The parcel of land is brought into account as a business asset

It is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade.

Paragraph 237 of MT 2006/1 provides that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business.

In this situation:

● it will cost a considerable amount to prepare the lots of land for sale and subdivision;

● a number of activities have been undertaken (see dot points above under the heading change of purpose for which the land is held).

Improving a property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade and demonstrates that the transaction has been undertaken in a commercial manner with an intention to profit from the subdivision of the property.

All this indicate that the parcel of land was brought into account as a business asset.

There is a coherent plan for the subdivision of the land

You will engage the services of your own company to do the earthworks as well as the services of various professionals who will undertake various activities in relation to the subdivision; including a surveyor in relation to the subdivision, a valuer to determine the selling price of the lots, local real estate agent and conveyancers in relation to marketing and selling of the subdivided land.

Your activities in respect of the subdivision have been planned and carried out in a businesslike manner.

Therefore, there is a coherent plan for the subdivision of the land.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision

According to example 35 of MT 2006/1 where an entity undertakes the minimal amount of work necessary to subdivide land on which they live for sale, then the entity is not considered to be carrying on an enterprise.

However, under paragraph 279 of MT 2006/1 the requirements to build roads and kerbs for access and the provision of electricity, gas, water, telephone connections to the subdivided lots demonstrate that there is a level of development of the land beyond that necessary to secure council approval for the subdivision. Such requirements indicate that an enterprise of land subdivision is being carried on.

To recapitulate, paragraph 265 of MT 2006/1 that if several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

In this case several of these factors are present. Moreover, you have indicated that though you have not previously conducted subdivision activities further land subdivisions may be considered in the future.

Consequently, we consider that your activities of land development are an adventure or concern in the nature of trade.

Are you required to be registered for GST?

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

(a) are carrying on an enterprise; and

(b) you meet the registration turnover threshold.

As determined above, you are carrying on a property development enterprise. Hence, you satisfy the requirement in paragraph 23-5(a) of the GST Act.

Currently the GST turnover threshold is $75,000 ($150,000 for not for profit entities).

As your turnover will be over $75,000 you will be required to be registered for GST.

Section 9-5 of the GST Act, provides that you make a taxable supply if you make the supply for consideration, in the course or furtherance of an enterprise that you carry on; the supply is connected with the indirect tax zone (Australia); and you are registered, or required to be registered.

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

In your case, the sale of the subdivided land will be for consideration; it is connected with the indirect tax zone and the sale of the subdivided lots will neither be GST-free nor input taxed. Therefore, you will be required to be registered for GST.

As your supply of the lots will be taxable you will need to remit 1/11 of whatever you receive as GST.

Margin scheme

The margin scheme enables the GST on certain sales of real estate to be calculated on a concessional basis.

Under subsection 75-5(1) of the GST Act, the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

Other than satisfying the requirement of the written agreement, to apply the margin scheme, an entity must be making a taxable supply by:

● selling a freehold interest in land;

● selling a stratum unit; or

● supplying a long term lease.

However, an entity will not be able to use the margin scheme if it is selling real property that it:

● acquired through a taxable sale on which the margin scheme was not used;

● inherited from a person who would not have been able to use the margin scheme;

● acquired from a member of the same GST group who would not have been able to use the margin scheme; or

● as a participant in a GST joint venture, acquired from the joint venture operator who would not have been able to use the margin scheme.

Where none of the above dot points apply an entity will be allowed to use the margin scheme.

If a taxable supply of real property is under the margin scheme the amount of GST on the supply is 1/11 of the supply for the margin.

The margin is defined as the difference between the consideration paid for the acquisition of what is sold and the consideration received for the sale.

Please note that in working out the consideration for an acquisition for the purposes of applying the margin scheme to a taxable supply of real property disregard:

● the cost or value of any other acquisitions that have been made by you; or any other work that has been performed, in relation to the real property; and

● the cost or value of any other acquisitions that are intended to be made by you, or any work to that is intended to be performed in relation to the real property after its acquisition;

including acquisitions or work connected with bringing into existence the interest, unit or lease supplied.

Also note that in working out the margin for taxable supply in relation to subdivided property use only the corresponding proportion of the consideration as applicable.