Edited version of private advice

Authorisation Number: 1051559670991

Date of advice: 2 September 2019

Ruling

Subject: GST and subdivision and sale of property

Question

Are you carrying on an enterprise pursuant to section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 in relation to the realisation of land situated at a specified location?

Answer

No

Relevant facts and circumstances

Individual 1 and Individual 2 (You) are not registered for GST.

On xx/xx/xxxx you signed a contract to purchase a property located at a specified location (the Property) for $xxx,000.

The Property has a land area of xx.x hectares and was zoned Rural Residential at the time it was acquired.

The Property was purchased as a lifestyle block to raise your family and contained a house. You lived on the Property with your children and did not use the Property for any farming or business activity.

On xx/xx/xxxx the Council implemented a scheme resulting the zoning of the Property to be changed due to its close proximity to residential activity. You did not have input into this zoning change.

After a period of bad health and unemployment for Individual 1 and considering your long term financial circumstances you decided as a result of the changed planning scheme to subdivide your property and sell a portion of it.

You engaged the services of a Company who lodged a subdivision application with the Council for the subdivision of the Property into two lots.

On xx/xx/xxxx, the Council approved the subdivision application for the following to occur:

·        Proposed subdivision of the Property into 2 lots, being Lot 1 having a land area of xx acres with the existing house located on it and Lot 2 having a land area of xx acres of vacant land;

·        Electricity and telecommunications were to be supplied to each of the subdivided lots; and

·        Vehicular access to be provided.

In xx/xxxx, you completed the subdivision of the Property into the two lots in accordance with the Council's requirements with Lots 1 and 2 being registered at the titles office on xx/xx/xxxx.

About that time you reviewed real estate sales in your area and you consulted your accountant in relation to how you may be able to realise the value in Lot 2 by subdividing that lot into smaller lots.

Following these discussions you decided to proceed with the subdivision of Lot 2 into xx lots, and keep Lot 1 and continue to live in the existing house on that Lot.

On xx/xx/xxxx, you held discussions with the Company to get advice on how to proceed with the subdivision of Lot 2 into xx lots of vacant land.

You did not acquire any additional land for the subdivision.

On xx/xx/xxxx, the Company lodged the development application with the Council for the subdivision of Lot 2 into xx lots.

On xx/xx/xxxx, the Development Application (DA) Decision notice was issued by the Council in relation to the subdivision of Lot 2 into xx lots.

In a letter dated xx/xx/xxxx, the Company appealed against a number of the requirements in the DA.

A negotiated Decision notice was issued by Council on xx/xx/xxxx and Council granted formal approval of the subdivision of Lot 2 in 3 stages and approval for a xx lot subdivision.

You subsequently engaged the services of the Company to manage the subdivision including:

·        preparing all drawings and designs

·        preparation and lodgement of applications with the Council

·        liaising with the Council

·        submitting water reticulation drawings to the relevant authority

·        undertaking stormwater analysis

·        preparation of tender documents to call for tenders; and

·        supervision of subdivision works and organisation of contract administration and

·        finalisation.

The estimated market value of the Property in xxxx prior to the initial subdivision into Lots 1 and 2 was $xxx,000 while the estimated market value of the lots once the first subdivision had been completed is as follows:

·        Lot 1, being xx acres with the existing house located on it, $xxx,000; and

·        Lot 2, being xx acres of vacant land, $xxx,000.

The estimated market value of Lot 2 with the approved Development Application was around $xxx,000 in xxxx.

The projected total costs for subdividing Lot 2 into xx lots in three stages is estimated to be $xxx,000 (however this is subject to change (increase) due to the fact that development is likely to happen over an extended period of time).

The three stages of subdivision will be undertaken as follows:

·        Stage 1 - x blocks

·        Stage 2 - x blocks

·        Stage 3 - x blocks

You will fund the subdivision of Lot 2 primarily using your savings.

You took out an asset line of finance from a financial institution to purchase the Property in xx/xxxx. No additional borrowing facility has been established to finance the work on the Property that is necessary to meet the requirements for the subdivision to be approved.

You have not claimed a tax deduction in relation to the interest expense incurred.

At the time that Development Approval for the subdivision into xx lots was granted it was estimated that the xx lots may be sold for $xxx,000 each, with total sale proceeds of $x,xxx,000.

You have not undertaken any similar activities in the past and do not intend undertaking any similar activities in the future.

You will engage the services of professionals to undertake the activities related to the subdivision of Lot 2 into xx lots and such development will take place in accordance with the Development Approval.

You are coordinating the work of the professionals however you do not have an office or issue letters for the development under a development letterhead.

The development will not include buildings or structures.

You are currently proceeding with Stage 1 of the subdivision.

You have engaged a real estate agent to manage the marketing of the subdivided lots and advertising is taking place through the normal channels including road signage close to the property.

In accordance with the Negotiated Decision Notice you are required to complete a number of activities including:

·        Remove fill used to fill old dam and compact with controlled fill.

·        Fill and grade the verge area and either turf or grass and seed the area to achieve a minimum of xx% grass coverage.

·        Provide crossovers and internal access driveways for 'battle-axe' blocks. In your case, two access driveways are required being one in Stage 2 of the subdivision (concrete construction of 100 metres) and one in Stage 3 (concrete construction of 94 metres).

·        Install a single street light which will be installed in Stage 3 of the subdivision.

·        Provision of stormwater drainage in order to service the development. This process will consist of placing pipe under the driveways.

·        Provision of underground power to serve internal allotments. Power will be provided to each Lot however the recipients of the individual Lots will be responsible for the installation of cables to bring electricity to their home.

·        Installation and maintenance of silt management facilities. This process involves the placement of stakes joined by short lengths of tarpaulin to moderate the flow of water during a rain event.

On xx/xx/xxxx you lodged a private ruling request seeking clarity on the income tax and capital gains tax consequences of disposing of the subdivided lots. The Commissioner issued a private ruling concluding the following:

In conclusion, the activities involved in the subdivision of the Property and the sale of the xx subdivided lots will not amount to carrying on a business. The transactions will not have the character of business operations or commercial transactions. There is no indication that your activities will become a separate business operation or commercial transaction, or that you will be carrying on, or are carrying out a profit-making undertaking or plan.

Therefore, as it is not viewed that you are carrying on a business, or that the activities will be an isolated transaction, any profit arising from the sale of the xx subdivided lots, but that it will be a mere realisation of your Property which will be accounted for under the capital gains tax provisions in Part 3-1.

In xx/xxxx you sold two of the subdivided lots of Stage 1 of the subdivision. The owners of the Lots have since constructed homes on the Lots.

On xx/xx/xxxx you entered into a contract to sell a block from Stage 2 of the subdivision.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-20

Paragraph 9-20(1)(a)

Paragraph 9-20(1)(a)

Reasons for decision

Note: In this reasoning, unless otherwise stated,

·        all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·        reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done:

·        in the form of a business (paragraph 9-20(1)(a)) or

·        in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

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 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

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.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, lists indicators of carrying on a business:

·        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.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

In this case we consider that you are not carrying on an enterprise in the form of a business. Next we will consider whether your activities are an activity in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

·        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.

Paragraphs 180, 252, 253 and 266 of MT 2006/1 provide the following commentary:

180. An enterprise can be conducted in a small way.⁶² The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

252. Improving 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.⁹⁹

253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

266 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.

In addition example 33 provides an example which we consider to be on foot with yours.

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

We consider that your level of activities on the land is minimal to bring the property to market and not on the same scale as business of property development

Therefore In weighing up all of the facts of this case, we do not consider your activities to constitute an adventure or concern in the nature of trade. Your activities do not fall within the scope of an 'enterprise' as defined in section 9-20 for GST purposes. The subdivision and subsequent sale of the vacant subdivided lots is considered to be the mere realisation of a capital asset.