Edited version of private advice

Authorisation Number: 1051590216897

Date of advice: 4 October 2019

Ruling

Subject: Sale of real property and enterprise

Question 1

Is the sale of the subdivided vacant lots and the lot containing your residence, a sale in the course of an enterprise or a mere realisation of capital?

Answer 1

The sales of the vacant lots and your residence are a mere realisation of a capital asset and are not supplies in the course of any enterprise you conduct.

Question 2

If the sales are in the course of an enterprise, are you required to give notice to any purchasers that GST is payable on the sale and the GST withholding provisions apply?

Answer 2

As you are not conducting an enterprise you are not required to provide notice to the purchasers that the sales are subject to GST.

This ruling applies for the following periods:

From 1 July 2019 to 30 June 2023

The scheme commences on:

1 July 2019

Relevant facts and circumstances

·        You have an ABN but are not registered for GST.

·        You subdivided land (the property) into 5 lots including the one upon which your principal place of residence is located.

·        You purchased the property some ten years ago as your principal place of residence.

·        You did not purchase the property with the intention of resale at a profit.

·        You moved in 10 years ago.

·        The property size is approximately 5 acres.

·        The property has been used as principal place of residence all this time and for no other purpose.

·        You previously tried to sell the property whole with three different real estate agents unsuccessfully.

·        You were advised by your current real estate agent that the property might be easier to sell in smaller parcels of land if subdivided.

·        The property is not located in an urban growth corridor.

·        You are not a land developer and have never operated as a land developer.

·        You did minimal work to get the subdivision approved by your local council which was to put in a driveway to create access to all blocks.

·        You have not sold any blocks but one will soon be under contract.

Relevant legislative provisions

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

˗   Section 9-5

˗   Section 23-5

Taxation Administration Act 1953

˗   Schedule 1, section 14-250

˗   Schedule 1, section 14-255

Reasons for decision

Question 1

You are not registered for GST and question at issue is whether you will be making supplies of the property as a mere realisation of capital or in the course of an enterprise. If you make the supplies of the vacant lots in the course of an enterprise you conduct they will be taxable supplies.

GST is payable on any taxable supply you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if:

(a)   you make the supply for consideration; and

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

(c)   the supply is connected with Australia; and

(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

Under the definition above, the supply of the lot with your residence on it will be input taxed even if you are conducting an enterprise and can therefore be excluded from further analysis.

In relation to the vacant lots, if all the elements of section 9-5 of the GST Act are satisfied, you will be making a taxable supply. As such, the first issue is whether you are conducting an enterprise. If subparagraph 9-5(b) is satisfied then a second question arises as to whether you are required to register for GST.

The question of whether an entity is carrying on an enterprise is examined in Miscellaneous Tax 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 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In your case, the activity of subdivision and sale of part of the property is an isolated transaction. In order to determine whether you make a taxable supply, we must first ascertain if the activities occurred in the course of carrying on an enterprise. It is necessary to consider whether the activities were of an adventure or concern in the nature of trade (profit-making undertaking or scheme) or whether they were the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making undertaking or scheme. 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);

˗   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.

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 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 applying the above factors to your case we find that:

˗   there has been no change of purpose for which the land was held as it is your principal place of residence;

˗   no additional land was acquired and added to the original parcel of land;

˗   the parcel of land was not brought into account as a business asset;

˗   there was a no business plan - subdivision was necessary to sell the property;

˗   there was no business organisation (for example, a manager, office and letterhead);

˗   the level of development of the land did not go beyond what is required for approval of the subdivision, namely, providing a driveway;

˗   no buildings have been erected on the land.

Further MT 2006/1 provides examples of subdivisions of land that are not enterprises from paragraph 288. Example 35 is considerably analogous with the fact position in this case:

297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell.

298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property.

299. A few years later Oliver and Eloise decide to sell some more land to meet their increasing debt obligations. They arrange for council approval to subdivide another part of Flat Out into four lots. Again they undertake the minimal amount of work necessary to enable the lots to be subdivided and arrange for the real estate agent to sell these lots.

300. Three years later Oliver's and Eloise's personal and financial circumstances are such that they again decide to sell some more land. They arrange for further council approval to subdivide part of their remaining property into three lots. Again they undertake the minimal amount of work necessary to enable the lots to be sold and arrange for the real estate agent to sell the lots.

301. Over the years involved Oliver and Eloise have subdivided 30 % of Flat Out. They continue to live on the remaining part of their property.

302. Oliver and Eloise are not entitled to an ABN as they are not carrying on an enterprise. They are merely realising a capital asset. In this example the following factors are relevant:

·        There is no change of purpose or object with which the land is held - it has remained their home.

·        There is no coherent plan for the subdivision of the land - the subdivision has been undertaken in a piecemeal fashion as circumstances change.

·        A minimal amount of work has been undertaken in order to prepare the land for sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision.

Having given consideration to the above factors, it is our view that the activities carried out in regard to the subdivision and future sale of the 5 lots is the mere realisation of a capital asset and not the carrying on of an enterprise.

Answer 2

Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 amended Schedule 1 to the Taxation Administration Act 1953 (the TAA) by adding sections 14-250 and 14-255. Under these provisions the purchaser of certain types of real property must withhold the GST amount under the contract and remit it to the Commissioner at or before settlement.

These provisions apply only where you are making a taxable supply to the recipient because section 14-250(1) states:

You must pay to the Commissioner an amount if:

(a) you are the recipient (within the meaning of the GST Act) of a taxable supply that is, or includes, a supply to which subsection (2) applies; and

(b) in a case where the supply is a supply of potential residential land - either:

(i) you are not registered (within the meaning of that Act); or

(ii) you do not acquire the thing supplied for a *creditable purpose.

Subparagraph 14-250 (2)(b) of the TAA provides that the provisions apply to sales of

(b) potential residential land that:

(i) is included in a *property subdivision plan; and

(ii) does not contain any building that is in use for a commercial purpose;

'Potential residential land' is defined in the GST Act, section 195-1:

potential residential land means land that it is permissible to use for residential purposes, but that does not contain any buildings that are residential premises.

Your subdivided lots will be a supply of potential residential land but for the withholding provisions to apply to this sale, the sale to the recipient must be a taxable supply.

As stated in question 1 above, the sale of the vacant lots is the mere realisation of a capital asset and not in the course of an enterprise you conduct. Therefore, they are not a taxable supply.

As the lots are not a taxable supply to the recipient, the withholding provisions will not apply.