Edited version of private advice

Authorisation Number: 1051597780809

Date of advice: 23 October 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 xx xxxx

Relevant facts and circumstances

You are not registered for GST.

You have resided, for numerous years, on a large parcel of land.

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 the main residence which will still be occupied by you.

The remaining lots will be sold as vacant land.

You will engage a company to do the earthworks.

All applications/submissions and management dealings have been conducted by a town planning entity and not by you.

There is an existing road outside of the land boundaries which as part of minimum conditions requires kerbing and sealing. The existing land will not be altered nor any roads created on it.

Any land ceded to the local authority as public open space as part of the subdivision will be landscaped by the local authority. The local authority is taking possession of the land and any possible compensation for this will be given in the form of credits to you.

There is land in the powerline easement that crosses the property that will be ceded as future road easement, any possible compensation for this will be given by the local authority in the form of credits.

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

You have not purchased and sold/subdivided land in the past. Though you have not previously conducted subdivision activities; further land subdivisions may be considered in the future.

There are no buildings on the land and no buildings will be erected on the land.

Electricity, gas, water, telephone connections will be provided in relation to the subdivided lots. The connections to the properties will be provided by the relevant service providers. The services are at the front of the lots currently.

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 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

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 2006/1The 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)  a business encompasses trade engaged in on a regular or continuous basis.

(b)  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.

MT 2006/1, paragraphs 233 to 257 explains that an entity is carrying on an enterprise where activities are being done 'in the form of an adventure or concern in the nature of trade'. This is not a defined term. However, MT 2006/1 points out in para 241 that this expression was used in the definition of enterprise as a result of a lengthy history of case law setting out the taxation of isolated transactions.

MT 2006/1 at paragraph 262 mentions that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Further where the activities involve subdivision and sale of real property, MT 2006/1 lists a number of factors drawn from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) to determine whether the activities are an adventure in the nature of trade. 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 set out at paragraph 265 of MT 2006/1.

·         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.

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

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.

Paragraph 266 of MT 2006/1 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. 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.

Examples 33 & 34 of MT 2006/1 have been reproduced below:

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.

Example 34

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

In this situation you have resided on the property for several years. In recent years the local authority has reclassified the property and you decided to subdivide the block into several lots.

On the facts provided:

·         you have the necessary skill set to project manage the subdivision and will also be using a contracting company to conduct the necessary earthworks on the subdivision for consideration;

·         there is an existing road outside of the land boundaries. As part of minimum local authority conditions this road requires kerbing and sealing. The existing land will not be altered nor any roads created on it;

·         any land ceded to the local authority as public open space, future road easement as part of the subdivision will be landscaped by the local authority. The local authority is taking possession of part of the land and any possible compensation for this will be given in the form of credits;

·         electricity, gas, water, telephone connections will be provided in relation to the subdivided lots. The connections to the properties will be provided by the relevant service providers. The services are at the front of the lots currently.

·         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 lots of land for sale and subdivision;

·         you engaged a town planner to conduct all applications/submissions and management dealings;

Your action of entering into an arrangement with the town planner, engaging surveyors, valuers, real estate agents and conveyancers, providing electricity, gas, water, telephone connections, spending a considerable amount of money to prepare the lots for sale and subdivision and receiving compensation in the form of credits from the local authority indicates there is a change of purpose for which the land is held with making a profit of a revenue nature, although the profit may or may not have been realised in a manner that was originally contemplated.

We are of the view that unlike the examples provided in paragraphs 33 & 34 of MT 2006/1 your subdivision of the land is not a mere realisation of a capital asset as 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 the agreements you entered into with the town planner, the local authority, surveyors, valuers, real estate agents and conveyancers, providing electricity, gas, water, telephone connections, spending a considerable amount of money to prepare the lots for sale and subdivision cannot be considered standard agreements for a mere subdivision. Those agreements reflect a commercial business undertaking carried on in a similar manner to that of other businesses in the same or similar trade and specific to the development of the land.

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 informed us that you have the necessary skill set to project manage the subdivision and will also be using a contracting company to conduct the necessary earthworks on the subdivision.

You further engaged the services of various professionals to undertake various activities in relation to the subdivision; including a surveyor, 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 including the town planner which is familiar with subdivision projects of any size, ranging from small-scale brownfield (infill) sites to large residential estates) to conduct all applications/submissions and management dealings.

We are of the view that 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 prepare the 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 for kerbing and sealing of roads for access and the provision of electricity, gas, water, telephone connections to the subdivided lots and the transfer of certain areas of land to the local authority for parks, environmental and other public purposes indicate that there is a level of development of the land beyond that necessary to secure local authority 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 provides a list of factors to determine whether activities are a business or an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 further mentions 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 and the subdivision goes well beyond what is necessary to prepare the land to be sold in smaller parcels.

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.

Carrying on an enterprise

Therefore, as set out above we consider that you are carrying on an enterprise of property development and not 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 the land is a revenue asset sold in the course of your trading operations; that you are carrying on a property development enterprise, and the supplies in this enterprise will be supplies of the lots.

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

Required to be registered for GST

Section 23-5 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 is currently set at $75,000.

Furthermore, section 188-10 of the GST Act provides that an entity GST turnover meets the registration turnover threshold of $75,000 if its projected GST turnover meets $75,000. An entity's projected GST turnover is calculated by adding the value of all the supplies it makes or is likely to make in a particular month and in the next 11 months (excluding certain supplies such as input taxed supplies).

Your land is not for personal use or enjoyment and is not to be retained for investment purposes. The subdivided lots 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.

Paragraph 9-5(d) of the GST Act is satisfied.

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

Note: You referred to MT 2005/1 (The new tax system: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number) in your application and mentioned that as the land sub-divisions are less than 10 blocks the taxpayers activity is not an enterprise, and therefore not subject to GST.

Please note that Mt 2006/1 finalises MT 2005/D1 and is considered as the ATO view.