Edited version of private advice

Authorisation Number: 1051604180099

Date of advice: 8 November 2019

Ruling

Subject: GST and sale of subdivided lots of land

Question

Will the sale of the subdivided lots of land under the terms of the agreement be taxable supplies for GST purposes?

Answer

Yes. The sale of the subdivided lots of land will be taxable supplies for GST purposes.

Relevant facts and circumstances

Applicants are joint tenants of a property (Land) and the land is located in an area as Urban Growth Zone.

The Applicants were aware of the zoning of the land at the time of purchasing of the Land.

The Applicants obtained a loan to purchase the Land and part of the purchase price also subject to vendor financing.

The Land contained an existing house on it, however, it was quite rundown and Applicants planned to demolish the existing house and build a new house on the Land for them.

The Applicants intended to fund the building of their new home by selling their home that they were living in at the time and using the proceeds from this sale to reduce their loan balance as well.

They allowed a family member to live in the existing house on the land.

A tree fell on the house and the house was no longer fit to be lived in. Ever since, it has remained vacant.

The Applicants made an insurance claim for the damage done by the fallen tree; however there were a significant delay in finalising their claim. This had delayed plans to build a new home.

The Applicants were approached by a developer with a proposal to develop the land. The developer had been undertaking a broader development in the area and wanted to include the Land in this development.

It was proposed that the Applicants enter into a development agreement with the developer who would develop the Land and sell the subdivided lots on behalf of the Applicants.

The developer received development approval (DA) for the subdivision of the Land into xx lots. The Applicants understand that the developer will perform the minimum work necessary to comply with the DA.

Under the Agreement, the developer agreed to:

·         engage consultants and contractors;

·         obtain all permits and approvals;

·         manage the day to day running of the development;

·         meet all the costs of the development; and

·         be solely responsible for marketing strategies for the sale of the lots.

The development fees will be based on the total sale proceeds from the sale of the lots less the fixed amount to be paid to the Applicants under the agreement.

The Applicants will receive a fixed payment by the developer. This will be paid in five instalments with the last instalment being paid by December 20YY at the latest.

The Applicants have agreed to grant a mortgage over the Land to the developer to fund the development costs.

Under the Agreement, the Applicants have agreed to:

·         comply with any reasonable request to provide information necessary for or incidental to any applications made by the developer;

·         consent to all reasonably necessary applications for approvals and permits required for the development;

·         pay all holding costs and when they fall due;

·         allow for a mortgage in favour of the developer to be registered;

·         execute any documents necessary to allow the developer to register a mortgage over the Land as security;

·         grant a power of attorney in relation to the Land to the developer;

·         grant a licence for the developer to enter the Land;

·         sign all the documents reasonably required in accordance with this Agreement or that are otherwise reasonably necessary for completion of the subdivision; and

·         not otherwise deal with the Land except as required or permitted by this Agreement.

Under the Agreement, the Applicants have agreed not to (without prior written approval):

·         grant any further mortgage over the Land;

·         seek to sell the Land;

·         sublet, lease or grant a licence over the Land; and

·         enter into any new occupation right or tenancy over any part of the Land.

Under the Agreement, the developer (and not the Applicants):

·         determine all issues in relation to the sale of the lots (including the sale price);

·         will sign all sale contracts under its power of attorney; and

·         will receive all proceeds from the sale of each of the lots and, if required, pay the Applicants any remaining instalments on their fixed sale price out of these proceeds.

·         engage any consultants and contractors it determines appropriate for the construction of the development.

The Applicants are not involved in planning or undertaking any subdivision on the Land.

The Applicants have never subdivided Land before and have no intention to subdivide any land in the future.

Neither of the Applicants have undertaken any business or investments activities including the leasing or licencing of land.

The Applicants have never been registered for GST either individually or as a partnership.

The Applicants have purchased and sold three properties in the past. None of these properties were subdivided before they were sold.

The Applicants never attempted to sell the Land in its entirety as their intention was to build their main residence on the property.

In consideration of the developer paying the Option fee to the Applicants, and subject to the developer not being in breach of the terms of the Agreement, the Applicants offer to sell the Land to the developer or its nominee.

The Applicants and the developer agree that for the duration of the project, the developer is entitled (but is not obliged) to construct and maintain a sales office on the Land for the purposes of marketing lots and erecting sales and marketing signage.

The developer is entitled to a development fee for providing the development services under the Agreement.

Power of Attorney

The Applicants irrevocably appoint and constitute the developer, its representatives and its solicitors as its lawful attorney to do all acts and things in relation to the project including but not limited to:

·                     Signing any applicants in the name of or on behalf of the Applicants;

·                     Entering into negotiations with any Government Agency in the name of or on behalf of the Applicants in relation to the development;

·                     Signing all documents necessary to effect any required subdivision of the Land, including all applications, survey plans, easements and related documentations;

·                     Signing contracts and all documentation (including for example, vendor statements or disclosure statements) relating to and necessary for the completion of contracts, including Land Titles Office forms in the name of or on behalf of the Applicants.

Applicants' contentions

There is no intention to carry on a property development business. The Applicants were approached by the developer with an offer to subdivide the Land as part of a broader development that the developer was undertaking in the area. The Applicants have no interest in this broader development.

The proceeds that the Applicants receive from the sale of the Land are not linked with the success or failure of the subdivision. The Applicants have been offered a fixed price for the Land - this is regardless of whether all of the subdivided lots are sold at that point.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 - section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 - section 188-25

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act 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; 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.

The Applicants are engaged in the sale of subdivided lots of land. The Land will be subdivided into xx lots for sale and for the supply of the subdivided lots to be taxable; all of the requirements in section 9-5 of the GST Act must be satisfied.

The subdivided lots of land will be sold for consideration and the supply will be connected with the indirect tax zone. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Furthermore, the supply of the subdivided lots will be neither GST-free nor input taxed. Therefore, it should be determined whether:

·                     the sales of the subdivided lots are in the course or furtherance of an enterprise that the Applicants will be carrying on; and

·                     if so, whether the Applicants are required to be registered for GST.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines enterprise to include an activity, or series of activities, done:

·                     In the form of a business

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

·                     On a regular or continuous basis, in the form of a lease, license or other grant of interest in property

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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' (MT 2006/1).

MT 2006/1 at paragraph 154 provides:

154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise.

The Applicants are currently not registered for GST. Based on the facts provided in the application for the private ruling, it is assumed that the Applicants are not required to be registered for GST due to not meeting the GST turnover threshold of $75,000. And the Applicants contend that they are not carrying on an enterprise in relation to the property development activities they have engaged in.

However, it is necessary to consider whether the arrangements made with the developer to develop the Land for sale would constitute carrying on of an enterprise by the Applicants. Under the development agreement (Agreement) the developer has undertaken the development activities (Project) on behalf of the Applicants. Under the power of attorney, the Applicants have authorised the developer to do all acts and things in relation to the Project including making decisions, negotiating with relevant Government agency, signing documents/contracts, etc.

Therefore, it should be determined whether the activities such as demolishing the existing home, subdividing the Land into xx lots for sale are done in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of 'an adventure or concern in the nature of trade' where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

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. Both terms require the features of a 'business deal'.

Indicators of carrying on a business

Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are:

·                     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.

In addition it is relevant to consider:

·                     the length of time the property had been held and to what purpose it had been put to in that time; and the personal involvement in the development activity.

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.

Application of the indicators to the activities undertaken by the Applicants

The Applicants have engaged in significant commercial activities such as entering into a property development agreement with the developer, granting a mortgage over the Land to finance the development project, appointing the developer as their lawful attorney in relation to the project and offering a call option to the developer to purchase the Land. The Applicants have agreed to provide all the necessary support and assistance to the developer in obtaining approvals and permits required for the development, sign all the documents reasonably required in accordance with the Agreement or that are otherwise reasonably necessary for the completion of the Project.

·                     Although the Applicants contend that they have no involvement in any aspect of the development activities, this is not the only determinative fact that should be considered. As explained above, the Applicants will be engaged in this venture in a commercial and business-like manner by entering into all the agreements to enable the developer to carry out the property development on behalf of the Applicants. As the owners of the Land, the Applicants will be paying all the holding costs when they fall due and required to meet all the terms and conditions of the Agreement in order for the developer to complete the project. This clearly demonstrates the purpose and intention of the Applicants of engaging in commercial activities.

·                     The Land has been zoned as Urban Growth Zone area. The Applicants were aware that the Land was zoned as Urban Growth Zone at the time of acquiring the Land. The Applicants' intention of acquiring the Land was to demolish the existing house and build a new residential home for them to live in. However, within a short period of time, the Applicants have decided to develop the Land and sell them by engaging a development manager. This indicates the intention of the Applicants to make the venture profitable.

·                     The Applicants will be carrying on the property development in a similar manner to that of other businesses in the same or similar trade. The Applicants had taken systematic steps in planning the subdivision and funding the project by mortgaging their Land. The developer will engage any consultants or contractors appropriate for the development activities. These are the types of activities routinely undertaken by owners or their service providers engaged in property development.

·                     The Land will be subdivided into xx lots for sale and the activities carried out to develop these lots will be of reasonable size.

·                     There is no clear evidence of a documented business plan for the development by the Applicants. However, the developer has taken a series of systematic steps to plan and execute the development project including sales and marketing on behalf of the Applicants.

·                     The Applicants have acquired and sold three properties in the past. Although none of these properties were subdivided and sold, it is considered that the Applicants would have gained sufficient knowledge and skills in buying and selling properties.

Paragraphs 264 to 266 of MT 2006/1 discuss judicial decisions that have established a number of factors 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 subdivision of the land

·                     there is a business organisation - for example a manager, officer and letterhead

·                     borrowed funds financed the acquisition or subdivision

·                     interest on money borrowed to defray subdivisional costs was claimed as a business expenses

·                     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.

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 and therefore an enterprise for GST purposes.

In applying the above indicators to the activities undertaken by the Applicants, it is noted that:

·                     there is a change of purpose for which the land was held as the Applicants have decided to accept the offer made by the developer and entered into a development agreement with the developer to subdivide the Land for sale. There is an expectation that the value of the Land may rise significantly as the Land is in the Urban Growth Zone.

·                     the Applicants have not acquired any additional land. However, their Land will be included in the broader development undertaken by the developer in the area.

·                     The developer will be undertaking a series of coherent and systematic steps to plan and execute the development project on behalf of the Applicants. The Applicants have provided all the authority necessary for the developer to carry on the development project.

·                     the Applicants have agreed to allow the developer to construct and maintain sales office on the Land. The sales office will be used for sale and marketing purposes with marketing signage.

·                     the Applicants have granted a mortgage over their Land to the developer to fund the development.

·                     although the Applicants contend that they understand that the developer will carry on the minimum work required or necessary to comply with the DA, the developer will demolish the existing house, may construct sales office on the Land in order to market the sales of the subdivided lots, will include the Land in their broader development undertaken in the area.

Further factors we have taken into consideration include:

·                     We acknowledge the fact that the Applicants will not be directly engaged with the property development activities. However, considering the arrangements made between the Applicants and the developer, it is our view that this types of arrangements an owner of a property would usually undertake as not everyone would have the knowledge and skills to engage themselves directly to develop and dispose the property. The terms and conditions of these agreements have the characteristics of a business deal.

·                     The Applicants have made no attempts to sell the Land in its entirety to another buyer or a developer. Instead they have accepted the offer made by the development manager to demolish the existing house and subdivide the Land and sell all the xx lots. It is clear that the intention of the Applicants is not just to dispose the Land as a mere realisation rather than engaged in a similar manner an entity would carry on an enterprise of property development.

·                     It is noted that although the developer will be funding the development costs and other associated costs, the financial risk in relation to the Project rests directly with the Applicants as they have mortgaged the Land to the developer. The developer acknowledges that the Land is at their risk from the date that the developer confirms satisfaction of its due diligence enquiries. However, the Applicants ultimately bear the risk (legal and financial) in that as it is the Applicants' Land that is committed and the Applicants will be liable to any cost in case the Agreement is terminated or defaulted.

·                     The Applicants contend that they will receive a fixed price from the sale of the subdivided lots regardless of whether all of the subdivided lots are sold at that point. We note that X is entitled to development fee for providing the development services to the Applicants. The development fee is calculated as described in the Agreement. We note that the developer and the Applicants have agreed to a fixed price taking into consideration the cost of the development and the development fees payable to the developer.

Registration

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

(a) you are carrying on an enterprise, and

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

Your GST turnover does not include the supply of capital assets as per subsection 188-25 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of a 'capital asset' at paragraphs 31 to 36.

Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

Furthermore, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

We have considered section 188-25 of the GST Act and this section does not apply to the sale of the subdivided lots of land. The subdivided lots will have the character of a revenue asset, rather than a realisation of a capital asset.

As the sale proceeds from the sale of the subdivided lots will exceed the registration turnover threshold, the Client will be required to be registered for GST.

Conclusion

As explained, the sale of the subdivided lots will be made in the course of a property development enterprise that the Applicants will be carrying on and the Applicants are required to be registered for GST. Therefore, the supply of the subdivided lots will be subject to GST.

Where the Applicants meet the requirements of Division 75 of the GST Act, the Applicants will be entitled to calculate the GST on their taxable supplies under the margin scheme.