Edited version of private advice

Authorisation Number: 1051616280684

Date of advice: 5 December 2019

Ruling

Subject: Goods and services tax (GST) and sale of property

Question 1

Is the supply of the portion of the the Property Lots located at XXX (the Property) that relate to the supply of residential premises input taxed under section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Is the supply of the portion of the Property Lots that relate to non-residential premises a taxable supply for the purposes of section 9-5 of the GST Act?

Answer

No

Relevant facts and circumstances

The respective Vendors (you) each perform any activities separately and independently of each other, other than in relation to the proposed sale of the Property to the Purchaser.

Each of the Lots were initially acquired by you for the purpose of residence.

The following Property Lots (the Property) and further description are below:

·   Property Lot A: Formerly held by another entity on XXdate/XXmonth/XXXXyear for residential accommodation.

·   Transferred through a will on on XXdate/XXmonth/XXXXyear.

·   Transferred to the current Vendor through a Will on on XXdate/XXmonth/XXXXyear.

·   A residential dwelling. A portion of the property is available for agistment under a licence by the Vendor.

·   Property Lot B: Formerly held by the current Vendor and another as joint tenants on XXdate/XXmonth/XXXXyear for residential accommodation.

·   Due to the operation of the right of survivorship, the current Vendor obtained the exclusive fee simple interest on XXdate/XXmonth/XXXXyear.

·   Two residential dwellings. The balance of the property is used for primary production with a portion of the property used for horse stables and training facilities which are used by the Vendor's relative for nil consideration and for grazing / agistment.

·   Property Lot C: Previous Vendors acquired the property on XXdate/XXmonth/XXXXyear for residential accommodation and some minor stock grazing (cattle and horses). Current vendor obtained the exclusive share interest on XXdate/XXmonth/XXXXyear.

·   A residential dwelling. Production for grazing and agistment.

No transfers of title have occurred subsequent to 1 July 2000.

In relation to Property Lot B, over time, parts of the were used as for primary production, agistment, horse stable and training facility activities. The Vendor receives no income from the licence of the land used by a relative to operate the agistment, horse stable and training facility activities. The Vendor's annual turnover from the other primary production activities (ie the agistment agreements with unrelated third parties) is below the registration turnover threshold.

In relation to property Lot C, the Vendor allowed the use of land for some agistment activities for unrelated third parties.There are no written agreements with respect to any of these activities. The licences mentioned above are not being sold or otherwise transferred to the Purchaser. They are casual and will be ended prior to completion of the proposed sale.

None of the agistment, horse stable and training facility activities on the Lots have resulted in annual income of $75,000 or more being earned by any of the Vendors.

Accordingly, you are not registered for GST for primary production and activities as per above.

In XXdate/XXmonth/XXXXyear, you were approached by the Purchaser to sell their respective Property Lots. You otherwise had no pre-existing intention to sell the Lots. The contemplated commercial arrangements between you as Vendor and the Purchaser are that the Purchaser will do any necessary work to attempt to sub-divide the Property Lots into en globo lots so that the Property can purchased in X stages. If the Property cannot be subdivided into X en globo lots, then the Property will be purchased as one unsubdivided lot. You and the Purchaser intend to enter into a put and call option to reflect these arrangements in XXdate/XXmonth/XXXXyear.

The Purchaser will undertake all planning and will action and pay for all works required and any costs associated with respect to the subdivision of the Lots.

The Vendors are not undertaking any further activities on the Lots except for the activities outlined above.

After the purchase of the Property is completed and transferred into the ownership of the Purchaser, the Purchaser intends to develop the Lots into a residential estate with the intention of a multi-lot subdivision and the future sale to residential lot owners after completion of the sale.

You are not involved in any property development or subdivision activities and the possible subdivision of the Property into en globo lots during the your ownership as the Vendor is purely for the purposes of allowing the Purchaser to buy in stages.

Further information in relation to the property arrangement and proposed subdivision is as follows:

·        In relation to sale contracts, the draft agreements have not been sufficiently progressed to be meaningful.

·        The heads of agreement between the Vendors/owners and Purchaser sets out the basis of the proposed arrangement between the parties.

·        No Development Agreement, Development Plan or Council applications or approvals are in place in respect of the proposed development.

·        The Purchaser may, but is not obliged to, carry out earthworks and marketing activities such as the erection and use of a site office, sales office, banner signs and billboards.

·        The Vendors may remove or relocate their business activities.

·        The subdivision will be a 'paper subdivision', no physical activity is required to create the six lots, and access from a public road is available.

·        It is intended that you as the Vendors will pre-approve a subdivision plan prepared by the Purchaser and sign a subdivision plan and related instrument to be registered at Land Registry Services, and produce your titles to register the subdivision plan, provided the plan/instrument complies with the approved plan. The Purchaser will manage and progress the subdivision process and the owners' involvement is limited to providing access to the property to prepare plans etc and reasonable assistance when requested.

·        Neither the Vendors nor the Purchaser has made any formal approach to Council regarding the proposed subdivision.

·        The Purchaser is not a related entity of the Vendors.

·        The Purchaser is registered for GST in its own right as a property developer.

·        It is intended the acquisition may be in X stages, the subdivision is based on the split required by the Vendors and the amount of developable land (low density residential, medium density residential and mixed use) being X% developable land in stage X and X% in stage Y. The proposed X number lot subdivision was to ensure that the Vendors retained sufficient security and value of developable land. There will be a residential dwelling in each stage but not on each lot in each stage.

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 Paragraph 9-5(b)

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 40-65

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-10(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-20(1)

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

In this ruling:

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

·   all terms marked by an *asterisk are defined terms in the GST Act

·   all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you must pay GST on any taxable supply that you make.

Under section 9-5, 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 the indirect tax zone; and

(c)   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. Emphasis added.

In your case, we need to consider whether the sale of the respective Property lots located at the Property addresses are a taxable supply under section 9-5.

Enterprise

One of the key requirements for making a taxable supply is under paragraph 9-5(b) which requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

Section 195-1 (the Dictionary) states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

In relation to the term enterprise, section 9-20 states:

(1)   An enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an

interest in property; or

...

The question of whether an entity is carrying on an enterprise is further examined 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.

The Goods and Services Tax Determination: Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? 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.

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.

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. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

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.

Paragraph 180 of MT 2006/1 discusses that an enterprise may be carried on a small scale stating:

180. An enterprise can be conducted in a small way. 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.

In this case, given the facts we consider that you are not carrying on an enterprise in the form of a business. You are not registered for GST as a property developer. Prior to the transfer of ownership of the property to you through a will and survivorship law, the previous vendor owned the property more than XX years ago.

Next we will consider whether your activities are 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 252, 253 and 266 of MT 2006/1 provide the following commentary:

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.

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.

Example 33 at paragraphs 291 to 293 of MT 2006/1 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.

In your case, there was no intention to subdivide and sell at time of acquisition by you.

You were approached by the Purchaser to sell your respective Property Lots. You otherwise had no pre-existing intention to sell the Lots. The contemplated commercial arrangements between you as Vendor and the Purchaser are that the Purchaser will do any necessary work to attempt to

sub-divide the Property Lots. The Purchaser is registered for GST in its own right as a property developer.

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 a business of property development.

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. The subdivision of Property and subsequent sale of the respective Property Lots is considered to be the mere realisation of a capital asset.

Requirement to be registered

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

·        you are carrying on an enterprise, and

·        your GST turnover meets the registration turnover threshold, which is currently $75,000 for entities other than non-profit entities.

Registration turnover threshold

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

·        your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or

·        your projected GST turnover is at or above the registration turnover threshold.

The registration turnover threshold applicable to you is $75,000.

Such supplies are disregarded when working out your projected GST turnover.

In addition, section 188-25 provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you:

·        by way of transfer of ownership of a capital asset, or

·        solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Subsection 188-20(1) provides that an entity's 'projected GST turnover' during a particular month is the sum of the values of all the supplies that it made, or that it is likely to make, during that particular month and the next 11 months. However, the following supplies are excluded from the projected GST turnover calculation:

·       Supplies that are input taxed; and

·       Supplies that are not made in connection with an enterprise that is carried on

Input taxed supplies of real property

Under section 40-65, a supply of residential premises (to be used predominately for residential accommodation) will be input-taxed unless:

·       The premises are 'new residential premises' other than those used for residential accommodation before 2 December 1998; or

·       The premises are 'commercial residential premises'.

'New residential premises' is defined in section 40-75 as residential premises that, amongst other things, have not previously been sold as residential premises (other than commercial residential premises).

'Commercial residential premises' is defined in section 195-1 and include a number of items which inludes a hotel, motel, inn or boarding house..

You advised that the respective Property Lots A, B and C have been held for residential accommodation prior to 2 December 1998, and none of the Property Lots satisfy any of the definitions of commercial residential premises.

Conclusion

The Property Lots have been held for residential accommodation prior to 2 December 1998, and none of the Lots satisfy any of the definitions of commercial residential premises nor are new residential premises. The supply of the portion of the Property Lots that relate to the residential premises are input taxed under section 40-65 and subsection 40-65(1) and input taxed supplies are excluded from an entity's projected GST turnover.

You are not involved in a property development enterprise and the supply of the portion of the Property Lots that relate to non-residential premises are not taxable supplies under section 9-5.