Edited version of private advice

Authorisation Number: 1051623253542

Date of advice: 6 February 2020

Ruling

Subject: GST - Subdivision - Revenue v Capital

Question 1

Will the supply of subdivided lots at XXX be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act")?

Answer

Yes.

Question 2

Confirm there if there is a requirement under section 14-250 of the Taxation Administration Act 1953 (TAA) for purchasers of the vacant lots to withhold and amount of GST?

Answer

Yes.

This ruling applies for the following periods:

1 July 201C - 30 June 202D

The scheme commences on:

1 July 201C

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65.

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

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In early 19xx, xxxx (xxxx) acquired seven and a half acres of land on xxxx ("the Land") and built a house on the Land.

In 19xx, xxxx (xxxx) married xxxx and the ownership of the Land was transferred to their joint names. They have been residing in the house as their main residence since then.

Between 19xx and 19xx, xxxx (as owners) held the Land as private residential property and did not rezone and/or subdivide the Land.

In 19xx, the xxxx Council ("the Council") advised the owners that the Council had to acquire xx% of the Land for water management (i.e. sewer and storm water) purposes. This resumption process by the Council was to accommodate the development of new suburbs of xxxx. As such the Council required the land to provide sewer lines and storm water for these new developing areas.

At the time the Council initiated the subdivision of the Land into four lots. Lot x and Lot y (being the lowest-lying land) were resumed by the Council for no consideration. This land was converted into parkland.

Lot x, which comprised of the owners residence, and Lot x, which consisted of vacant land used for residential purposes, was retained by the owners.

Lots x and x were not adjoining, being separated by one of the lots taken by the Council. However, the owners continued to use Lots x and x for personal use.

At the time of the subdivision of the Land in 19xx, the owners negotiated an agreement with the Council in respect of Lots x and x that:

·         In the event of the future sale, the owners would not be charged any development fees from the Council or have to provide land as greenspace if they subdivided the lots;

·         The owners were to be provided with new access from xxxx to Lot x and Lot x;

·         The owners would also be allowed to direct excess water run-off from their two remaining lots directly into the nearby creek.

In 19xx, the owners sold Lot x and remained living in the house which was originally built on Lot x.

xxxx passed away in 20xx and full ownership of Lot x passed on to xxxx who has remained living in the house.

In 20xx, xxxx Pty Ltd ("xxxx") approached xxxx with an offer for xxxx to undertake a property subdivision and sale of Lot x on their behalf.

Further reference to Lot x (including xxxx house) are together referred to as "the Property".

xxxx and xxxx entered into a Development Management Deed dated 20xx.

Development Approval (DA)

A DA application was subsequently lodged by xxxx on behalf of xxxx to the Council, which relied on the original 19xx agreement between the owners (now xxxx) and the Council regarding any future redevelopment of the Lot.

Advice provided to xxxx was that the DA should have been approved by the Council as it was submitted, as it was in accordance with the agreement reached with the owners in 19xx.However, the Council declined the submission for a number of reasons. In declining the submission the Council did not acknowledge the 19xx agreement reached with the owners.

xxxx incurred costs of objecting to the Council's decision in relation to the DA application. Xxxx incurred all costs and undertook all work in respect of the DA and objection.

xxxx only involvement in the DA and objection process was to attend meetings at the requirement of xxxx or the Council to attest to the agreement made with Council in 19xx.

Xxxx incurred and paid approximately $x in costs to get the DA approved.

Eventually the Council approved a xx lot subdivision following application to the Court and a subsequent mediated settlement.

The Property has since been subdivided in accordance with the development plan. This is outlined below under the heading "Development Agreement - xxxx".

Since the Property was acquired in 19xx and up to the current development:

·         no applications or submissions had previously been made to the Council by xxxx to rezone or subdivide the land;

·         no improvements were made to the land by xxxx, that did not relate solely to their use of the property for private and domestic purposes as their residence;

·         even though the owners had negotiated an agreement with the Council in 19xx when half the land was resumed xxxx did not make any improvements in accordance with that agreement.

The Property has never been leased or rented to anyone else. It has been used solely as a main residence. That is, since 19xx:

·         the Property has remained in its original state without any improvements; and

·         it has never been used for any business purpose or generating income.

Development Arrangement - xxxx

The terms of the Development Management Deed ("the Deed") as agreed with xxxx and xxxx is as follows:

·         the parties are not involved as a partnership or joint venture arrangement. That is, the arrangement is a development management agreement

·         xxxx will charge a development management fee to xxxx for xxxx services.

The Development fee charged will reflect the return agreed to be provided to xxxx being

(i)       a cash payment of $xxx overall and

(ii)     the construction of a house (worth $x) on xxx of the lots the xxxx will retain for their new main residence.

xxxx will retain title of the Property throughout the project and be the vendor listed on any sale contracts. xxxx involvement in the project is limited to the following:

·         xxxx, as landowner, is to ensure that they consent to and execute all documents (i.e. DA applications, contracts for sale of land) as required by or consistent with the Deed.

·         Apart from appearing at some meetings with the Council (as required by xxxx) to provide evidence of the agreement reached in 19xx xxxx has not otherwise been involved with xxxx on the project work.

xxxx, as the Developer, is to do everything necessary to undertake the project, including:

·         obtaining all of the relevant DA approvals (including objections in relation thereto) relevant to the project;

·         liaise and coordinate with the contractors, suppliers, and others involved in the development. It will effectively engage all the consultants (including engineers, lawyers. real estate agents. etc.) to assist with the design of the Development, supervision of the construction of the development, and the sale of the Lots;

·         be responsible for marketing the sale of the lots including appointment of real estate agents and negotiating the sale price with respective purchasers;

·         be responsible for the payment of all the project costs and construction costs to undertake all the works to subdivide the Property into the Lots.

xxxx will not be involved in negotiating any construction agreements or be invoiced by any sub-contractors directly. That is, xxxx has no say in what costs are incurred, how the work is to be performed, or who is to do the work.

xxxx only third-party costs (invoices they receive) will solely be for the development fee they are charged by xxxx as the Lots are sold.

Specifically, under the Deed xxxx obligations as developer include:

·          take all steps reasonably necessary to lodge the Development Application with the local authority and obtain the Development Approval.

·          the management and supervision of the Development, including doing everything reasonably necessary to ensure the Development is completed.

·          enter into the Development Contract, manage the Development Contract and the actions of each Contractor engaged to carry out the Development.

·          create and maintain records for the Project.

·          take all steps reasonably determined by xxxx to market and sell the Lots including engaging marketing and sales consultants.

·          remit to the relevant authority all GST and CGT required to be paid by xxxx upon the sale of the Lots.

·          provide any other services which would generally be performed by a Manager including site representation.

·          xxxx obligations under the Deed as the land owner are to:

-        promptly consent to and execute all Documents required by or consistent with the Deed.

-        deal with the Land only as specifically provided for in the Deed and with the prior written consent of xxxx.

-        not deal with their interest in the Property in any way which would interfere with the ability of xxxx to perform its obligations under the Deed.

-        at all times, grant access to the Property to xxxx and xxxx Agents where access is necessary or desirable for the carrying out of the Project.

Under the DA approved by the Council it is noted that:

·         the Council finally consented to a xx lot subdivision.

·         xx lot was required to be given to Council as greenspace.

Of the remaining xx lots, xxxx was going to retain one lot personally to build their residence on. However they have decided to retain x lots for their personal use. The remaining xx lots are to be sold and are the subject of this private ruling.

The Council consented to the development on the grounds that:

·          the Council would waive their standard $x contribution for each block.

·          however, any water discharged into the creek would now have to be treated first. This required xxxx to construct a bio retention bed to trap and filter the water before it was discharged into the creek. This area was to be landscaped by xxxx as part of the requirement

·          a lot (at a cost of $x) would be given to the Council for greenspace.

·          Xxxx was to contribute $x as a tree off set levy;

·          the Council required xxxx to build a xx metre retaining wall (cost $x) around the Property as a condition of approving for the development for flood mitigation purposes. This required some xxxx m2 of soil to be installed (cost $x).

The total extra cost of the development due to the Council's conditions was approximately $x. These were costs incurred to meet Council requirements and would not have been incurred otherwise.

xxxx has only undertaken those subdivision works as required by the Council in order to comply with the terms of the DA approval. No additional improvements are being made to the lots being sold to third parties.

As part of the development agreement, xxxxx is building a house for xxxx. The cost this construction is effectively being offset against the consideration xxxx is receiving from the sale of the xx lots.

Due to the Council development requirements, and xxxx keeping xx lots (as opposed to their original xx lot) there was a variation signed to the Development Agreement whereby the:

·         Developer was able to take out security against the Property for the purpose of its borrowing to cover the additional costs; and

·         net return to xxxx has deceased, as they are no longer selling the x lot they decided to keep, but still has to pay for xxxx development costs for that lot. xxxx intends to give the xx Lot to their child to build a house on for their child to live in.

·         the net receipt by xxxx after adjustments decreased from $x to $x.

The xx lots are mainly between xm² to xm² each. The average selling price for the lots is between $x to $x each.

Construction started in xxxx 20xx, and xxxx continued to residence in the residence on the property until xxxx 20xxwhen they moved into their child's house to make way for the demolition of their residence.

Registration of the titles for the individual xx lots has not yet been completed.

xxxx is not personally involved in any other property subdivisions or sales and did not own any other property since 19xx.

Reasons for decision

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the 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 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.

(Items marked with an *asterisk are defined in the Dictionary at section 195-1 of the GST Act).

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

In your case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the sales of the proposed subdivided vacant bocks will be for consideration and the sales will be connected with the indirect tax zone as the subdivided blocks are situated in Australia.

Therefore, what needs to be determined is:

·             whether the sales of the proposed subdivided vacant blocks will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and

·             whether you will be required to be registered for GST (paragraph 9-5(d) of the GST Act),

Whether the sale of the proposed subdivided vacant lots will be in the course or furtherance of an enterprise that you carry on

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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; ...

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) considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an Australian business number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise for the purposes of A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

The principles outlined in these rulings have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 states:

An activity or series of activities

10. Essentially, this is any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

As the acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

Paragraph 11 and 12 of GSTD 2006/6 explains activities done in a form of business and states:

In the form of a business

11. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts.] The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

12. The definition of 'business' in section 195-1 is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'.

The term business ordinarily would encompass a trade that an entity is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised that you have never been involved in property development in the past and that your activities represent a one off transaction on the land that XXXX purchased.

As the activities include clearing of land, development and sale of properties, it is necessary to determine whether the all the activities undertaken are of a commercial nature that goes beyond the mere realisation of an investment asset or private asset.

At Paragraphs 13 and 14 of GSTD 2006/6 it explains in the form of an adventure or concern in the nature of trade, it states:

13. 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

Therefore from the above isolated transactions with a commercial flavour are included as in the form of adventure or concern in the nature of trade. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. At paragraph 263 of MT 2006/1 it states:

263. The issue to be decided is whether the activities 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions...

Change of intention

You contend that your activities are a mere realisation of a capital asset as they are not 'significant' when compared to cases such as Statham and Casimaty. Both these cases have considered the issue of intention and whether the proceeds from the venture are of a capital or revenue nature.

In Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income.

In Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham's case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

As held in the above cases, a taxpayer can embark on a venture in the nature of a business or in the nature of trade, where the property is applied for a different purpose, after the property was first acquired.

The question whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions (paragraph 262 of MT2006/1).

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.

We consider that the facts in your case can be distinguished from those in Statham and Casimaty as outlined below.

You advised that you have lived in "The Property" since acquiring it in 19XX and has not been used for income producing purposes. You are looking towards retirement and after this subdivision you will reside in a new house on one of the sub divisions and will be retaining x lot. You have also not sought any rezoning laws.

Whilst we acknowledged that the property has been your principle place of residence, after taking into account the circumstances of your case, we consider that the activities undertaken have significantly changed the character of the land (Lot X). It is no longer being used for private purposes for which it was initially acquired for and is now being applied for the purpose of land development. That is, the land is being developed and subdivided into xx lots of which x of them will be retained by you.

The size and scale of the development of the xx lots is extensive, as there is a substantial amount of works required to be undertaken on the land to bring it onto a condition ready for residential sale such as clearing, construction of roads, lighting and retaining walls.

There is a coherent and complex plan for this development, we consider this venture to be organised as there has been a significant amount of pre-planning work that has gone into this subdivision including water management and sewerage.

You hold title of the land at all times and are only transferred once the sub-divided lots are sold.

As evidenced by the Deed of Variation, you have permitted the land to be secured with the 1^st ranking mortgage to the Lender and have provided a personal guarantee which is for the purposes of providing the funds for all engineering and construction works. This has conversely mitigated the risk for the developer to fund this project. Notwithstanding other factors, this demonstrates that you have increased your financial exposure to the Project and therefore heightened the level of risk borne as you ultimately bear the risks of the development and the repayment of the Project Costs.

Whilst your tax agent, "A" has advised us that you are doing no more than what the Council requires of you, however in weighing up all the factors of the case and the state of the land it appears that this development works undertaken goes beyond what the Council requires.

Flow of funds

As per the terms of the LSD, you are at all times the landowner as you retain the title of the Property throughout the project and remain the vendor listed on all sale contacts.

The following summarised paragraphs are relevant for the purpose of this ruling:

Clause 3 - Appointment of Manager

You appoint a developer to provide Management Services (as set out in clause 3.2 of the DMD) and subject to the provisions of the DMD make all reasonable decisions about the Management Services. In addition the DMD provides that the Developer as the "Manager" for the "Project" has the overall responsibility for all execution and completion of the Project, including the Development subject to the other provisions of the DMD.

Clause 4 - Development Funding

The Developer will be responsible for the payment of all the project costs and all of the construction costs. For the avoidance of doubt, you will not be required to contribute to the Project Costs or the Construction Costs.

Clause 11 - Dealing with Sale Proceeds

Clause 11.1.1 - Payment to You

Until you receives the Agreed Payment upon settlement of each lot, you are to be paid the Net Sale Proceeds* for each Lot by bank cheque directly from the purchaser.

Net Sale Proceeds* will be the difference between Sale proceeds less Selling Costs which is calculated as per below. From Net Proceeds:

·             the loan is repaid (clause 12.2.2);

·             then you received agreed payment; and

·             then Project Management Fee is paid. This fee will be for project management services (Clause 3 above) and Project and Construction Costs (Clause 4 above) as per the LSD.

From the clauses above, we consider the developer is providing you project management services and you have engaged them for the purpose of completing the development of the land. Therefore, the Project Management Fee is consideration for the provision of services provided by the developer, the developer to you, pursuant to the development agreement. The costs associated with the development are in relation to the enterprise of the developer and they are making a supply as evidenced by Clause 3 and Clause 4 mentioned above.

We consider you are making supplies of developed subdivided lots and your acquisition is the Project Management Fee that the Developer invoices you for development works.

For the above reasons, whilst we recognise your original intention for acquiring the land was for private purposes however we consider there is a change in intention and on balance the activities undertaken in developing the land goes beyond that of a mere realisation and is an enterprise in the form of an adventure or concern in the nature of trade (isolated property undertakings). That is there has been a clear change in purpose for which the land is being used, and the undertaking is being in a commercial/ business-like manner.

Consequently, under paragraph 9-5(d) of the GST Act, where you are not registered we need to consider if you are required to be registered.

Requirement to register for GST

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

(a)   You are carrying on an enterprise, and

(b)   Your GST turnover meets the registration turnover threshold.

You are required to be registered where both the above requirements are met.

In your case, as you satisfy the first requirement in the form of an adventure or trade, it is therefore necessary to consider the second requirement.

We need to determine whether you GST turnover meets the registration turnover threshold. The registration turnover threshold for an entity (other than a non-profit entity) is $75,000.

Subsection 188-10(1) of the GST Act provides that your GST turnover will meet a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

When calculating your current and projected GST turnover, some supplies, including supplies that are input taxed are disregarded. However, turnover from leasing commercial properties is not excluded when calculating the current and projected GST turnovers.

You advised that it should be excluded on the basis that the disposals of the subdivided lots are a capital asset.

Whether the sale of the subdivided lots will be a transfer of a capital asset

Section 188-25 of the GST Act provides that in working out your projected GST turnover you should disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours, and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of capital assets is not defined in the GST Act. Goods and Services Ruling GSTR 2001/7 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

GSTR 2001/7 provides that, generally, the term capital assets refer to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of an enterprise. That is, if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital nature even if such a disposal is an occasional or one-off transaction.

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

In your case, the sale of the subdivided lots is inherent in carrying on an enterprise in the form of an interview in the nature of trade. As stated earlier, the development of the vacant lots will change the character of them from a capital asset into a trading/revenue asset. Therefore, the sale of these lots will not be a transfer of a capital asset. Accordingly, the sale of the subdivided lots will not be disregarded under section 188-25 of the GST Act when calculating your projected GST turnover.

Furthermore, you advised us that the average selling price for the lots will be between $XX to $XX. The largest lot which is x m2 has an estimated selling price of $XX which will be provided to the Council. Accordingly, where at a time during a particular month you expect to sell that block either during that month or the following 11 months, it is reasonable to expect that your projected GST turnover will meet the registration turnover threshold of $75,000. At that point in time, the requirement of paragraph 23-5(b) of the GST Act will be satisfied.

As both requirements of section 23-5 of the GST Act will be satisfied you will be required to be registered for GST. Consequently, the requirement of paragraph 9-5(d) of the GST Act will be met.