Edited version of private advice

Authorisation Number: 1051625910515

Date of advice: 10 January 2020

Ruling

Subject: GST and subdivision of residential property

Question

Will your supply of the vacant subdivided lots of land (vacant lots), resulting from the sub-division of the Original Property) be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, provided you are not registered for GST at the time of the supply.

Facts:

You purchased a residential property (Original Property). The Original Property was not eligible for subdivision.

The leasing enterprise:

You carried on a leasing enterprise and rented out the Original Property since owning the Original Property. You have declared rental income and claimed eligible deductions for the leasing of the Original Property.

The subdivision

The Council changed the zoning of the Original Property, making it eligible for subdivision. You decided to subdivide the Original Property and sell the subdivided lots. You thought you would have struggled to sell the existing house as it was an old house and in need of constant repair.

You are the registered owner for the Original Property both before and after the subdivision.

You lodged a subdivision application and the survey-strata plan was approved for X vacant residential lots. The approval sets out conditions for approval, and the conditions include demolishing the existing house on the Original Property and levelling the blocks.

You borrowed money to buy the Original Property, and you still have that mortgage. But you have not borrowed any extra money to finance the development costs for the Original Property.

You stated that when you applied for permission to subdivide the Original Property, you did not think so much would need to be done. However the conditions placed upon the approval, particularly the conditions that all existing structures be removed and that all blocks be levelled, have resulted in this being the minimum required to meet those conditions. It is your opinion that you have done only what is needed to maximise the capital return from the Original Property while doing the minimum amount of development required.

The Original Property has never been put on the market by you while it was a house on a single block. When you began to subdivide the land into X blocks you engaged a real estate agent to advertise the blocks for sale in the usual way on the internet and in the newspapers. You have exchanged contract on one block, the contract is subject to the titles being issued by a certain date.

Previous subdivision or development activities/ experience:

The only prior land development you have been involved in was at a residential property. This property has a house on the land. You moved into and lived in the house immediately after you bought it, and stayed there until the subdivision. You applied for and received permission from the local council to subdivide the block. The subdivision involved the retaining the original house on the front block, and the creation of a new vacant rear block. You sold both blocks.

Registration for GST:

You said you were registered for GST for the subdivision project because your accountant advised you to. You applied to register for GST and backdated to the start of the subdivision, and lodged nil BAS, that means you have neither reported any GST payable nor claimed any GST credits.

You applied for a ruling because you are uncertain of whether you should be required to be registered for GST or not in relation to the subdivision activities. However, you have asked whether you are required to be registered for GST and if you are not required to be registered for GST then you may apply to cancel your GST registration before the settlement date of the supply of the vacant blocks.

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 Paragraph 9-5(d)

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

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

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

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

Reasons for decision

Summary

We consider that your development and sale of the three vacant lots is not in the course of a property development enterprise, but in furtherance of your leasing enterprise. The subdivision activities are the mere realisation of the capital asset of your leasing enterprise.

If you remain registered for GST and are registered for GST at the time of the settlement of the vacant lots then you will satisfy all requirements of section 9-5 of the GST Act, and the sale will be a taxable supply.

You are not required to be registered for GST, and if you are not registered for GST at the time of the settlement, you do not satisfy paragraph 9-5(d) of the GST Act, and your supply of the vacant lots is not a taxable supply.

Detailed reasoning

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies.

Section 9-5 of the GST Act provides that:

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, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Based on the facts provided, your supply of the X vacant blocks satisfies the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supply that you make are for consideration, and the vacant lots are located in the indirect tax zone respectively.

Paragraph 9-5 (b) of the GST Act:

We will discuss whether your supply is in the course of your leasing enterprise or in the course of a new property development enterprise. We need to consider your intention when you stopped leasing the Original Property and started the subdivision project at the Original Property, to decide whether there is a profit motive and whether the subdivision transaction has the character of a business operation or commercial transaction. The consideration could apply even for a one-off transaction, such as:

·        a subdivision by a non-business taxpayer

·        a transaction by a business taxpayer that is outside the ordinary course of their business.

Isolated transactions

Are you carrying on an enterprise of property development when you carry out this subdivision?

The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) 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 an interest in property.

The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. The principles outlined in the ruling and the determination have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision and sale of real property.

The term business ordinarily would encompass a trade that 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 only been involved in property development by subdivision once. You have subdivided the property which you lived at into 2 blocks and sold them.

In the absence of other facts, it is considered that your activities in the current subdivision project are not carried out in the form of a business if these activities are part of a one off transaction on the Original Property and not the beginning of an ongoing property development business.

As we do not consider that your activities of development and sale of the vacant lots is a property development business, it is necessary to determine whether the development and sale of the X vacant lots will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

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

Paragraph 13 of GSTD 2006/6 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. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

Similarly certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

·        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 for council approval for the subdivision, and

·        buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each 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.

Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

In Scottish Australian Mining Co Ltd v. FC of T (1950) 9 ATD 135; (1950) 81 CLR 188 (at ATD p 140; CLR p195) his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said:

The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out.

In Statham & Anor v FC of T 89 ATC 4070 (Statham) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means.

In FC of T v. Williams 72 ATC 4188; (1972) 127 CLR 226 (Williams) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income.

In Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amount to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks.

In FC of T v. Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 (Whitfords) where the court found that the taxpayers activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot.

Application to your circumstances

You bought the Original Property to carry on a leasing enterprise and you leased the Original Property for a number of years. We are satisfied that from the long use of the Original Property in your leasing enterprise that your intention at the time of purchase was not to make a profit from the subdivision and sale of the Original Property. You state that your intention is to realise the Original Property as a capital asset of your leasing enterprise. The reasons for the decision to realise the land relate to change in zoning and the difficulties of maintaining the existing house on the Original Property.

You have been involved in a subdivision before on a small scale on your place of residence.

You have not obtained a loan to pay for the subdivision of the Original Property. This is listed in MT 2006/1 as a factor to be considered in relation to profit making undertaking.

In McCorkell v Comrnissioner of Taxation 1998 AATA 562 the taxpayer borrowed money to conduct subdivision activities. In that case, the existence of borrowed funds did not mean the taxpayer's activities amounted to a profit making undertaking or scheme - the Court was satisfied that the taxpayer was merely realising a capital asset.

You have subdivided the Original Property into X vacant lots. You have carried out the minimum work as required for approval of the subdivision by the Council.

There are a significant number of authorities where developments of a larger scale have been held not to constitute a commercial or profit making undertaking (e.g. Allied Pastoral Holdings v. FCT 83 ATC 4015, Stratham v. FCT 89ATC 4070, Case No QT96/187 and Casimaty v. FCT 97 ATC 5135).

In Allied Pastoral aproject that generated a profit of approximately $648,000 in 1974 was held not to be a profit making undertaking. In real terms, the projected 'profit' anticipated by you on the subdivision and sale of the Original Property will be far less than in Allied Pastoral.

In Casimaty, the land was subdivided into a total of 80 lots which were developed in eight separate stages involving internal roadworks, The court considered that the profits from the subdivision and sale were capital receipts and not ordinary income.

The scope of the project is not comparable to the massive scale of projects referred to in cases such as FCT v. Whitfords Beach Pty Ltd 82 ATC 4031 or Stevenson v. FCT 91 ATC 4476.

It can be argued that the nature and scale of your sub division activities can be characterised as merely realising a capital asset.

You engaged experts to carry out the subdivision. You have given details about the tradespeople you pay to provide their expertise. All parties have been unrelated. You have engaged professionals to undertake all necessary work involved in the subdivision. You have been involved in a decision making capacity and have relied on their expertise.

It can be argued that the length of time involved of the Original Property in your leasing enterprise, coupled with the scale of only X lots is not consistent with a businesslike approach and supports the contention that the development is simply the ordered realisation of a capital asset of your leasing enterprise. Your current subdivision activities on the Original Property is not a new property development enterprise.

In summary, these activities do not indicate a commercial approach and there is not a clear intention of profit making. Accordingly, the activities undertaken by you in the development of the Original Property do not have the characteristics of activities that would constitute an adventure or concern in the nature of trade. We consider that the supply of the vacant lots are the mere realisation of the capital asset of your leasing enterprise.

Hence your supply of the vacant lots is in the course of your leasing enterprise and paragraph 9-5(b) of the GST Act is satisfied.

Paragraph 9-5 (d) of the GST Act

You are registered for GST hence paragraph 9-5(d) of the GST Act is also satisfied.

The supply of the vacant lots is neither GST-free nor input taxed, hence your supply would be a taxable supply under section 9-5 of the GST Act.

However, you have asked whether you are required to be registered for GST, and if we decide you are not required to be registered for GST then you may apply to cancel your GST registration.

You state that you registered for GST for the subdivision project because your accountant advised you to. You applied to register for GST and backdated to the start of the subdivision, and lodged nil BAS, that means you have neither reported any GST payable nor claimed any GST credits. You would like to know whether you are required to be registered for GST in relation to the sale of the vacant lots which you subdivided from the Original Property or not.

Section 23-5 of the GST Act 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.

In this case the identified enterprise is leasing and the Original Property was a capital asset used in that enterprise.

Sub section 188-10 (2) of the GST Act provides that your GST turnover does not exceed the registration turnover threshold if:

a.     your current GST turnover is at or below $75,000 and the Commissioner is not satisfied that your projected GST turnover is above $75,000; or

b.     your projected GST turnover is at or below $75,000.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

a. supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).

b.     supplies that are not for consideration.

3. supplies that are not made in connection with an enterprise that you carry on.
4. supplies that are not connected with Australia.

Current GST turnover:

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months.

At the time you started your subdivision activities at the Original Property, your current GST turnover was below $75,000 since residential rent is input taxed and not included in your GST turnover.

Projected GST turnover

Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

The sale proceeds of a capital asset:

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours. 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 capital assets. For the purposes of section 188-25 of the GST Act, the character of an asset must be determined at the time of the expected supply.

As mentioned above, we consider that the creation of the vacant lots are the mere realisation of the capital asset of your leasing enterprise. Hence section 188-25 of the GST Act applies, and the sale proceeds of the 3 vacant lots is excluded from the calculation of your projected GST turnover.

Since your projected GST turnover is under the GST turnover threshold of $75,000, you are not required to be registered for GST per paragraph 188-10 (2) (b) of the GST Act.

Alternatively, your current GST turnover is below the GST turnover threshold of $75,000; and the Commissioner is not satisfied that your projected GST turnover is above the GST turnover threshold of $75,000, hence you are not required to be registered for GST per paragraph 188-10 (2) (a) of the GST Act.

Summary

We consider that your development and sale of the three vacant lots is not in the course of a property development enterprise as defined in section 9-20 of the GST Act. The supply of the three vacant lots of land is the transfer of a capital asset used in your leasing enterprise.

If you remain registered for GST and are registered for GST at the time of the settlement of the vacant lots then you will satisfy all requirements of section 9-5 of the GST Act, and the sale will be a taxable supply.

However, since you are not required to be registered for GST, you may choose to apply to cancel your GST registration. If you are not registered for GST at the time of the settlement, you do not satisfy paragraph 9-5(d) of the GST Act, and your supply of the vacant lots is not a taxable supply.

NOTE:

According to Goods and Services Tax Advice GSTA TPP 070, you do not need to examine the requirements of section 9-5 of the GST Act until the settlement date. At settlement date, if you do not satisfy paragraph 9-5(d) of the GST Act because you are neither registered nor required to be registered for GST, then your supply of the vacant lots is not a taxable supply.