Edited version of your private ruling

Authorisation Number: 1051743409891

Date of advice: 26 August 2020

Ruling

Subject: GST and sale of vacant land

Question

Will you be making a taxable sale under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the vacant lot of land which would be from the subdivision made to your main residence that is located in Australia?

Answer

No, you will not make a taxable sale under section 9-5 of the GST Act when you sell the vacant lot of land which would be from the subdivision made to your main residence that is located in Australia.

You will need to notify the purchaser in writing that they do not have a withholding obligation when purchasing the vacant land and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sales contract or in a separate document prior to settlement.

Relevant facts

Mr and Mrs XYZ (You) reside in Australia and are not individually or jointly registered for GST. You do not carry on any business activity in Australia.

You purchased a property in Australia and the property has been your main residence since that time. The zoning of the property is residential.

You would like to downsize the main residence and therefore intend to demolish the house on the property and subdivide the property into two lots.

You intend to sell one of the lots as a vacant land and keep the remaining lot for building a new main residence for you and your wife.

The cost of subdividing the property would be self-funded. The subdivision has not been completed. At this stage you are evaluating all potential costs involved prior to committing to the sub-division.

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 23-5

Reasons for decision

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Summary

As all the requirements in section 9-5 of the GST Act are not satisfied, you will not make a taxable supply when you subdivide the property which you use as your main residence into two lots and sell one of the two subdivided lots as vacant land.

Detailed reasoning

GST is payable on a taxable supply.

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 Australia; and

(d)  you are registered, or required to be registered, for GST.

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

In your case, you will make a supply of vacant land in Australia for consideration satisfying paragraphs 9-5(a) and (c) of the GST Act. Further, the GST-free and input tax provisions do not apply in your circumstances.

However, it is necessary to determine if the supply of the vacant land is made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b) of the GST Act) and if you are required to be registered for GST (paragraph 9-5(d) of the GST Act).

Enterprise

Subsection 9-20(1) of the GST Act provides that an enterprise relevantly includes:

An activity, or series of activities, done:

·         in the form of a business; or

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

Paragraphs 244,259, 262 and 263 of MT 2006/1 state:

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

Isolated transactions and sales of real property

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

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....

For the subdivision of your main residence and sale of one of the two subdivided lots, we consider it will be a 'one-off' or isolated real property transaction. We need to consider whether this activity is the carrying on of a business or an adventure or concern in the nature of trade.

Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken for the subdivision or sale of the land are an 'adventure or concern in the nature of trade' and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation... (Statham) and Casimaty v. FC of T... (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farmland was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: ...

·         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.

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.

...

269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience...

The property you will subdivide is the property which you are staying in as your main residence. You are considering downsizing your main residence and this would be done by demolishing the house on that property and subdivide the property into two lots. On one of the lots you will build a house to use as your main residence and you intend to sell the other lot as a vacant land.

You have no plan for the proposed subdivision beyond:

·         obtaining subdivision approval,

·         subdivide the land to meet the council approval's requirements,

·         arranging for the vacant lot to be advertised and sold under contract.

No building would be erected on the vacant land to be sold and you will self fund the subdivision.

After considering the above factors, we consider that the subdivision of your main residence and the sale activity for the vacant lot of land do not amount to an enterprise in the form of a business or in the form of an adventure or concern in the nature of trade. The activity is the mere realisation of a capital asset.

Therefore, you do not satisfy paragraph 9-5(b) of the GST Act when you sell one of the lots as vacant land after the subdivision of the property which you currently use as your main residence is done.

Registration

Under section 23-5 of the GST Act you are required to register for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

As you are not considered to be carrying on an enterprise when you subdivide your main residence and sell one of the subdivided lots as vacant land, you are not required to be registered for GST. Paragraph 9-5(d) of the GST Act is not satisfied.

Summary

As all the requirements in section 9-5 of the GST Act are not satisfied, you are not making a taxable supply when you subdivide the property which you use as your main residence and sell one of the two subdivided lots as vacant land. You will not have a GST liability for the sale in this instance.

Other information

GST at settlement

From 1 July 2018, most purchasers must withhold an amount from the contract price at the date of settlement and pay it directly to the ATO. The sale price is paid to the property supplier. This applies to:

·         new residential premises

·         land that could be used to build new residential property

Suppliers must notify purchasers in writing as to whether they have a withholding obligation or not when they sell.

Suppliers must determine if they are running an enterprise. Even one-off property sales could mean they have a GST obligation.

More information on 'GST at settlement' is available at ato.gov.au

As we have determined that you will have no GST liability when you subdivide your main residence and sell one of the subdivided blocks as vacant land, you will need to notify the purchaser in writing that they do not have a withholding obligation and do not need to pay a withholding amount from the contract price of the property to the ATO. This can be included in the sales contract or in a separate document prior to settlement.