Edited version of private advice

Authorisation Number: 1051752098364

Date of advice: 11 September 2020

Ruling

Subject: GST and sale of property

Question

Will your sale of Lot 1 constitute a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

This ruling applies for the following period:

1 July 20XX - 30 June 20XX21

Relevant facts and circumstances

Individual A and Individual B (You) are registered for GST as a partnership.

You carry on two enterprises consisting of a sheep grazing business and a gravel quarry business.

In yyyy, you purchased xx hectares of land (the Property). The Property consisted two titles of xx.x hectares and xx.x hectares.

In yyyy the Property was subdivided via the realignment of boundaries which re-subdivided the two titled Property into two new lots of different sizes:

·         Lot 1

·         Lot 2

Lot 1 is a sub-divided x.x hectare site.

Lot 1 was originally purchased as part of the overall original Property. Your intention when you purchased the Property was to establish a grazing business (and potentially a quarry). The area of the Property now known as Lot 1 land was never physically able to be used for any business purpose. Subdivision was done in yyyy with the purpose of separating a title with land on either side of a road and establishing a new title as Lot 1. At that time (yyyy) you intended to build your family home on Lot 1, however over time the requirements to clear trees and establish tracks and driveways became too burdensome and Lot 1 has since remained an uncleared area (bush block) with no business use.

You are both in your 80's and have decided to remain living in your current residence.

The title of the subdivision clearly states that no grazing animals or other agricultural activities such as cropping are permitted to be carried out on Lot 1.

There have been no improvements made to, and no buildings erected on Lot 1. No grazing or quarrying activity has taken place on Lot 1.

The Property was included as an asset of the partnership business since the acquisition in yyyy.

When the Property was subdivided in yyyy, Lot 1 was not removed from the assets of the partnership in the financial statements.

A number of other 'personal assets' (for example your primary residence and a personal loan to a family member) are included in the assets of the partnership in the financial statements.

You have not claimed an income tax deduction for depreciation, interest or any other costs related to the personal assets.

Lot 1, together with other personal assets, are included on the financial statements of the partnership purely for recording purposes only. The purpose is to record the historic costs of assets and any additions/improvement to them and also to establish the financial position for lenders.

The Property when originally acquired in yyyy was financed by way of a loan. Interest on the loan was claimed as an expense until the loan was repaid in the early 1990's.

The total amount of Council rates, charges and levies for the year ending 30 June 20XX was not apportioned between Lot 1 and Lot 2. The entire amount was treated as an expense of the partnership.

You have been approached to sell Lot 1 by a private buyer who is not registered for GST and who plans to build a home on Lot 1 within 2 years.

Lot 2 is an xx.x hectare site from which you operate your grazing and quarry businesses.

Lot 2 is not permitted to be further subdivided and your intention is to retain Lot 2 to carry on your enterprises.

You have not applied for any further subdivisions of the land and are not involved in any other property development activity.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 9-5

Section 9-40

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 legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

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

Section 9-40 of the GST Act provides that you are liable to pay GST on any taxable supply that you make.

Section 9-5 of the GST Act states 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 to the indirect tax zone (Australia); and

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

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

The issue in this case is whether the sale of Lot 1 is made in the course or furtherance of the sheep grazing and gravel quarry enterprises you carry on. Alternatively, whether the sale is in the course or furtherance of another enterprise you carry on.

Guidance on whether a sale is made in the course or furtherance of an enterprise is contained in paragraphs 26 to 31 of Goods and Services Tax Ruling GSTR 2004/8; Goods and services tax: when does an entity have a decreasing adjustment under Division 132?:

26. One of the requirements for a sale of a thing to be a taxable supply is that you need to sell the thing in the course or furtherance of the enterprise that you carry on.

27. ...

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

-                      at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

-                      at the time of sale it was applied in carrying on your enterprise to at least some extent; and

-                      it is sold as a transaction of your enterprise.

31. Factors that tend to indicate that a sale is a transaction of the enterprise include the following:

-                      the sale is made from enterprise premises;

-                      payment is accepted using enterprise facilities such as a cash register or a credit card facility;

-                      the proceeds of sale are deposited into an enterprise bank account; and

-                      enterprise book accounts are used to record the transaction.

The list in this paragraph is not exhaustive or conclusive. All the facts and circumstances must be considered and balanced.

The question of whether a property was sold 'in the course or furtherance of an enterprise' was considered in Touram Pty Ltd (as Trustee for the GKA Family Trust) and Federal Commissioner of Taxation [2008] AATA 1167 (Touram).

In summary, the facts of Touram were:

·         husband and wife (Vendors) purchased vacant land in 1994

·         in 1997, the Vendors made a successful application to change the zoning from residential to business

·         the land remained vacant and unused by the Vendors until sold in 2006

·         the Vendors were registered for GST at the time the property was sold and carried on enterprises not associated with the land in question

·         the Vendors recorded the purchase price, holding costs and other costs in respect of the land in the partnership's financial accounts

·         the Vendors also gave evidence that they tended to put all of their assets (apart from the family car) in the partnership accounts.

The relevant issue identified by the Tribunal was, as in your case, whether the Vendors were carrying on an enterprise in relation to the land for the purposes of GST.

The Tribunal [at 23] considered the critical question to be whether there was evidence that the activities conducted by the Vendors in relation to the land (i.e. the acquisition and sale) were carried on in a business-like way.

In considering the evidence, the Tribunal [at 29] were satisfied that the Vendors were carrying out activities in the form of a business and therefore were conducting a property investment enterprise as:

·         they had acquired the land for the sole purpose of selling it for a profit [at 26];

·         while they did not intend to develop the land themselves they went about doing the groundwork for a development in a business-like way [at 28]; and

·         (describing, [at 27], as 'the more important indicia'), the practice of recording the purchase price, holding costs and 'development' costs in the partnership financial reports exhibited 'the sort of system and regularity one expects to see in a business'.

The Tribunal [at 27] noted that it did not accept that the land was included in the partnership accounts 'by accident'. Accordingly, the Tribunal concluded that the Vendors made a taxable supply of the land in the course of property investment enterprise.

The Tribunal placed particular importance on the activity of recording the purchase, 'development' and holding costs of the land in the partnership accounts. We understand that it is common practice for investment assets, which are unrelated to the partnership business, to be included in the financial accounts of small family partnerships, particularly husband and wife partnerships.

We also note that it does not necessarily follow that the recording of an asset in the books of accounts will, upon the sale of the asset, be characterised as being done in the course of carrying on an enterprise. Whilst the accounting treatment may be relevant, a conclusion regarding the nature of relevant activity will depend upon all of the facts in the particular case. The Tribunal, whilst placing considerable weight on the accounting practices of the Vendors, also took into account other factors, including the evidence, which it accepted, that the property was acquired with the intention of resale at a profit, the undertaking of rezoning and development plans and the engagement of professional assistance.

Application to your situation

In this case, a number of facts are similar to that in Touram. In particular:

·         you, as husband and wife, purchased the Property a number of years ago

·         you are registered for GST as a partnership and carry on enterprises not associated to Lot 1 of the Property

·         the Property remained unused and vacant during your ownership

·         you recorded the Property as an asset in the financial statements of your partnership

·         you also expensed costs (at least in regard to the 2020 rates on the Property) in the books of the partnership

However, as expressed in GSTR 2004/8 and Touram, all the facts and circumstances are to be considered in determining whether something is done in the 'course of furtherance of an enterprise' one carries on.

It was not your intention to acquire the Property (specifically the portion of the Property known as Lot 1) for the purpose of sale for a profit. Your intention was to use Lot 1 to construct a residential dwelling for use as your principle place of residence. However due to circumstances, your intention has not been realised and you have decided to sell Lot 1.

Furthermore, in contrast to the situation in Touram where the Vendors applied to the relevant authority to have the land rezoned whilst retaining a town planner to prepare development plans to accompany the application, you did not engage in any activities in relation to Lot 1 considered to be business-like in nature.

Given the above, and considering your situation and circumstances in totality, we consider your activities in relation to Lot 1 do not constitute an enterprise. In addition, the sale of Lot 1 is not made in the course or furtherance of either of the current enterprises you carry on, being your sheep grazing and gravel quarry businesses.

Therefore, the sale of Lot 1 does not satisfy the definition of a taxable supply as defined in section 9-5.