Edited version of private advice

Authorisation Number: 1051767539003

Date of advice: 15 October 2020

Ruling

Subject: Goods and services tax and sale of subdivided lots

Question

Will GST be payable on the sale of the subdivided lots to be created from Lot X?

Answer

No.

Relevant facts and circumstances

You were previously registered for GST, but you are not currently registered for GST.

You formerly owned the (name) Resort Land (the Resort), Lot Y (address), which was rented to a related party, the (Entity X), which operated a motel business from the resort.

In (month and year), you acquired a (number) acre parcel of vacant land known as Lot X. Lot X is situated directly across the road from the Resort. Lot X was the only land in the surrounding area that did not have a caveat prohibiting its use for a motel operation. In order to protect the motel business operated at the Resort from competition, you purchased Lot X to prevent someone else acquiring it and erecting a motel. Lot X has remained vacant land to this date.

Following the death of one of your directors in (year) and with the advancing ages of the surviving directors, a decision was made to sell your assets, including the Resort and Lot X.

It was decided that Lot X should be offered to potential purchasers of the Resort and if they did not wish to acquire Lot X, Lot X would be subdivided and sold.

In (month year), a development approval for a (number) block subdivision of Lot X was applied for and granted.

In (month year), a local real estate agent, (name), was engaged to complete a local advertising campaign. The campaign revealed a lack of demand. As a result the potential subdivision did not go ahead.

In (year), the motel business was sold, and the Resort was subsequently sold in (year). You offered Lot X to the purchasers of the motel business and the Resort. However, neither purchaser wished to acquire it.

In (month year), a builder approached (real estate agent) with interest in acquiring a few blocks in the potential subdivision of Lot X.

You have since commenced investigating the potential subdivision of Lot X, including putting out a request for tenders for earthmoving services.

You have never derived revenue from Lot X.

You will not acquire additional land to amalgamate with the land to be subdivided.

Lot X has not been brought to account as a business asset.

You have a coherent plan for the subdivision of the entirety of Lot X.

You have not set up a business organisation in connection with the property subdivision project.

The level of development of Lot X will be no more than what Council required to secure approval to subdivide. This entails connection of services being sewer, water, power, NBN plus provision of a road into the estate, footpaths and street lighting. You will not erect buildings on the land to be subdivided.

You engaged a local project manager to tender the construction works and oversee the construction and council liaison. However, being such a small subdivision and only completing minimum works for council requirements, all of the development/construction work has been tendered out to one local earthmoving/civil construction firm. They will complete works by a certain date late. As such, you do not see a major role for the local project manager.

The subdivision work will cost about (amount)

You will borrow (amount) from directors for the development project. The directors will charge a certain percentage interest on this loan. You will claim this interest as a tax deduction to the extent, if any, it is an allowable deduction and the lenders will declare it as income.

The estimated proceeds from the sales of the subdivided lots is (amount).

The estimated GST-exclusive value of each sale of a subdivided lot exceeds $75,000.

The estimated profit from buying Lot X, subdividing it and selling the subdivided lots is (amount), if GST does not apply to the sales of the subdivided lots.

None of your directors have skills or knowledge in property subdivision activities.

Lot X was zoned residential (R1) when you purchased it and it remains residential (R1). The subdivided lots will also be residential (R1).

You did not investigate a marketing strategy that will provide the best return for the project. As there are only (number) blocks unsold, a local real estate agent simply advertised in the local paper. The real estate agent will also advertise on their website. The real estate agent will negotiate with potential buyers.

The lots will be marketed under a promotional estate name, (name).

Since the builder approached you wanting a few blocks on the proposed subdivision, you are now advertising the sale of the remaining blocks.

You did not consult an accountant and legal advisor for advice on how to proceed with the development. You made your own decision that you would complete a (number) block subdivision when enough pre-sales were confirmed.

You did not prepare a business plan for the development project.

A town planner/surveyor was engaged to assist with the application for a DA as this is a requirement in order to get a DA.

The entities you have hired in relation to the subdivision are not related parties to you.

Development is to start in (number) weeks and will be completed on (date); which includes the (certain period). A few blocks have already been pre-sold with the builder wanting to start building asap. It is expected that, with housing being erected quickly on those blocks, the remaining blocks will be sold within (number) months.

The parties that you hired to assist with the development and sale of the lots are not related parties to you.

You have been involved in developing one property before. You developed retail premises in partnership with a builder. You and the builder in partnership operated a retail shop business from these premises

Your current income is derived from renting out two commercial properties. You receive less than $XXX a year in rent from these properties.

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

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision

Summary

GST will not be payable on your sale of the subdivided lots, as you are not registered or required to be registered for GST.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a)  you make the supply for *consideration; and

(b)  you make the supply 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.

(*Denotes a term defined in section 195-1 of the GST Act)

The indirect tax zone includes mainland Australia and Tasmania and certain other areas.

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is:

·         you will supply the subdivided lots for consideration (the prices of the lots) (paragraph 9-5(a) of the GST Act); and

·         the sale of the lots will be connected with the indirect tax zone as the lots will be situated in the indirect tax zone (paragraph 9-5(c) of the GST Act).

Therefore, what remains to be determined is whether your sale of the subdivided lots will be made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

There are no provisions of the GST Act under which the sale of the subdivided lots will be GST-free or input taxed.

Whether the sale will be made in the course or furtherance of an enterprise that you carry on

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination 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 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' where:

·         a business would encompass trade engaged in, on a regular or continuous 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.

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. It refers to 'the badges of trade' and outlines a number of factors 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.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing the following:

·         Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

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

Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time.

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.

The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors 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.

No single one of these factors will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

In accordance with MT 2006/1, where a subdivision is developed in a businesslike manner for example there is a project manager, significant development costs and comprehensive marketing campaign including an estate name for the land, this is an indicator that the project may be a business or adventure or concern in the nature of trade.

Other factors that the courts have used in arriving at a decision on whether a property subdivision amounts to a business or adventure or concern in the nature of trade are:

·         whether the landowner held the land for a considerable period of time prior to any subdivision and sale;

·         the purposes for acquiring the property, and whether it was used for any other purposes prior to sale;

·         whether the landowner conducted farming or other activities on the land prior to beginning the process of developing and selling the land;

·         whether the landowner originally acquired the property as an investment, such as long term capital appreciation or to derive income;

·         whether the land was originally acquired near the urban fringe of a major city or town;

·         if the property has been rezoned, whether the landowners actively sought that rezoning;

·         whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement;

·         whether the landowners had tried to sell the land without subdivision;

·         whether the landowner had any history of buying and profitably selling developed land or land for development;

·         the extent to which the development goes further than that required to obtain council approval;

·         whether the operations will be planned, organised and carried on in a business-like manner;

·         whether the landowners have changed their business activity relating to the land from one business to another (for example, from farming to property development);

·         the scope, scale, duration and degree of complexity of the proposed development;

·         the reasons for selling the land;

·         who initiated the proposal to develop the land for resale;

·         the complexity of the development;

·         the level of involvement that the taxpayer had in the development, marketing and sale of the property;

·         the level of legal and financial control maintained by the landowners in the proposed or final development agreement;

·         whether any finance must be obtained in order to fund the development activities; and

·         the level of financial risk borne by the landowner in acquiring, holding and/or developing the land.

Paragraph 270 of MT 2006/1 states:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Scale and scope are important indicators of whether a subdivision is a mere realisation or a business or adventure in the nature of trade.

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 property owner's 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 addition to his management role, at times in the course of the development, Stevenson did work on the land himself to save the cost of employing a labourer. For instance, he personally cut and cleared the bullrushes growing in the lake adjacent to the land.

In Stevenson, Jenkins J quoted Deane J in Whitfords Beach v FCT (1979) 28 ALR 637 at 653-654 stating

Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds.

The decisions in Casimaty and McCorkell v Federal Commissioner of Taxation 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell) demonstrate that if a taxpayer does not intend to make a profit when he or she acquires land then the likelihood that any profit made on the eventual sale of land arises from a trading activity is greatly diminished.

Applying MT 2006/1 and relevant court case factors to your circumstances

Based on the facts provided, we consider that you held Lot X as a capital asset given that:

·         you did not purchase it to resell.

·         you purchased Lot X to prevent the motel business from competition; and

·         you have owned Lot X for a long time.

We now need to consider whether the character of this asset will change from a capital asset to a trading/revenue asset as a result of the property subdivision activity.

Factors that are indicative of your property subdivision activity being a business or adventure or concern in the nature of trade are as follows:

·         You expect to make a profit.

·         There has been a change in purpose for which you have held the entirety of Lot X. Your original purpose in holding the land was to protect the motel business from competition. You will not retain part of the land to continue with this purpose. You have pre-sold (number) lots and intend to sell all of the other subdivided lots.

·         You have a coherent plan for the subdivision of the entirety of Lot X. You will not subdivide the land in a piece-meal fashion.

·         You will bear the financial risks of the development.

·         You will borrow to finance the subdivision work.

·         You did not try selling Lot X as an un-subdivided block on the open/wider market.

·         You are undertaking the subdivision in a business-like manner

·         You will claim income tax deductions to the extent if any that they are claimable for the interest expense.

Factors that are indicative of your property subdivision activity not being a business or an adventure or concern in the nature of trade are as follows:

·         You did not purchase Lot X to resell. You purchased it to hold as a capital asset, and you held it as a capital asset. You held the land for a long period of time.

·         Following the death of one of your directors in (year) and with the advancing ages of the surviving directors, a decision was made to sell your assets, including the Resort and Lot X.

·         You will not acquire additional land to amalgamate with the land to be subdivided.

·         Lot X has not been brought to account as a business asset.

·         You have not set up a business organisation in connection with the property subdivision project.

·         You did not consult an accountant and legal advisor for advice on how to proceed with the development. You made your own decision that you would complete a (number) block subdivision when enough pre-sales were confirmed.

·         You do not have a business plan in relation to the project.

·         Your property subdivision is of a small scale and scope and it will not be a complex one. You will divide Lot X into only (number) lots. The scale of the subdivision in your case in terms of the number of lots to be created is similar to the scale of the subdivision in example 35 of MT 2006/1, in which a property was subdivided into 20 lots, which is more lots than in your case. In example 35, it was considered that the property owner was merely realising a capital asset. The level of development of Lot X will be no more than what Council required to secure approval to subdivide. You will not erect buildings on the land to be subdivided. The subdivision work will only cost about (amount).

·         The duration of the development project and the time-line for selling the lots is not long. Development is to start in (number) weeks and will be completed in (month and year); which includes (a certain period). (Number) blocks have already been pre-sold with the builder wanting to start building asap. It is expected that, with housing being erected quickly on those (number) blocks, the remaining blocks will be sold within a certain number of months.

·         You will have very limited active or direct involvement in the property development or the sales of the (number) lots that remain to be sold. You sold (number) lots to a builder who approached you to buy them.

·         You did not investigate a marketing strategy that will provide the best return for the project.

·         You tried to sell Lot X without subdividing it, but without success.

·         The entities you have hired in relation to the subdivision are not related parties to you.

·         None of your directors have skills or knowledge in property subdivision activities.

·         Although you were involved in the development of a property before (as a partner in a partnership), you did not develop the property for the purposes of reselling it - the partnership operated a retail business from the premises it developed.

Although, there are a few factors that are indicative of your property subdivision and sale activity being either a business or adventure or concern in the nature of trade, these factors are outweighed by the factors that are indicative of the activity not being a business or adventure or concern in the nature of trade. Therefore, your property subdivision and sale activity are not a business or adventure or concern in the nature of trade.

We consider that your sale of the subdivided lots will be a supply you make in the course or furtherance of your leasing enterprise, as the purchase of Lot X indirectly assisted you in maintaining the income you received from the motel business operator, given that:

·         you were renting the resort to the motel Business operator; and

·         you held Lot X to protect the motel Business from competition; and

·         by protecting the motel business from competition, you thereby assisted the motel business in remaining viable and maintaining its capacity to pay rent to you and maintain the level of rent.

Therefore, the requirement of paragraph 9-5(b) of the GST Act is met.

Are you required to register for GST?

An entity is required to be registered for GST if they are carrying on an enterprise and they meet the $75,000 compulsory GST registration threshold.

An entity meets the $75,000 threshold if their current GST turnover or projected GST turnover is at or above $75,000.

However, if current GST turnover is above $75,000, but projected GST turnover is under $75,000, the entity is not required to be registered for GST.

You are carrying on a leasing enterprise.

As you held Lot X as a capital asset and the property subdivision is not of a revenue nature (the land in question will not be turned over in the course of trading operations), your sale of the subdivided lots will be the realisation of a capital asset.

Therefore, in accordance with paragraph 188-25(a) of the GST Act, the sale of the subdivided lots will be excluded from your projected GST turnover.

Your projected GST turnover will be comprised of leasing income. As your leasing income will be under $XXX a year, you are not required to be registered for GST.

Conclusion

As you are not registered or required to be registered for GST, you do not meet the requirement of paragraph 9-5(d) of the GST Act. Therefore, GST is not payable on your sale of the subdivided lots.

You will need to notify the purchasers that they are not required to withhold GST at settlement. See fact sheet, GST at settlement, which can be found on www.ato.gov.au for more information.