Edited version of private advice

Authorisation Number: 1051769648454

Date of advice: 22 October 2020

Ruling

Subject: Goods and services tax (GST) and property subdivision

Question 1

Will GST be payable on the sale of the vacant lot - property B?

Answer

No.

GST is payable on taxable supplies.

An entity makes a taxable supply if they 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)

In accordance with subsection 9-30(4) of the GST Act, a supply that you make is taken to be a supply that is input taxed if it is a supply of anything (other than new residential premises) that you have used solely in connection with your supplies that are input taxed but are not financial supplies.

Your supply of the house on property A by way of lease is an input taxed supply under section 40-35 of the GST Act, as it is a supply of residential premises by way of lease.

The land that the vacant lot comprises previously formed part of property A. You leased out the house on property A for a period of about (number) months prior to splitting property A into two titles. Therefore, you used the pre-subdivision property in connection with your supplies that are input taxed (the supply of the residential premises by way of lease). You used the pre-subdivision property solely in connection with your supplies that are input taxed. Additionally, the vacant lot is not new residential premises and your leasing of the house is not a financial supply. Therefore, your sale of the vacant lot is input taxed under subsection 9-30(4) of the GST Act. Hence, GST is not payable on your sale of the vacant lot.

You may need to give a written notification to the purchasers that they are not required to withhold an amount for GST at settlement, depending on the purchasers' circumstances. See fact sheet, GST at settlement, on the website, ato.gov.au for more information.

Question 2

Are you required to be registered for GST?

Answer

No.

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.

You retained the land that the vacant lot comprises as a capital asset, as it formed part of a lot that you retained to produce income (leasing income). You were leasing out the house on property A for a period of about (number) months prior to splitting property A into two titles. We do not consider that your subdivision activity is a business or adventure or concern in the nature of trade, but rather your sale of the vacant lot is the mere realisation of a capital asset.

Therefore, your sale of the vacant lot will be a supply you make in the course or furtherance of your leasing enterprise.

An entity is not required to be registered for GST if their projected GST turnover is under $75,000. Projected GST turnover includes sales/supplies made by an entity in connection with their enterprise. However, there are a number of exclusions.

Projected GST turnover is relevant projected turnover over the period of 12 months beginning with the current month.

Input taxed supplies are excluded from projected GST turnover. Leasing out residential premises is an input taxed supply. Therefore, your rental income from leasing out the house on property A is excluded from projected GST turnover.

Sales of capital assets are excluded from projected GST turnover.

Your sale of the vacant lot is excluded from projected GST turnover as:

• the sale is input taxed; and
• it is a sale of a capital asset

Your projected GST turnover is zero.

Therefore, you are not required to be registered for GST.

Relevant facts and circumstances

You are registered for GST as a partnership.

You have two partners - they are individual X and individual Y.

Individual X and individual Y each work as employee AAA. Individual Y also carries on a BBB business, the revenue from which is about (mount) a year.

You purchased a residential property located in Australia (property A) on (date) for (amount); associated costs were (amount.)

Property A had a house on it, which remains on the land to this day.

You do not own investment properties at other locations.

You held two rental properties prior to (year). Both properties were bought and sold without any development having occurred.

You purchased property A for the purposes of renting it out. Additionally, at the time you purchased this property, you had an intention of subdividing it and selling the vacant lot created from the subdivision for a profit

At the time of purchasing property A, the intention was to complete the subdivision to either reduce the costs of purchasing the property or use the money to reduce personal mortgage.

Apart from purchasing property A to rent out, the vacant rear area provided an opportunity for you to develop and sell to reduce the cost of the initial purchase price, whilst having an ongoing income through renting out the existing residence.

You have subdivided property A into two lots - one is a lot with the house on it (which is number square metres); the other is a rear vacant lot (the vacant lot)(which is number square metres). Approval was given, and the pre-subdivision property was split into two titles, around (month and year). The addresses of the two current lots are (address) and (address) (the vacant lot).

At the time of purchasing the property no costings had been done to complete the subdivision.

You have entered into a contract to sell the vacant lot. An offer was accepted on (date). The sale has unconditional finance approval and is due to settle on (date). The sale price of the block is (amount).

You have rented out the house on property A for approximately (number) years and (number) months. The original tenancy commenced on (date). The current tenancy has been in place since (date). You are retaining the existing residence as a rental property for the foreseeable future.

The previous owner had made an application to the local council and had been given provisional approval to subdivide subject to completion of work to remediate certain issues. The previous owner did not progress this.

For the first (number) months after you purchased property A, you focused on cleaning up the house and cleaning the rubbish from the block. It wasn't until around (month year) that you decided to focus on getting the block subdivided with the knowledge it needed to be completed by (month year), as required under the development approval.

The previous owner had commenced subdivision of the property rendering the rear of the block useless in the state in which you purchased it. A Geo Tech Report commissioned by the previous owner with supporting photographic evidence demonstrates this.

The previous owner had erected a colourbond fence around the rear of the property and requested a Geo Tech Report and council approval to do the subdivision. A garage had been demolished leaving part of the metal frame and extensive concrete footings, there was also an asbestos fence, that needed to be removed, extensive rubbish on the block and three significant tree stumps.

When clearing the block of rubbish an unused leach drain was located and subsequently removed.

You did not demolish any buildings on the area of land that is to be sold.

You only did the work required by local Council to secure approval to subdivide the property.

It has cost (amount) to subdivide property A and sell the vacant lot created from the subdivision.

See table of subdivision project costs below:

The partners did not do any of the subdivision work themselves. Although the partners took responsibility to speak with tradespeople employed to do the subdivision. The partners also sought advice from the surveyor as to what was required to complete the subdivision.

You did not hire a project manager or development company to arrange the subdivision of the property.

The partners hired the individual construction etc contractors themselves.

Once the subdivision work had been completed, an entity put in an application to approve the subdivision with the local council.

You hired a real estate agent to sell the vacant lot, who marketed the property through a property advertising website.

The parties you hired in connection with the subdivision project and sale of the vacant lot were not related parties to you.

You did not draft up a business plan in relation to the subdivision project.

You did not consult an accountant or relevant expert to determine how to maximise their return from the subdivision project.

You did not set up a business organisation in relation to the subdivision project.

You did not acquire additional land to amalgamate with property A.

Property A was not near the urban fringe of a major city or town when you purchased it.

You borrowed (amount) to purchase property A.

You did not borrow any money to finance the subdivision project.

You have plans to claim income tax deductions for the subdivision project costs.

The pre-subdivision property was zoned residential when you purchased it. The property remains residential zoned post subdivision.

The local council has a residential zoning in place for the area.

The partnership has not brought the property to account as a business asset.

The partners have not been involved in property development or property subdivision activities before.

The partners did not have skill, knowledge or experience in property development or property subdivision activities before they undertook the subdivision in question.

Since purchasing property A, prices in the area have continued to deteriorate going down by approximately (certain %). Once the sale of the vacant lot has been completed there will be a significant reduction in the value of the remaining lot.

The remaining lot is worth (amount) to (amount). After subdivision and sale of the vacant lot, (a valuer) would value property A at (amount) with a range of (amount) to (amount). This valuation was obtained through documentation from the partnership's real estate agent.

In the current market, selling the complete property A would result in a financial loss of between (amount) and (amount) taking into consideration the cost of purchasing and selling the property. This does not take into consideration subdivision costs of (amount) which would be a further loss if the partners sold as a complete lot.

By subdividing the property, a potential profit of (amount) to (amount) will be made - this will also be impacted by capital gains tax and potential GST.

You do not plan to lease out properties, or carry on a business, at other locations, in the next 12- calendar months.

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 subsection 9-30(4)

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

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