Edited version of private advice

Authorisation Number: 1051788233428

Date of advice: 07 December 2020

Ruling

Subject: GST taxable supply

Question 1

Is the proposed sale of Lot 1 (vacant land) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Question 2

Does Lot 1 (vacant land) meet the requirements of potential residential land?

Answer

Yes

Relevant facts and circumstances

You are planning on purchasing the property situated at XXXX (original property).

The original property comprises of two dwellings each situated on a separate block and each block on a separate title with a common land shared driveway between the two blocks.

After you purchase the original property, you intend to demolish both the existing dwellings, amalgamate the two blocks under one title and build your new personal residence on the new block created.

Due to the size, shape and position of the original property, your proposed new personal residence will not take up the entirety of the new block created.

You therefore intend to subdivide the new block to create the new Lot 1 (vacant land) and Lot 2. Your intended personal residence will be built on Lot 2 and you intend to sell Lot 1 (vacant land) which will become vacant land, as you will not need the additional land.

You are not builders in the business of building or in the construction industry.

You are not personally registered for GST.

You intend to purchase the original property in your own personal names.

You intend to use the proposed new dwelling on Lot 2 as your primary place of residence.

You will be engaging professionals to do all the work involved in the proposed development of the original property.

You have never undertaken any subdivisions or tasks of this type in the past.

You intend for Lot 1 (vacant land) to be sold as is, that is, as vacant land with no building or development of the block.

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 9-40

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 section 188-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 for GST.

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

The issue in this case is whether the supply of Lot 1 (vacant land) which will be vacant land when sold, is in the course or furtherance of an enterprise you carry on. If so, as you are not currently registered for GST, we will consider whether you are required to be registered.

Enterprise

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 or done in the form of an adventure or concern in the nature of trade (paragraphs 9-20(1)(a) and (b)).

Section 195-1 clarifies that the phrase 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1), provides guidance as to when an enterprise is considered to be carried on.

Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal (paragraph 234 of MT 2006/1).

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 (paragraph 244 of MT 2006/1).

The characteristics of trade including the badges of trade is discussed in paragraphs 243 to 253 of MT 2006/1.

If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. However, it is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade (Paragraph 254 of MT 2006/1).

Further, 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

In relation to "resale at a profit" you would meet this requirement where the activities you undertake have a "reasonable expectation of resulting in a profit or gain" (see MT 2006/1).

You have told us that your intention in relation to the creation of Lot 1 (vacant land) is to resell the land as it is excess land for your purposes. However, you say your intention was not to gain a profit from buying/selling this land, but to build your own home in a layout that suited your requirements.

We believe in your case, the requirement of resale at a profit is met as there is a reasonable expectation that the resale of Lot 1 (vacant land) will result, if not in a profit, in a gain as the money from the resale of Lot 1 (vacant land) could be used to partially fund the development of Lot 2 (see example 29 in paragraphs 273 to 276 of MT 2006/1).

Given the fact circumstance of your case, we consider the series of activities that will be undertaken for the creation and resale of Lot 1 (vacant land) will be done in the form of an adventure or concern in the nature of trade and therefore will constitute an enterprise.

GST registration

Section 23-5 of the GST Act provides that an entity is required to be registered for GST where it carries on an enterprise and its GST turnover meets the registration turnover threshold. For the purposes of section 23-15 of the GST Act the GST registration turnover threshold is an amount of $75,000.

Section 188-10 of the GST Act explains whether your GST turnover meets, or does not exceed, a turnover threshold. Relevantly section 188-10 states:

(1)  You have a GST turnover that meets a particular *turnover threshold if:

(a)  your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold, or

(b)  your projected GST turnover is at or above the turnover threshold.

(2)  You have a GST turnover that does not exceed a particular *turnover threshold if:

(a)  Your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

(b)  Your projected GST turnover is at or below the turnover threshold.

You will meet the current GST turnover threshold where the proceeds from the proposed sale of Lot 1 (vacant land) is greater than $75,000.

Section 188-20 of the GST Act provides the meaning of projected GST turnover. It states:

(1)   Your projected GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a)   supplies that are *input taxed; or

(b)   supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or

(c)   supplies that are not made in connection with an *enterprise that you *carry on.

Accordingly, your projected GST turnover will also satisfy section 188-20 of the GST Act where proceeds from your proposed sale of Lot 1 (vacant land) exceeds $75,000.

Further, section 188-25 of the GST Act states the following:

188-25 Transfer of capital assets, and termination etc. of enterprise, to be disregarded

In working out your *projected GST turnover, disregard:

(a)   any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)   any supply made, or likely to be made, by you solely as a consequence of:

(i)            ceasing to carry on an *enterprise; or

(ii)     substantially and permanently reducing the size or scale of an enterprise.

Goods and Services Tax Ruling, GSTR 2001/7, Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) considers the issue of transferring of a capital asset. In particular at paragraphs 46 to 47 of GSTR 2001/7 it states:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Consistent with the above, the proposed sale of Lot 1 (vacant land) is not a transfer of a capital asset. As such the proposed sale of Lot 1 (vacant land) will need to be taken into account when calculating the projected GST turnover.

Where the proceeds from the proposed sale of Lot 1 (vacant land) exceeds $75,000, you will be required to register for GST.

In the circumstance that you are required to be registered for GST, your sale of Lot 1 (vacant land) will meet all the requirements of section 9-5 of the GST Act in which case the proposed sale of Lot 1 (vacant land) will be a taxable supply.

Question 2

From 1 July 2018, most purchasers are required to pay a withholding amount from the contract price at the date of settlement. This applies to:

•   new residential property

•   land that could be used to build new residential property (potential residential land).

A new residential property is a property where any of the following apply:

•   It hasn't been sold as residential property before.

•   It's been created through substantial renovations.

•   New buildings replace demolished buildings on the same land.

•   One of the properties above that has been rented out for

-   less than five years

-   more than five years but it has been actively marketed for sale while it is rented.

Potential residential land is land that is permissible to be used for residential purposes but does not contain any buildings that are residential premises - for example, houses and strata units.

The amalgamation of titles and the subdivision of the original property to create the new Lot 1 (vacant land) results in a property that has never been sold before. Lot 1 (vacant land) can be used to build new residential property and therefore is potential residential land.

Where the potential sale of Lot 1 (vacant land) is a taxable supply, you will have to provide notice to the purchaser and the purchaser will have to withhold tax in accordance with the rules of GST at settlement.