Edited version of private advice

Authorisation Number: 1051790249049

Date of advice: 14 December 2020

Ruling

Subject: Goods and services tax and property subdivision

Question

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

Answer

No.

Relevant facts and circumstances

Individual A and individual B (you) are not registered for GST.

You purchased a block of land located in Australia (property X) many years ago to build your family home. You built a house on the property which you have been living in since that time (about so many years).

You will subdivide the property into (number) lots. A number of lots will be vacant land and the existing house will remain on the other lot. You will sell the vacant lots to reduce the property maintenance.

You did not try selling the property as an un-subdivided block as you wish to continue living in the house on the property.

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

You will not seek the rezoning of the land. It is already zoned residential.

The land 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 will not borrow money finance the subdivision work.

You will not claim income tax deductions or input tax credits in connection with the subdivision.

The cost of the subdivision will not be significant. Your development of the land will not go beyond what council required to secure approval for the subdivision. The development will involve construction of crossover/s, fencing, and also connecting electricity and water and telecommunications (the amenities).

You will not hire a project manager.

You will not do any of the subdivision work yourself. You will hire individual tradesmen to do the subdivision.

You will hire a real estate agent.

The entities you hire in relation to the subdivision will not be related parties to you.

There will not be a promotional estate name for the vacant subdivided lots.

The market value you add to the land as a result of subdividing it into (number) lots will be about (dollar amount) more than the cost of subdividing it.

The timeline for getting approval to subdivide, undertaking the subdivision and selling the lots will be a few years. The planning and approval process took about (number) months partly because a neighbour objected to the proposed development. All vacant subdivided lots should be sold by (date).

You do not have previous experience in property development other than building house/s you have lived.

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

Reasons for decision

GST will not be payable on your sale of the subdivided lots, as these sales will not be supplies you make in the course or furtherance of an enterprise that you carry on.

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).

You are not registered for GST.

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;

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

•         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;

•         the complexity of the development;

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

•         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 of a capital asset or a business or adventure or concern 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 amounted 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 the current parcel of land as a capital asset given that:

•         you did not purchase it to resell

•         you have lived in a house on the land for many years.

We now need to consider whether the character of this asset will change from a capital asset to a trading/revenue asset of a business or adventure or concern in the nature of trade as a result of the property subdivision activity.

The relevant factors in your case are:

•         You have a coherent plan for the subdivision of the entirety of the property.

•         The market value you add to the land as a result of subdividing it into four lots will be about (dollar amount) more than the cost of subdividing it.

•         You will bear the financial risks of the development.

•         You did not try selling the property as an un-subdivided block

•         You will hire individual tradesmen to do the subdivision.

•         The duration of the development project and the time-line for selling the lots is a few years.

•         You are individuals.

•         You purchased the pre-subdivision land to use as a capital asset and you have always held it as a capital asset. You have lived in the house on the property for about many years.

•         There will be no change in purpose for which you hold the land. You will continue to hold onto one of the subdivided lots and live in the house on the lot.

•         You will sell the vacant subdivided lots to reduce the amount of property maintenance.

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

•         You will not seek the rezoning of the land. It is already zoned residential.

•         The property 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 will not borrow money to finance the subdivision work.

•         You will not claim income tax deductions or input tax credits in connection with the subdivision.

•         Your property subdivision is of a small scale and scope and it will not be a complex one. You will divide the property into only a small number of lots. The cost of the subdivision will not be significant. Your development of the land will not go beyond what council required to secure approval for the subdivision. Crossovers, fencing, and also connecting electricity and water and telecommunications (the amenities) will need be constructed/connected. The small scale and scope of the subdivision and low level of complexity is an important factor.

•         You will not do any of the subdivision work yourselves.

•         You will not hire a project manager.

•         There will not be a promotional estate name for the vacant subdivided lots.

•         You do not have property development experience other than building house/s you have lived in.

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.

Your sale of the vacant lots will be the mere realisation of a capital asset and will not be supplies you make in the course or furtherance of an enterprise that you carry on. Therefore, as the requirement of paragraph 9-5(b) of the GST Act will not be met, GST will not be payable on your sale of the subdivided lots.

You may 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.