Edited version of private advice

Authorisation Number: 1051836073289

Date of advice: 2 July 2021

Ruling

Subject: GST and property subdivision

Question

Is the sale of each subdivided lot individually, or the sale of the subdivided lots in one line to a single purchaser a taxable supply under section 9-5 of the A New Tax System (Goods and Services) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

You are registered for GST. You have been registered for GST since (date).

You own (number) acres of land at (location in Australia). You built a dwelling on the land many years ago. You have resided in the home since it was built and it is your main residence. It is this land that you are subdividing into lots for sale and the subject to this private ruling.

You have not done any renovations to the dwelling since its construction.

You initially used your land for farming vegetables, however a number of decades ago you ceased the farming activity and started working in an unrelated service industry. A number of decades ago you started leasing the land (but not the residential premises) to livestock graziers. The current lease has been with the same lessee for many years.

The leasing fee was fixed at a nominal amount per month many years ago and the rate has not been revised since that date. The rate is not a commercial rate. This amount has been insufficient to cover the costs that relate to the leased land over each of the past few years and you have made large losses on the activity for each year within that period.

Making a profit was not a factor in your decision to lease out the land. You allowed your land to be used for grazing livestock by a neighbour to control the growth of scrub and grass and to manage the risk of bushfire. Agisting was the simplest way of controlling the scrub and grass.

Your leasing income and property holding costs relating to the leased land over the past few years were as follows, based on the information in your income tax returns.

Over the last so many years, the local Council decided to rezone the land in and around the local area to facilitate further plans for urban development in the area. The council decided to rezone the land from rural zone to light industrial B4 zone. This was further followed by the decision to rezone the land a B6 Enterprise Corridor zone, which meant any lots must maintain a minimal lot size of (number) thousand square metres.

You and your parent were approached by council in the past to assist facilitating council planning in the area.

You want to sell the land due to your age and downsizing as the land is now too large. There had originally been no offers from potential buyers. This motivated you into subdividing your land.

You will sell all (number) acres including your main residence.

You will create a (number) lot residue subdivision and (number) additional lots to be given to council for the widening of two roads and the drainage area.

Following the subdivision, you will sell the remaining (number) lots either individually or in one line to a single purchaser if the opportunity presents itself.

The land subdivision process required you to undertake the following steps:

•              Completion of Application Form, arrangement of fee quotes from council, payment of certain applications and other fees,

•              Provision of survey plan and plan of subdivision to the council that outlines the areas and dimensions of the lot,

•              Arrange for a Contamination Assessment and remediation plan,

•              Onsite waste water report,

•              Bushfire and Indigenous Archaeological Assessments,

•              Obtain Development Approval consent,

•              Lodge the subdivision certificate with the local council and pay certain fees to various authorities

•              After the subdivision certificates are issued, lodge for registration with the Land Registry Services and pay the required fees.

•              Obtain Development Approval consent, lodge subdivision certificate with local council with fees paid to related to entities of the subdivision, payments for new title when they are created,

•              Payments for new titles when they are created.

You engaged a surveyor for the costings of the subdivision.

Initially it was your intention to extend the sewer line to each block. However, this has not occurred and would ultimately be the responsibility of the purchasers of the lots.

Since (date), you encountered some difficulty marketing the land. You were advised to take further steps to improve the marketability of the land and obtain approval for roads to be constructed on the land.

You commissioned consultants to amend the plan of subdivision to include the proposed roads. An amended plan of proposed subdivision has been lodged with the local council You funded the design, preparation and lodgement of the plan of proposed subdivision. Council is yet to approve the amended plan of proposed subdivision. Each of the (number) lots will be impacted in some way by a road dedication.

The subdivision will be by way of a paper subdivision. You will not enter into a development agreement in anticipation of sale. You will not fund or be involved in the physical works, such as roads, driveways, drainage, sewer lines or connection of water or electricity mains or any other infrastructure. These works would be funded and undertaken by the purchaser of each lot.

You have incurred (amount) to date in relation to the subdivision. These costs include expenses incurred for preparation and lodgement of the original Development Approval and subsequent amendment of the Development Approval to include the proposed roads. You do not anticipate incurring further substantial expenses above what you have incurred to date.

You engaged a local real estate agent on (date). The property has remained with the same real estate agent since it was placed on the market on (date). The real estate agent will receive a commission based on the sale price obtained for the land - this is a base commission of (number)% of the sale price.

You or any of your related entities have not previously been involved in any subdivision or property development activities.

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 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

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

Reasons for decision

Summary

The sale of the subdivided lots will not be subject to GST as these supplies will not be made in the course or furtherance of any enterprise that you carry on.

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)              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.

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.

Paragraph 9-5(a)

The sale of the subdivided lots meets the requirement of paragraph 9-5(a) of the GST Act as the subdivided lots will be sold for consideration.

Paragraph 9-5(c)

The sale of the subdivided lots meets the requirement of paragraphs 9-5(c) of the GST Act as the subdivided lots will be situated in Australia.

Paragraph 9-5(d)

You meet the requirement of paragraph 9-5(d) of the GST Act as you are registered for GST.

The note in section 23-5 of the GST Act provides that it is only the 'entity' (as defined in section 184-1 of the GST Act) that can register for GST and not the enterprise.

This means that an entity can only register for GST once, even if the entity operates more than one enterprise.

Paragraph 9-5(b)

The term 'enterprise' for GST purposes is defined in section 9-20 of the GST Act and includes, among other things, an activity or series of activities done:

•              in the form of a business (paragraph 9-20(1)(a))

•              in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b))

•              on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c))

However, an activity carried on by an individual without a reasonable expectation of profit or gain is excluded from the definition of enterprise (paragraph 9-20(2)(c) of the GST Act).

Miscellaneous Taxation Ruling 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 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.

The sale or disposal of capital assets used within an enterprise will be in the course or furtherance of the enterprise for the purposes of paragraph 9-5(b) of the GST Act. As such, the sale by a GST-registered entity or land used within its enterprise is subject to GST (refer to footnotes 104 and 106 in MT 2006/1 and paragraph 75 of GSTR 2003/13).

Further, the phrase, 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of either commencing or terminating an enterprise. This means, for example, that the sale of a business asset as part of the process of winding down or ceasing the business will be treated as a supply in the course or furtherance of that enterprise, and thus is a taxable supply if the other requirements are met.

Paragraph 9-20(1)(a) and (b)

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'. The ruling provides that the term business would encompass trade engaged in, on a regular or continuous basis. However, 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.

Paragraphs 258 to 261 of MT 2006/1 discuss the concept of trade versus investment assets. Investment assets are assets purchased with the intention of holding them for income producing purposes or assets such as the family home and other private assets held for the pleasure or enjoyment of a person. Further, assets can change their character but cannot have a dual character at the same time.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

A mere realisation of investment assets does not amount to 'trade'. That is, more than a mere realisation of an investment asset is required for an activity to amount to a trading activity and the character of the activity as a whole needs to be considered. Depending on the facts, an isolated transaction, such as subdividing or developing land, may amount to the carrying on of an enterprise where the activity has the characteristics of a business deal.

Paragraph 265 of MT 2006/1 refers to Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 which established a number of factors that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. These factors are as follows:

•              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

•              buildings have been erected on the land.

As stated in paragraph 266 of MT 2006/1, no single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your facts

Initially you were using the land in your farming activities and since a number of decades ago you have been leasing the land to livestock graziers. We do not consider that your sale of the subdivided lots is something done in the course or furtherance of a crop farming enterprise (even if the crop farming activity you formerly carried on the land was a business) as you ceased operating the farming activity decades ago and you have since converted the farmland to another purpose or use - that is, leasing.

You are subdividing the land into (number) lots with (number) additional lots to be given to council for the widening of two roads and the drainage area. To improve the marketing of the land you have taken additional steps involving seeking approval from the relevant authority for roads to be constructed on the land. The subdivision is a paper subdivision. You will not fund or become involved in any physical works. The works will be funded and undertaken by the purchaser of each lot.

Based on the facts of your case, your sale of the subdivided lots either individually or in one line will be the realisation of a capital asset, rather than a sale of a trading asset. Therefore, your subdivision and sale activities do not amount to a business or an adventure or concern in the nature of trade.

We are satisfied that neither paragraph 9-20(1)(a) or (b) is satisfied.

If the leasing activity is an enterprise, then the sale of the leased land will be subject to GST given that you are registered for GST.

You satisfy paragraph 9-20(1)(c) given that you have leased the land (except for the residential premises) since a number of decades ago. The current lease has been with the same lessee for many years.

However, the leasing activity is not an enterprise carried on by you, an individual, if there is not a reasonable expectation of profit or gain (in accordance with paragraph 9-20(2)(c) of the GST Act).

Example 40 in MT 2006/1 involves a small scale agistment/leasing arrangement. It states:

Example 40 - use of property on a continuous basis which is not an enterprise

321. Klara owns acreage and allows her neighbour to permanently agist a couple of mares on part of her land. She only charges a small amount for the agistment because her neighbour is a very good friend. Klara receives $20 per month agistment fees but this is insufficient to cover the costs of the rates for this part of the land.

322. Klara is not entitled to an ABN. She has granted a licence on a continuous basis for the neighbour's horse to graze on her property. However, the activity will not qualify as an enterprise on the basis that there is no reasonable expectation of profit or gain.

As in example 40 of MT 2006/1, you have allowed your neighbour to permanently agist animals on part of your land and you have only charged a small amount for the agistment arrangement. The leasing fee in your case was fixed at a nominal amount per month many years ago and this has not been revised since that date. The rate is not a commercial rate.

You stated that you allowed your land to be used for grazing livestock to control the growth of scrub and grass and to manage the risk of bushfire. Agisting was the simplest way of controlling the scrub and grass.

We consider that you are not currently carrying on a leasing enterprise due to having been no reasonable expectation of making a profit or gain over the past few years. From your income tax records you did make actual losses from the leasing activity in each year of the past few years and this outcome would have been anticipated as:

•              you did not charge a commercial rate of rent and have not raised the rental rate for many years

•              you have not made changes to how you operate the leasing activity over the past few years to try to make it profitable.

•              property holding costs would be reasonably predictable

•              your focus for leasing the land to a grazier was to control the growth of scrub and grass and to manage the risk of bushfire by grazing livestock. As such the focus was to reduce the holding costs of the land as opposed to seeking a profit.

Your sale of the subdivided lots will not be in the course or furtherance of any enterprise that you carry on. Therefore, the requirement of paragraph 9-5(b) of the GST Act will not be met.

Based on these facts, GST will not be payable on your sale of the subdivided lots.