Edited version of private advice

Authorisation Number: 1051848016138

Date of advice: 7 June 2021

Ruling

Subject: GST and subdivision of land

Question 1

Is the partnership carrying on an enterprise when they subdivide the vacant land and sell the subdivided lots under section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the partnership is carrying on an enterprise when they subdivide the vacant land and sell the subdivided lots under paragraph 9-20(1)(b) of the GST Act.

Question 2

Will the sale of the subdivided lots made by partnership be a taxable supply under section 9-5 of the GST Act?

Answer

Yes, thesale of the subdivided lots made by partnership will be a taxable supply under section 9-5 of the GST Act.

Relevant facts

The partnership (you) is registered for GST from 1 July 2000.

You began trading as an earthmoving and landscaping business and the business was wound up in 2018 and the equipment sold.

In 2004 you purchased vacant land. The land is zoned as residential. You purchased the land for the purpose of long-term capital growth.

From time to time the vacant land was used by letting a couple of horses to graze on it and this was not on a commercial scale. You have never carried on a cattle business on the land.

You have been advised by a local real estate agent that it is currently a good time to subdivide and sell residential land due to COVID-19 economic conditions.

You decide to sell the land because your health is becoming an issue and you would like to consolidate and simplify your financial affairs before you become too old to do so. You have witnessed an increase in demand for land and housing which is the result of COVID-19. You believe that this current situation makes it an ideal time to subdivide and sell the land as your land is the only vacant land zoned residential.

You personally initiated the proposed subdivision of the land into 26 residential blocks.

You took a business loan for the finance of the subdivision development. You have given us a copy of the Mortgage Loan Application with the finance company. The land is the only security offered for obtaining the loan. The loan is 'interest only loan payments' and the interest will be capitalised to the loan during the development phase and cleared from the sale of the individual lots. The declaration for the loan states it is predominantly for business purposes.

You engaged civil engineers who with their qualifications and experience will subdivide the land in a way which maximises its capital value and meets all the standards and technical criteria that are required by the local council, power and water authorities and state land authorities. The civil engineers will also seek tenders for the subdivision infrastructure from arm's length contractors.

All subdivided lots will be put on the market for sale. You will engage a local real estate agent to market and sell the subdivided land.

You hope that all properties will be sold by the end of 2023.

You have never undertaken a property subdivision before

You are responsible for taking all the financial risks of the subdivision project and you expect to receive all the net proceeds of the subdivided lots.

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

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Question 1

The definition of an enterprise in subsection 9-20(1) of the GST Act includes (amongst other the 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).

Miscellaneous Taxation Ruling MT 2006/1provides guidance on what constitute an enterprise for the purposes of eligibility for registration for an Australian business number. Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to GST.

The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically 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 a revenue nature, as opposed to the mere realisation of a capital asset.

From the facts received, you have never undertaken a property subdivision before. In this instance, we consider your subdivision of the land and sale to be a 'one-off' or isolated real property transaction. In this case it is necessary to consider whether the subdivision and sale of the subdivided lots is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

Paragraph 265 of MT 2006/1 outlines factors that indicate whether activities undertaken on a one-off are an 'adventure or concern in the nature of trade' and states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade... If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. 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; and

•         buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be the combination of factors that will lead to a conclusion as to the character of the activities.

Applying the information received

From the facts received:

• The land was originally purchased for capital growth. Sometime later it was decided to subdivide the land and sell the subdivided lots as there is a demand for vacant land and you decided to capitalise on this demand by starting the subdivision project and derive a profit.
• You are responsible for taking all the financial risks of the subdivision project and expect to receive all the net proceeds of the subdivided lots.
• You borrowed funds to finance the subdivision project. The purpose for the loan under the loan contract is mainly for business purposes. The loan taken is 'interest only loan payments' and it is agreed that the interest will be capitalised to the loan during the development phase and cleared from the sale of the individual lots This action indicates a property development business or profit-making undertaking.
• There is a coherent plan for the subdivision of the land so that the capital value is maximised and for the sale of the subdivided lots.

From the above we consider there is a significant commercial component in the activities carried on the land and the extent of the activities is not merely the realisation of capital assets. Accordingly, the subdivision and sale of the lots are activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Your subdivision and sale of the lots amount to the carrying on an enterprise in the form of an adventure or concern in the nature of trade under paragraph 9-20(1)(b) of the GST Act.

Question 2

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 Australia; 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.

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

From the information received you satisfy paragraphs (a) to (d) in section 9-5 of the GST Act as:

a)    you will sell the subdivided lots for consideration; and

b)    the supplies will be made in the course of the property development enterprise that you carry on; and

c)    the supplies are connected with Australia as the lots are located in Australia; and

d)    you are registered for GST.

However, your sales of the subdivided lots will not be taxable supplies to the extent that the sales are GST-free or input taxed.

There is no provision in the GST Act under which the sales of the lots will be GST-free or input taxed.

Your sales of the subdivided lots will therefore be taxable supplies under section 9-5 of the GST Act.