Edited version of private advice

Authorisation Number: 1051852985440

Date of advice: 21 June 2021

Ruling

Subject: GST and the sale of vacant land

Question

Is your impending sale of vacant land detailed in the facts a taxable supply?

Answer

No. The supply of the land will not be a taxable supply as it is the mere realisation of a capital asset and is excluded from your projected turnover calculation.

Relevant facts and circumstances

•    You purchased the property in 2014.

•    You have never registered for GST.

•    You have never registered for an Australian Business Number.

•    You held the property in your own name and not in any other entity type or capacity.

•    You initially purchased the property with the intention to build your own residence when you retired. You were not sure when you would be ready for the construction phase. Due to this, you leased the property out in 2019.

•    You arranged to have the residence on the property demolished but as you did not have previous experience you decided the process was too complex and beyond your capacity, so you decided to sell the property.

•    Neither you nor any of your associates have experience in the construction and property development industry.

•    You have not applied for, or taken steps to obtain building permits or undertaken town planning activities in relation to the property including obtaining permission to subdivide the property.

•    You decided to sell this block of vacant land via a public auction and you entered a contract of sale in June 2021 (the contract) as a result.

•    The sale of the property was at arm's length to a third party.

•    The consideration under the contract is less than $1 million.

•    The contract indicates the 'includes GST' box is not ticked.

•    A clause of the contract is about GST at Settlement. It says:

GST Withholding - Vendor's Notice

Words and expressions defined or used in Subdivision 14-E of Schedule 1 to the Taxation Administration Act 1953 (Cth) or in A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) have the same meaning in this Special Condition unless the context requires otherwise.

The vendor hereby notifies the purchaser that the purchaser does NOT have a withholding obligation under section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (Cth) and at Settlement, the purchaser is NOT required to withhold any amount for GST.

•    The special conditions for the sale allow for the margin scheme to apply to the sale if the sale is ultimately found to be taxable.

•    You are seeking a ruling as the contract amount is currently uncertain to your advisors as you need to know whether the sale will be subject to GST.

•    Your stated intention from the outset was to live on the property as your residence rather than to sell for a profit.

•    Additional borrowings were not required to complete the purchase of the property.

•    You had held the land since 2014 before you decided to sell. Your motivation to sell was to free up capital to purchase a residence for your retirement.

•    Your income tax return for the 2018-2019 financial year shows gross rent reported near $40,000. No other returns show rental income.

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 25-55,

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 and

A New Tax System (Goods and Services Tax) Regulations 2019,section 23.15.01.

Reasons for decision

Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 Australia; 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.

Under paragraph 9-5(d) of the GST Act, one of the requirements for making a taxable supply is that the supplier is:

(i) registered for GST, or

(ii) required to be registered for GST.

The land that you propose to sell has been used as a capital asset in your enterprise of leasing residential premises.

Enterprise is defined in subparagraph 9-20(1)(c) of the GST Act to be amongst other things an activity or series of activities done "in the form of a lease, licence, or other grant of an interest in property".

You have not subdivided nor intended to subdivide the property. The property is located in Australia and the GST-free and input tax provisions do not apply in your circumstances as the property is now vacant land as the residence was demolished.

Your current turnover is less than the GST registration threshold and you are not registered for GST. Therefore, unless you are required to be registered for GST your supply of the lots will not be a taxable supply.

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

(a) you are carrying on an enterprise; and

(b) your GST turnover meets the registration turnover threshold.

Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise).

On the facts provided, you satisfy paragraph 23-5(a) of the GST Act as you are carrying on an enterprise that includes the leasing of property to tenants who reside in the residential premises and as discussed below you were not engaged in the enterprise of property development.

Subsection 23-15(1) of the GST Act states:

(1) Your registration turnover threshold (unless you are a non-profit body) is:

(a) $50,000; or

(b) such higher amount as the regulations specify.

The A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations), regulation 23.15.01 specifies that for paragraph 23-15(1)(b) of the GST Act, the amount is $75 000.

Paragraph (a) of the definition of 'GST turnover' in section 195-1 states that in relation to meeting a turnover threshold - has the meaning given by subsection 188-10(1) of the GST Act, and the subsection 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.

Under section 188-15 of the GST Act, generally:

(1) Your current 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 the 12 months ending at the end of that month, 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.

Under section 188-20 of the GST Act, generally:

(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.

In your case, the income you have derived in the current month and the preceding 11 months has been income derived from a lease of residential premises which is under $75,000.

Leasing of residential premises is an input taxed supply under Division 40 of the GST Act and therefore will be excluded in calculating your current and projected GST turnover. Accordingly, your current GST turnover may not meet the GST registration turnover threshold of $75,000 on this basis alone based on the rental income reported in your 2019-2019 income tax return.

Additionally, in calculating projected GST turnover, section 188-25 of the GST Act provides:

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.

Of relevance for consideration in this case is paragraph 188-25(a) of the GST Act.

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 turnoverincludes guidance onthe meaning capital assets. GSTR 2001/7 explains:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income.....

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. [Footnotes excluded].

Considering the explanation in GSTR 2001/7, the land is potentially a capital asset of relevance to determining your projected turnover. If the dealing in land is considered part of a business, or a one off adventure in the nature of trade, the sale will not be considered capital but rather revenue in nature.

The ATO view is set out in detail in 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). 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':

•         a business encompasses trade engaged on a regular 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. They provide 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.

The property was originally held as a residence and also as part of your leasing enterprise.

Paragraph 264 of MT 2006/1 discusses two court cases [Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty)] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets.

From these 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 as opposed to the mere realisation of a capital asset.

Paragraphs 178 of MT 2006/1 set out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions

Indicators of carrying on a business.

• a significant commercial activity;
• a purpose and intention of the taxpayer to engage in commercial activity;
• an intention to make a profit from the activity;
• the activity is or will be profitable;
• the recurrent or regular nature of the activity;
• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;
• activity is systematic, organised and carried on in a businesslike manner and records are kept;
• the activities are of a reasonable size and scale;
• a business plan exists;
• commercial sales of product; and
• the entity has relevant knowledge or skill.

Factors used to examine an isolated transaction:

• 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 addition other factors that may be relevant include:

• the length of time the property had been held and the purpose to which it was put to in that time; and
• the personal involvement in the development activity.

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.

In applying the above factors to this case, we acknowledge that:

• The property you are selling is the now vacant land you originally purchased as an investment property which you have held for seven years.
• You have used the property as an asset to derive income from the leasing of the land or as a private residence since it was acquired until the house was demolished.
• Your original intention in purchasing the land was to hold the property as a residence and in 2019 briefly used it as an income earning investment. The characteristics of the land predisposed the land to this use, as the property was residential but not new residential premises in nature.
• Your motive for sale is not the pursuit of profit but to free up capital to buy a residence for your retirement.

•         There was no business plan, it is small scale, and a single suburban lot is not of itself a significant commercial activity.

•         The indicators above for isolated transactions also do not apply in your case based on the facts you have provided.

On balance, we consider that over the period that the land was held by you, its character has not changed from capital to revenue. Accordingly, paragraph 188-25(a) of the GST Act will apply and the supply such that the sale will not be included in your projected turnover.

The Commissioner is satisfied that you not required to be registered for GST and the sale of the land is not taxable as it apparent that you are not in business buying and selling property as trading stock. As a result, the margin scheme does not apply to the sale because it is not a taxable supply which means that clause of the special conditions is not applicable.

Additionally, the GST at settlement clause of the contract is correct in notifying that there is no GST withholding obligation on the basis of the facts of this case.