Edited version of private advice

Authorisation Number: 1051852992836

Date of advice: 16 June 2021

Ruling

Subject: GST and the sale of subdivided blocks

Question

Will the subdivision and subsequent sale of land at a Development Site into X lots by Entity A be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

Entity A is registered for GST effective from dd/mm/yyyy.

Entity A is a charity pursuant to the Charities Act 2013 and endorsed by the Australian Taxation Office (ATO) to access the following tax concessions:

1.    GST Concession dd/mm/yyyy

2.    FBT Rebate from dd/mm/yyyy

3.    Income Tax Exemption from dd/mm/yyyy.

Entity A has the status of Deductible Gift Recipient (DGR). Entity A is also registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC).

In 1991 Entity A purchased vacant land being X,XXXm² (the Property).

Legal title of the Property was registered in the name of The Property Trust.

The Property Trust was established by legislation to hold property on behalf of Entity A and other similar entities in the capacity as a bare trustee. The Property Trust executes various documents relating to buying, selling and leasing such properties. It also acts as the trustee for several denominational trust funds which it administers under restrictive trust deeds.

The Property Trust does not have input into day-to-day decisions made in relation to the Property. The role of the Property Trust is passive and subject to the provisions of the relevant legislation.

The Property is recorded in Entity A's financial accounts as land and buildings and Entity A has responsibility for the liabilities and outgoings with respect to the Property.

Entity A's original intention when Entity A acquired the Property was to construct a XXXX building for use by the local XXXX however this did not occur. Entity A also had plans to build a XXXX on the site at one stage however this intention also changed.

Shortly after Entity A acquired the Property, Entity A built a small XXXX which was used by Entity A's members until yyyy.

From yyyy to yyyy the small XXXX was used for various community purposes.

In yyyy, Entity A decided to publicly offer the Property for sale to fund the acquisition of a XXXX at a different site.

In mm/yyyy an offer was made to purchase the Property, post development approval and pre-Construction Certificate, by a third party property developer. However, the parties could not agree on terms (it is believed mainly in relation to the purchaser's delayed payment) so the offer was not accepted.

Entity A subsequently decided that in order to achieve the best return Entity A would subdivide the Property into X lots and sell the vacant lots. Each lot will be for sale at an average sale price of $XXX,XXX.

The development is being funded by a loan. The budget for the subdivision is $XXX,XXX. The loan will be repaid once the sales of the vacant lots have gone through.

Once Entity A sells the X lots, Entity A will look for a block of land to build a XXXX on in XXXX, or nearby in XXXX. Alternatively, Entity A may buy a building to convert. An exact location is unknown at this point, however the size of building Entity A seeks is approximately XXX or XXXm².

XXXX XXX, a member of the Church, works for an earthmoving company, XXXX, as a Quantity Surveyor. XXXX has constructed residential subdivision for 50 years and is project managing this subdivision process. XXXX is not being paid for his work.

There is a signed sales agreement with XXXX Real Estate as the agent responsible for selling the lots. The lots will be sold at public auction.

Entity A has not undertaken or contemplated any previous subdivision or 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 9-40

A New Tax System (Goods and services Tax) Act 1999 Division 38

A New Tax System (Goods and services Tax) Act 1999 Division 40

A New Tax System (Goods and services Tax) Act 1999 subsection 184-1

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

Reasons for decision

In this reasoning, please note:

•    all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•    all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•    all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

Section 9-40 provides that you must pay the GST payable on anytaxable supply that you make.

Under section 9-5, you make a taxable supplyif:

(a)  you make the supplyfor *consideration; and

(b)  the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c)   the supplyis *connected with the indirect tax zone; and

(d)  you are *registered,or *required to be registered.

However, the supplyis not a *taxable supply to the extent that it is *GST-freeor *input taxed.

Section 195-1 states that if a provision of the GST Act uses the expression 'you', it applies to entities generally, unless its application is expressly limited.

In this case, the registered owner of the Property is The Property Trust.. However, the Property Trust purchased the Property as bare trustee for Entity A.

Goods and Services Tax Ruling GSTR 2008/3 Goods and services tax: dealings in real property by bare trusts (GSTR 2008/3)discusses the role of a bare trustee in a bare trust arrangement. Paragraph 30 provides that in applying the GST Law to a dealing in real property held on bare trust, the question arises as to which entity makes the relevant taxable supply, the trustee or the beneficiary.

For a supply to be a taxable supply under section 9-5, the entity making the supply must do so in the course or furtherance of an enterprise it carries on.

Subsection 184-1(1) treats a trust as an entity. Subsection 184-1(2) goes on to note that the trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time. Subsection 184-1(3) confirms that a legal person can have a number of different capacities in which the person does things and in each of those capacities the person is taken to be a different entity.

The activities of a bare trustee are essentially passive in nature. A trustee of a bare trust has either no active duties to perform or only minor active duties. A bare trust does not carry on an enterprise for GST purposes by virtue of its dealings in the trust property (paragraph 37 of GSTR 2008/3).

On the other hand, a beneficiary of a bare trust may carry on an enterprise involving an asset held on trust for the beneficiary by the bare trustee (paragraph 38 of GSTR 2008/3).

Paragraph 11 of GSTR 2008/3 provides an example which aligns with Entity A's situation. In that example, despite legal title to the property being held by T, the property is used by B in carrying on its enterprise. Paragraph 11 states:

An entity (B) that carries on an enterprise may, for reasons of convenience or anonymity, arrange for real property which is used in its enterprise to be acquired by another entity (T) to hold on bare trust for B - that is, subject to an obligation to transfer legal title to the asset to B, or to a third party if B so directs, and with no other active duties to perform.

Paragraph 39 of GSTR 2008/3 states that if an asset is sold, the transaction will involve a transfer of the legal title to the property to a third party by the trustee at the direction of the beneficiary.

Paragraph 40 of GSTR 2008/3 continues stating (with reference to paragraph 11 discussed above):

The definition of' 'taxable supply' concerns itself with supplies made in the course of an enterprise. It is the entity which conducts that enterprise that makes the relevant supply. In other words, if T transfers legal title to the property to a third party at the direction of B, it is B that causes the supply to be made in the course of its enterprise and is liable for GST, if the other requirements for a taxable supply in section 9-5 are met.

In this case, the Property Trust holds the Property as bare trustee. Consequently, in relation to the Property, it is Entity A's activities as the beneficiary, that must be examined.

Entity A will make taxable supplies of X subdivided lots to third party purchasers where all the requirements specified in section 9-5 are satisfied.

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively. Where a supply is GST-free or input taxed, GST will not be payable on the sale.

We consider Division 38 and 40 do not apply to the sale of the subdivided lots. This means, where all the requirements specified in paragraphs 9-5(a), (b), (c) and (d) are satisfied, GST will be payable on the supply of the subdivided lots.

In this case, the subdivided Lots are being sold for consideration, are located in Australia and Entity A is registered for GST. That is, paragraphs 9-5(a), 9-5(c) and 9-5(d) are satisfied.

Paragraph 9-5(b) requires that the supply is made in the course or furtherance of an enterprise that the entity carries on.

The definition of the term 'enterprise' is defined in section 9-20 and includes an activity, or a series of activities, done by a charity (paragraph 9-20(1)(e)).

Entity A is an endorsed charity and as such are considered carrying on an enterprise for GST purposes.

The nexus between the sale of a thing and whether the sale is connected to an enterprise being carried on is discussed in paragraphs 28-31 of Goods and Services Tax Ruling GSTR 2004/8: Goods and services tax: when does an entity have a decreasing adjustment under Division 132?

28. For the sale of a thing to be made in the course or furtherance of your enterprise, the sale of the thing must have a connection with your enterprise. Whether a connection between the sale of the thing and your enterprise exists will depend on the facts and circumstances. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 states:

'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise. 'In the course or furtherance' does not extend to the supply of private commodities, such as when a car dealer sells his or her own private car. See Case N43 (1991) 13 NZTC 3361.

29. Given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent.

30. Each of the following characteristics of a thing indicates strongly that the sale of the thing has a connection with your enterprise:

•         at the time of sale it formed part of the assets of your enterprise (for example, it is trading stock or a depreciable asset for income tax purposes);

•         at the time of sale it was applied in carrying on your enterprise to at least some extent; and

•         it is sold as a transaction of your enterprise.

31. Factors that tend to indicate that a sale is a transaction of the enterprise include the following:

•         the sale is made from enterprise premises;

•         payment is accepted using enterprise facilities such as a cash register or a credit card facility;

•         the proceeds of sale are deposited into an enterprise bank account; and

•         enterprise book accounts are used to record the transaction.

The list in this paragraph is not exhaustive or conclusive. All the facts and circumstances must be considered and balanced.

Given the facts of this case, we consider that the sales of the subdivided lots have a sufficient nexus to the enterprise that Entity A is carrying on and as such, paragraph 9-5(b) is satisfied.

As all the requirements of section 9-5 are met, the sale of the land at the Development Site after subdivision into X lots to third party purchasers will be a taxable supply pursuant to section 9-5.