Edited version of private advice

Authorisation Number: 1051865279626

Date of advice: 9 July 2021

Ruling

Subject: GST and the sale of subdivided lots

Question

Are you, J and D, liable to pay GST pursuant to section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 when you sell subdivided lots of vacant land known as XXX?

Answer

Yes

Relevant facts and circumstances

J and D (together referred to as 'you') are not registered for GST.

In 20XX you purchased a X hectare block of farming land for approximately $xxx located at xxx (the Land) with P and C (the parents of J) as tenants in common.

The original intention for the use of the Land was to graze cattle and build a home for you to live in. However this never eventuated due to the remoteness of the Land and the cost of connecting water and power services and issues with grazing cattle on the land.

You abandoned the intention to use the Land as a home the following year and purchased a property to use as a home located at xxx. You persisted with using the Land for grazing activities until around xxx, where you became aware of the intentions of Government Entity A and Government Entity B to compulsorily acquire parts of the Land. You ceased grazing activities from that time.

In xxx you engaged Company A as consultants to assist you in preparing and submitting an application for a planning permit to subdivide and develop the Land for commercial use. Your intention was to ensure the Land had some future use given the previous issues with using the Land as farmland. The planning permit application was submitted to xxx (the Council) in xx, however approval was delayed pending the resolution of overlays on the Land in favour of Government Entity A and Government Entity B.

On or around xxx, Government Entity A compulsorily acquired approximately xx hectares of the Land for the construction of a bypass road.

You registered a company called Company K on xxx. The company had no use at the time of registration and remained dormant. You established the company as you thought it was important to establish the company name for future use.

On or around xxx, Government Entity B compulsorily acquired xx hectares of the Land for a retarding basin and wetlands. This meant only xx out of the original xx hectares of the Land remained available for subdivision under the planning permit application.

The Council issued a planning permit in xx permitting the development of 11 lots (the Planning Permit).

The cumulative value of all 11 lots at the time of the subdivision was approximately $xxx.

C passed away on xxx. You entered into an agreement with P on xxx to divide the ownership of the 11 lots (the Agreement). Ownership was divided as follows:

• Lots 1, 2, 7, 8 and 9 owned by P
• Lots 3, 4, 5, 10 and 11 owned by you
• Lot 6 owned by P (50% share) and you (50% share).

The Planning Permit was subject to a number of conditions requiring road and drainage construction, sewer reticulation, water reticulation and electrical works to be undertaken on the Land prior to development commencing. Company A issued a tender in xxx seeking a contractor to perform those services on your behalf. In xxx you repurposed Company K to act as a vehicle for processing invoices and making payments for expenses incurred in the subdivision and preparing the land for development. P was appointed as a director of Company K at this time. Company K was registered for GST on xxx. Invoices for services rendered in preparing the land for development were issued to Company K (and included GST), which then on-invoiced (inclusive of GST) 50% of those expenses to you, and the remaining 50% to P and C or their estates. You, P, and C's estate paid for the invoices from personal accounts. You never claimed input tax credits with respect to payment of your portion of the expenses as you considered the expenses to be private in nature. You have not used Company K for any other purpose.

Company B submitted a tender to undertake the services sought by Company A on xxx for $xxx, which was accepted and a contract between Company K and Company B for this amount was signed in xxx. Company B issued invoices (GST inclusive) for its services to Company K, which were paid for in the manner described above.

P passed away on xxx. Title to the lots owned by P passed to his estate.

Company B completed its work under the contract with Company K in xxx.

In xxx you sold lots 10 and 11, both of which comprised of vacant land. You did not charge GST on the sale as you considered the sale to be a mere realisation of a capital asset, and not made in the course or furtherance of carrying on an enterprise.

As a result of the Agreement, you owned lots 3, 4 and 5, and you shared ownership of lot 6 as tenants in common with P. You eventually acquired the remaining 50% share in lot 6 and so now have 100% ownership in lots 3, 4, 5 and 6 (the Four Lots). The cumulative area of the Four Lots is approximately xxx hectares.

The Four Lots are vacant land. You have not commenced construction of any buildings on any of the Four Lots, nor have you engaged any other entity to commence construction of buildings on any of the Four Lots. You have entered into contracts of sale for the Four Lots.

You have no history of property development and you have not subdivided and sold property prior to acquiring the Land and subdividing it into the lots described above. You advised you are selling the Four Lots to fund a project you are undertaking on your current residential premises. Your bank has advised you to sell any assets to fund these 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 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

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

Reasons for decision

Summary

The sales of the Four Lots are taxable supplies. GST is payable on the sales.

Detailed reasoning

In this reasoning, please note:

·   unless otherwise stated, 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, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO's website ato.gov.au

Section 9-40 provides GST is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:

a)    you make the supply for consideration

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

c)    the supply is connected with the indirect tax zone (Australia)

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.

In this case, the sale of the Four Lots to the buyers for their respective purchase prices will be supplies for consideration. The sales will be supplies connected with the indirect tax zone as the sale will occur in Australia and the Four Lots are located in Australia.

It needs to be determined whether the sale of the Four Lots will be a supply made in the course or furtherance of an enterprise that you carry on.

Section 9-20 provides an enterprise is an activity, or series of activities, done (among other things):

a)    in the form of a business; or

b)    in the form of an adventure or concern in the nature of trade; or

c)    on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999. However, paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise:

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Paragraph 180 of MT 2006/1 explains that small scale activities can still constitute an enterprise:

Small scale activities

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

On these facts, the relevant activities are the activities associated with preparing the Land for sale including the process of subdividing the Land into 11 lots and the subsequent sale of the subdivided lots. These activities will now be examined in light of the relevant types of enterprises listed under section 9-20, described above.

Are the relevant activities relating to the Land in the form of a business?

Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

As noted in paragraph 176 of MT 2006/1, the meaning of 'business' is considered in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with carrying on a primary production business, the principles discussed in TR 97/11 apply to any business.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, with reference to the principles in TR 97/11:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

·         a significant commercial activity;

·         a purpose and intention of the taxpayer to engage in commercial 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.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

We consider that the following facts in your case are indicators of you carrying on a business:

·         the subdivision of the Land into lots and the sale of your lots constitutes a significant commercial activity that is profitable - the project involves more than $xxx in expenses and sales exceeding $xxx and a tender for contractors to undertake site preparation activities that are sophisticated, extensive, and require technical expertise

·         you had a purpose and intention to engage in commercial activity given you abandoned the intention to use the Land as a home and for grazing and acquired an alternative property for these purposes. All of your activities in relation to the Land from that point on were to maximise the profit from selling your share of the Land. Furthermore, you repurposed Company K to act as an entity to pay contractor invoices, and to on-invoice you and P, in order to streamline the process paying contractors for their services in proportion to your and P's ownership interests of the 11 lots.

·         your activities in relation to the Land were systematic, organised and carried on in a businesslike manner pursuant to a staged plan of subdivision with records being kept - this was facilitated by you engaging Company A to assist in overseeing the project and preparing the Land for subdivision and development, which is consistent with how other businesses in the property development sector would conduct such a project.

While the above facts indicate the carrying on of a business, the facts overall suggest that the indicators set out in paragraph 178 of MT 2006/1 are not present to a sufficient degree to warrant the conclusion that you are carrying on a business. In particular, your activities are not regular or recurrent, which is a hallmark of business activities generally. While your activities represent a significant commercial activity that is profitable, we think they are not of such a size that would overcome the lack of recurring or regular activities and justify the finding of a business being carried on. Therefore, we consider you are not carrying on a business with respect to your activities in relation to the Land.

Are the relevant activities relating to the Land in the form of an adventure or concern in the nature of a trade?

'An adventure or concern in the nature of trade' is not defined in the GST Act.

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':

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be 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 provides additional guidance on the nature of activities that would constitute 'an adventure or concern in the nature of trade':

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

In your case, given that the relevant activities concern a single project, consideration needs to be given whether your activities constitute an adventure or concern in the nature of trade.

Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty). Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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 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 to the above, paragraphs 266 and 267 of MT 2006/1 provides that there may be other relevant factors outside this list that a present on the facts of a given case, and that no individual factor is determinative to the question of whether an enterprise is present:

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

In your case, we consider that the following facts regarding the activities associated with the subdivision of the Land and subsequent sale of the subdivided lots point towards an adventure or concern in the nature of trade:

• you abandoned the intention to use Land as your home approximately 1 year after you acquired it and you acquired the xxx property to use as your home instead, suggesting a change in purpose in your use of the Land
• you abandoned the intention to use the Land for grazing activities in xxx and hired Company A in xxx as consultants to assist you in ensuring the Land had future use, suggesting a change of purpose in your use of the Land towards a profit-making activity
• you made an application in xxx for a planning permit to subdivide the property for commercial use, confirming and crystallising your intention to use the land for a profit-making purpose
• you acquired P's 50% interest in lot 6, and so acquired additional land to what you originally held to be used for a profit-making purpose
• the Planning Permit permitted an industrial subdivision in stages with multiple lots and required detailed, complex and extensive road and drainage construction, sewer reticulation, water reticulation and electrical works to be undertaken on the Land prior to development commencing
• Company K was repurposed to act as an entity to pay contractor invoices, and to on-invoice you and P, in order to streamline and organise the process paying contractors for their services in proportion to your and P's ownership interests of the 11 lots.
• Company K was used to engage Company B to undertake these complex works required under the Planning Permit. The contract signed with Company B shows a detailed plan of site preparation activities that are sophisticated, extensive, and require technical expertise
• the cumulative total of the sale prices of the Four Lots (being xxx hectares of land in total) amounts to $xxx. This is far greater than the value of your share of the Land (being a portion of xxx hectares) when acquired in xxx for $xxx, your share of the fees charged by Company B (being a portion of $xxx), and your share of the fees that Company A would have charged you for their consulting services.

We consider that the following facts in preparing the Four Lots for sale point towards a mere realisation of a capital asset:

• you and P and C acquired the Land with the original intention to use it as your home and for grazing activities
• you persisted with the grazing activities on the Land for approximately xxx years and did not take steps to subdivide and prepare the land for commercial use during this time
• you have not conducted any construction on the subdivided lots on the Land that you currently hold and previously held
• your lots have never been included in the accounts of your partnership, nor have any expenses associated with your lots been included in the accounts of your partnership
• all expenses you paid for in relation to your activities on the Land were from your own personal accounts - you did not borrow money to fund your activities
• you have no history of property development and you have not subdivided and sold property prior to acquiring the Land and subdividing it.

On balance, we consider the facts pointing towards an adventure or concern in the nature of trade outweigh the facts pointing towards a mere realisation of a capital asset. The activities described above associated with subdividing the Land and preparing it for commercial use show a level of sophistication, organisation, and complexity above and beyond what would reasonably be expected in a mere realisation of a capital asset. While these activities may not meet the threshold of being a 'business' (as discussed earlier), they do have a commercial flavour and give the strong impression of a 'business deal' designed to maximise the profit on disposing of the asset, as discussed in paragraphs 234 and 244 of MT 2006/1. They are activities that one would not ordinarily engage in as part of merely disposing a capital asset for market value.

While you may not have prior experience or history in property development, you engaged experts as needed (in particular, Companies A and B) to bridge the gap in your expertise and knowledge and to help you facilitate the desired outcome of maximising the profit on the disposal of your lots. Furthermore, while you acquired the land for non-commercial reasons and persisted with grazing activities for some time, the facts show a clear change in intention and direction for the use of the Land towards a profit-making purpose. The fact that you had alternative premises to reside and graze on also supports the notion that the Land had no other purpose than a profit-making one once your intention for the use of the Land changed.

For the above reasons, we consider your activities in relation to the Land are activities done as an adventure or concern in the nature of trade, and as such fall within the scope of an 'enterprise' as defined under section 9-20. The sales of the Four Lots will constitute supplies made in the course or furtherance of that enterprise as per paragraph 9-5(b).

You advised that you are not registered for GST, so it remains to be determined whether you are required to be registered for GST as stipulated in paragraph 9-5(d) in order to determine whether the sale of the Four Lots are taxable supplies under section 9-5.

Section 23-5 provides that you are required to be registered for GST if:

a)    you are carrying on an enterprise; and

b)    your GST turnover meets the registration turnover threshold.

As discussed above, we consider you are carrying on an enterprise and therefore satisfy paragraph 23-5(a).

The current registration turnover threshold for entities other than non-profit bodies is $75,000. This is the threshold that applies to you.

Subsection 188-10(1) provides that you will meet the registration 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.

Section 188-15 defines the term 'current GST turnover' as the sum of the values of supplies made in a particular month and the previous 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

Section 188-20 defines the term 'projected GST turnover' as the sum of the values of supplies make in a particular month and are likely to make in the following 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

The above exclusions do not apply in this case and therefore your sales of the subdivided Lots will be included in your registration turnover threshold calculations.

Furthermore, section 188-25 provides that in working out your projected GST turnover you should disregard, amongst other things, any supply made or likely to be made by you by way of a transfer of ownership of a capital asset of yours.

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 turnover (GSTR 2001/7) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

Meaning of 'capital assets'

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. 'Capital assets' can also include intangible assets, such as your goodwill.

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.

We consider that your share in the Land changed in nature from a capital asset when you acquired it in xxx to a revenue asset when you commenced development activities on the Land in xxx by engaging Company A to assist you in submitting the planning permit application. The subdivision of your share in the Land results in revenue assets in the form of the subdivided lots of vacant land.

Therefore section 188-25 does not apply to your sale of the Four Lots and must be included in the calculation of your GST turnover. Given the sale prices you have advised us in relation to the Four Lots, your GST turnover meets the registration turnover threshold and so you are required to be registered for GST under section 23-5.

Conclusion

All of the positive limbs of a taxable supply as defined in section 9-5 are satisfied. Furthermore the sales of the Four Lots are neither GST-free nor input taxed.

Therefore, your sale of the Four Lots will be taxable supplies and GST is payable on the sales pursuant to section 9-40.