Edited version of private advice

Authorisation Number: 1051867501807

Date of advice: 14 July 2021

Ruling

Subject: Goods and services tax and property subdivision.

Question

Can the Commissioner confirm the Taxpayers are not carrying on an enterprise, so that they are not required to be registered for GST and that no GST is required to be remitted on the sale of the Property?

Answer

Yes, the Commissioner confirms that the sale of the Property is the mere realisation of a capital asset and does not form part of an enterprise being carried on by the Taxpayers.

Relevant facts and circumstances

You acquired the Property with a view to it being your main residence, particularly in your retirement.

Initially the Property was occupied by tenants, whilst you continued to reside at your former main residence.

You took up residence on the Property only after your former main residence was sold.

After living on the Property, you decided the Property no longer suited your requirements. It was too large to maintain.

You approached real estate agents with a view to selling the Property, each of whom recommended to best realise the value of the Property you should consider obtaining a development approval over the Property.

You were then approached by the acquisitions manager for a development company. They explained they had a long history of developing rural residential land. They had identified the Property as being in final stages of approval for a subdivision. They acknowledged you may have plans to develop the Property yourself but noted if this were not the case then they would be interested.

You were issued a development permit allowing for the Property to be reconfigured into lots.

You are interested in selling the entire Property to the developer, together with the benefit of the approvals obtained. You do not intend to retain one of the lots as your main residence. You have lived at the Property and have decided the Property no longer suits your needs.

You have entered into a contract to sell the Property to the developer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1997 section 9-5

A New Tax System (Goods and Services Tax) Act 1997 section 9-20

Reasons for decision

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.

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".

If a 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 has been held as your main residence.

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.

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

•                    The Property you are selling is currently your main residence and was originally purchased as an investment property which you have held for many years.

•                    You have previously used the Property as an asset to derive income from the leasing of the land.

•                    Your original intention was that the Property would become your main residence, including for your retirement. 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 that the Property no longer suited your requirements. It was too large to maintain.

•                    There was no business plan, it is relatively small scale, and 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.

The Commissioner is satisfied that the sale of the Property is not taxable as it is apparent that you are not in a business of buying and selling property as trading stock. Therefore, the sale of the Property is the mere realisation of a capital asset.