Edited version of private advice

Authorisation Number: 1051931812826

Date of advice: 9 December 2021

Ruling

Subject: GST and property development enterprise

Question

Will your supply of the Premises) 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

On ddmmyyyy you, purchased a property with a house located on it in Australia to live in. You continued to live there until the property's subdivision as described below.

On ddmmyyyy you decided to develop the Property.

The development involved splitting the land down the middle (front to back) into 2 allotments with the same street frontage and building a new house on the new Lot (the Premises). Your initial intention behind developing and building the Premises was to adopt this as your principal place of residence, while retaining the original place of residence for rental.

As the existing principal residence was built across both allotments, the development was drawn up in such a way, that only part of the existing residence had to be demolished to make way for the new development. The idea was that new premises would be constructed on the new allotment, while on the other side the existing principal residence would be improved/altered, but in essence, the majority of the existing principal residence remained intact.

An application for development approval was submitted with the Council in mmyyyy and development approval was granted in yyyy. On receipt of the initial approval you decided not to progress the development. Between yyyy and yyyy a number of extensions were granted by the Council, as throughout this period you were not in any particular hurry, or in a financial position to start the development.

At the start of yyyy you were advised by the Council that no further extensions would be granted. It was unlikely that you would be granted a development approval on the same terms if you allowed the approval to lapse and apply again in the future.

On receipt of this advice from the Council, you decided to proceed with the development.

The partial demolition of the existing residence commenced early to mid-yyyy. Construction of the new Premises commenced mid to late yyyy. The construction was managed and completed by the you personally through your private company of which you are a director. Your company provides Project management, and site management services in both Commercial & Domestic construction. You hold a Supervisor- Building Works license and have worked in the property and construction industry.

All costs for the construction were subsequently charged to you. The total cost of construction was $XX. Your intention for the use of the Premises changed around this time. Rather than live in the new Premises being built as originally intended, you decided that you would sell it. The reasons for your change in intention include the following:

• one of your long standing business clients went into bankruptcy in yyyy, resulting in a sudden loss of a key source of income for you. You had relied on this source of income for over 18 years. You were not able to find consistent replacement work since this time and your company's profit has fallen in recent years
• in mmyyyy you separated from your partner. At the time you were unsure of the financial consequences of the breakup and wanted to prepare yourself financially.
• In addition, you were also concerned with COVID and world affairs that started appearing in the news from late mmyyyy.

Construction of the new Premises was completed in mmyyyy.

The Premises was listed for sale in mmyyyyy. The sale price was $XX.

You registered for GST in mmyyyy with an effective date ddmmyyyy as you had received initial advice that the development and sale would be considered an enterprise for GST purposes and eligible for the Margin Scheme.

You subsequently submitted all Activity Statements, in which all relevant GST Credits were claimed. GST was reported and paid on the sale of the Premises as per the Margin Scheme.

You advised that had you have been in a stronger financial position, you would have taken the Premises off the market when COVID-19 first occurred. Selling the Premises at this time led to you having to reduce the sale price by approximately $XX, compared to when the property was first listed on the market for $X million, due to a huge decline in market confidence. You reported the sale in your BAS.

The Premises was sold in mmyyyy, with GST being withheld and reported under the Margin Scheme.

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 9-40

A New Tax System (Goods and services Tax) Act 1999 section 40-65

Reasons for decision

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; 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 the indirect tax zone (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.

In your case you received consideration of $XX.00 for the sale of the Premises which was located in Australia. In addition, you are registered for GST and in your situation the sale will not be GST-free or input taxed.

It remains to be determined whether your sale of the Premises is in the course or furtherance of an enterprise you carry on.

Enterprise

Section 9-20 relevantly defines enterprise to include an activity, or series of activities, done:

•            In the form of a business

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

•            On a regular or continuous basis, in the form of a lease, license or other grant of an interest in property

The ATO view on the meaning of the term 'enterprise' is explained 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). 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) provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

It is necessary to consider whether your activities are in the form of a business or an adventure or concern in the nature of trade, carried out in a business-like and commercial manner.

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.

Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, lists 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.

In relation to the existence of a business, you have submitted that you did not have an intention for the development of the Premises to be conducted and completed in a commercial manner. You have also submitted that you did not attempt to maximise the profit on the enterprise. For the reasons discussed later in this reasoning, we disagree with both of these submissions. However we nonetheless consider that the activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. It is clear from the facts provided that your development of the Premises was a 'once off' without an intention to conduct additional residential property development in the future. We do not consider that your actions of obtaining a planning permit and developing the Premises constitute activities in the form of a business.

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

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

Paragraph 234 of MT 2006/1 provides that 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.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•            the subject matter of the realisation;

•            length of period of ownership;

•            frequency or number of similar transactions;

•            supplementary work on or in connection with the property realised;

•            circumstances that were responsible for the realisation;

•            motive

Paragraph 244 of MT 2006/1 clarifies 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 with such transactions being of a revenue nature. However, the sales of the family home or 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.

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 are useful to take into account in the case of isolated property transactions.

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:¹⁰⁷

•         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 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.

As discussed above, you were living on your property as your primary place of residence. That is, it was your private asset. Your intention for the use of the property changed in mmyyyy where your intention became a dual one of private use and property development.

Although you started this process in yyyy you did not move forward with it except to the extent of getting approval for the development of half your block into the Premises. It is considered that your intention regarding applying for development approval in yyyy was to maximise the profitability of your land, whether by leasing or selling one of the premises, rather than merely realise part of the land's capital value. This is supported by the fact that you elected to not let the development approval lapse and accelerated your development plans to take advantage of the favourable conditions of the development approval. You considered it would be unlikely that you would receive such favourable conditions if you let the development approval lapse and apply again. Furthermore, you applied for development approval at a time when you were not in financial distress, and you later proceeded to follow through on your original intentions despite the financial distress you later suffered.

You then went about developing this private asset and used your professional building company, to construct new residential premises and the Company charged you fees for that service. You were the controlling mind behind that company and used your experience in commercial and residential property development to build the Premises. Although development and construction took several years to commence after development approval, once it did commence it was conducted in a commercial and organised manner through your company.

Your initial intention in developing the Property was to build a new house for you to live in. However you changed your mind and decided to sell the newly built Premises as it would generate more profit than selling your existing principle place of residence. We consider that you spent the amount of $XX in order to make a profit on the sale of the Premises instead of taking some other course of action - such as selling your own principal place of residence and moving into the Premises. The facts also show that you believed selling the Premises would maximise your potential profit and put you in a better financial position than selling your existing residence, even after the tax implications were considered. The facts confirm that you sold the Premises for a profit.

Although you submit that you are not carrying on an enterprise, you nonetheless registered for GST in mmyyyy upon receiving advice. You proceeded to claim concessions only available to enterprises under the GST system - namely, claiming input tax credits for expenses incurred and electing to use the Margin Scheme to reduce your GST liability when selling the Premises. Both of these concessions serve to maximise the profits of your activities.

For these reasons, we consider your activities from yyyy onwards of constructing new residential premises and subsequent sale of the Premises as being done in the form of an adventure or concern in the nature of trade. 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.

A balanced view of these observations cumulatively, with no one feature being determinative in isolation, reasonably leads to a conclusion your intention for developing and selling the property was for the purpose of an adventure or concern in the nature of trade.

We therefore consider the activities from yyyy onwards amount to a property development enterprise and that the sale was in the course of that enterprise.

Required to be registered for GST

As the development and the sale of the Premises is considered to be an enterprise then the Premises was a revenue asset in that enterprise and was required to be including in your GST turnover for GST purposes.

You contended that you only registered for GST because you were advised to and considered that you might not have needed to.

We advise that as the enterprise commenced at the earliest date of mmyyyy you could have registered for GST at that date. However, you would have been required to be registered 12 months prior to your expected turnover exceeding $75,000. We consider that some time prior to mmyyyy (when you listed the Premises for sale) you would have been required to be registered for GST and that the choice of your GST registration date is a reasonable time for you to register for GST as you were entitled to register for GST at that date and required to be registered sometime before the listing of the property for sale.

Conclusion

On the basis of the above, the supply of the Premises was a taxable supply as you met all the requirements of section 9-5 and the supply was not GST free or input taxed. GST is payable on the sale under section 9-40.