Edited version of private advice

Authorisation Number: 1051932509700

Date of advice: 10 December 2021

Ruling

Subject:GST - enterprise

Question

Is the supply of property located in the indirect tax zone (the Property) a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

The Trust

You formed on DD/MM/YYYY.

You consist of X unit-holders each holding X units and all are self-managed superannuation funds.

You have provided the Deed in which the relevant clauses form part of this ruling.

You acted on professional advice and applied and received an ABN and active from DD/MM/YYYY.

You have a bank account.

You acted on professional advice and registered for GST from the DD/MM/YYYY.

You have lodged income tax returns.

You describe your main business activity in those returns as Land Development and Subdivision.

You entered into a transaction to the Property on DD/MM/YYYY and settled on DD/MM/YYYY.

The Property is a X hectare parcel of land.

You have not undertaken any previous activity other than the purchase of the Property.

None of the unit holders are in the business of land development / land subdivision and the sole purpose of entering into the purchase transaction was investment purposes.

Research undertaken up to and including the purchase of the Property

You were seeking appropriate investments as part of a long-term strategy to deploy the savings of the unit holders.

You researched various properties in the area as they were coming up onto the market.

You spoke with various real estate agents and were looking at properties that had a good chance of sale in the future with a decent return, before buying the Property.

The Property was not approved for residential development at the time you entered into contract but was Precinct Structure Plan (PSP) approved. A PSP is a master plan for localised development and investment that will occur over many years.

This approved PSP does foreshadow future residential and commercial development and a factor in your decision to purchase this Property.

You were advised by real estate agents that the road in the suburb was a potential future prime and main road, with a potential train station and shopping centre to be built.

Other properties researched were also PSP approved however some of these properties had water easement issues and some had issues in terms of having a low percentage of area that could be developed.

In terms of an exit strategy, you would consider selling the Property once any of the related parties to the unit holders approached retirement. This would assist the unit holders get a return on their investment.

Decision to acquire Property, funding and recording of the Land in your accounts

There are no formal minutes and no formal structure to recording any such meetings.

Unit holders held informal meetings over dinners and social gatherings, discussing ideas.

You decided to acquire the Property as it aligned with your long-term strategy to achieve a good return for unit holders.

The acquisition of the Property was funded each unit holder as a result of capital raising.

You maintain financial statements that include profit and loss statements and balance sheet.

You have recorded the Land as a fixed asset in the balance sheet.

You recorded amounts as a liability in your balance sheet that reflected the balance owing for the purchase of the land due to the X year settlement period. This liability balance reduced to nil upon full payment made to the vendor.

You have recorded expenses in your profit and loss statement and recorded expenses in the respective income tax returns. These expenses principally relate to rates, land tax, hire, administration, repairs, mowing and accounting fees.

In the year ending 20YY you incurred an expense for demolition costs totalling $X. This related to the removal of an old derelict uninhabitable structure. Council requested you to remove the structure as it might become a public hazard due to the wild weather and also squatter risk.

You have not claimed input tax credits on these acquisitions.

The Purchase Contract

The Purchaser listed on the contract is Company Pty Ltd and/or nominee as the Unit Trust.

Company Pty Ltd is the corporate trustee for the purchase and thus is listed on the title.

The contract is dated DD/MM/YYYY with a X year settlement period being DD/MM/YYYY. The amount paid for the property is $X. The reason for the extended settlement period was to enable the unit holders time to organise the cash funds.

Special Conditions 4.2 states, 'the Purchaser and the Purchaser's authorised representatives are granted the right to enter the property and thereon to take measurements and conduct tests for any purpose related to the Purchaser's Due Diligence or its proposed Development of the Property. These rights are exercisable at any time and from time to time after the Day of Sale'.

Special condition 4.3 states, 'When requested by the Purchasers so to do The Vendor must sign and executed or consent to any Applications required by the Purchasers for permits for the proposed Development of the Property by the Purchaser.

These conditions were included because unit holders were entering into this purchase as their one-time investment. The SMSF's are not sophisticated investors and included conditions that would allow them to conduct due diligence and also conduct measurements of such a large purchase.

No GST was applicable to the sale.

Activities undertaken on the land during period of ownership

There has been no development of any buildings / structures / fixtures or fittings undertaken by you since the purchase.

You have not undertaken any improvements on the land.

You have not undertaken any works for subdivision.

You demolished an old derelict uninhabitable shed type structure

Except for the removal of the shed, the Property is being sold in its original condition.

Heads of Agreement for the sale of the property

Your circumstances and market conditions are now suitable for selling the Property. Currently X of the unitholders are expected to retire. This fits in alignment with the terms of the sale which would help them retire once the sale contract is settled.

You have entered into a Heads of Agreement dated DD/MM/YYYY with Purchaser for the sale of the Property for $X with a X month settlement from the date of contract of sale.

The X year settlement period is to allow the Purchaser to arrange finance and or conduct due diligence.

There were no unforeseen circumstances in existence that required you to sell before it intended, as per its investment strategy.

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 184

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

In this ruling,

•                    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 website ato.gov.au

Detailed reasoning

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act provides 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; and

d)            you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

You are registered for GST, have made the sale of the Property for consideration, and the sale was connected with Australia. In this instance paragraphs (a), (c) and (d) in section 9-5 of the GST Act are satisfied.

Based on the facts the supply of the Property will not be input taxed or GST Free.

Entity

Trusts are given statutory status as entities in themselves under subsection 184-1(1) of the GST Act.

The Act does not create two separate entities (the trust and trustee) but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. This is recognised in subsection 184-1(2) which provides that the trustee in that capacity is taken to be the trust entity.

The trust is a separate entity to the related parties of that trust.

With respect to the transaction involving the Property, you (the Trust) are the relevant entity.

We will now consider paragraph 9-5(b) of the GST Act which requires the sale of the Property to be made in the course or furtherance of an enterprise that you carry on.

If this paragraph is satisfied, then the supply of the Property is a taxable sale.

Enterprise

Subsection 9-20(1) of the GST Act provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•                    in the form of a business (paragraph 9-20(1)(a))

•                    in the form of an adventure or concern in the nature of trade, including isolated or 'one-off' transactions (paragraph 9-20(1)(b).

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) provides the meaning of enterprise for the purposes of entitlement to an ABN. 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 in MT 2006/1 equally applies to the term enterprise as used in the GST Act and can be relied on for GST purposes.

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.

In the form of a business

Paragraph s 170 to 179 of MT 2006/1 discusses the circumstances where an enterprise is done in the form or a business for the purposes of paragraph 9-20(1)(a).

Paragraph 178 of MT 2006/1 provides some indicators for consideration when making this determination.

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;

•                    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.

Based on the facts provided, whilst there are some indicators suggesting a business is being carried on, we do not consider that your activities in relation to this one off transaction of buying, holding and selling of the Property constitute activities done in the form of a business under paragraph 9-20(1)(a) of the GST Act.

The following paragraphs in MT 2006/1, 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) and Taxation Ruling TR 92/3 Income Tax: Whether profits on isolated transactions are income (TR 92/3) are extracted for your information.

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

The facts show this Property transaction is a one-off transaction. The issue to determine is whether the activities that relate to this property dealing is in the nature of trade and therefore an enterprise for GST purposes.

Paragraph 234 of MT 2006/1 discusses that a one-off transaction may be 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.

Paragraphs 244 to 261 of MT 2006/1 explain 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. They refer to 'the badges of trade' and outlines a number of factors that may be considered 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.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Isolated transactions and sales of real property

Paragraph 263 in MT 2006/1 provides that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. TR 92/3 provides guidance in determining whether profits from isolated transactions are ordinary income.

Paragraph 265 of MT 2006/1 provides factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade. These factors are drawn from case law involving farmland that had been subdivided and although whilst not specifically on point with your circumstances may provide some assistance. They include:

•                    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

•                    buildings have been erected on the land.

Paragraph 266 in MT 2006/1 provides that it is necessary to examine the facts and circumstances of each particular case.

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.

Paragraph 35, 46 and 47 in GSTR 2001/7 discusses circumstances where an enterprise may consist of an isolated transaction or a dealing with a single asset and the characterisation of that single asset.

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 of this Ruling.

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Land bought with the intention of resale

Paragraph 270 in MT 2006/1 discusses isolated transactions involving land is considered an enterprise when purchased with an intention of resale at a profit.

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

Paragraphs 6 to 9 in TR 92/3 provides guidance in this area:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

•                     (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

•                     (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Meaning of 'capital assets'

Paragraph 31 to 36 of GSTR 2001/7 provides discussion on what are 'capital assets' as it is not a defined term in the GST Act.

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 of this Ruling.

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.

Paragraphs 258 to 260 of MT 2006/1 provide further guidance on the distinction between trading/revenue assets and investment/capital assets.

258. United Kingdom cases categorise assets as either trading assets or 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.

259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade.

260. Assets can change their character but cannot have a dual character at the same time.

Based on the facts presented we conclude you have undertaken this activity in a business-like manner, including;

•                    the related parties of the X unit holders came together for the common purpose of acquiring and selling the land

•                    a business entity structure was then established, in the form of a Trust, for the purpose of carrying out this common purpose

•                    the Deed enables you to purchase, acquire, sell, transfer hire, lease, dispose of, mange, divide, encumber or otherwise deal with any real or personal property

•                    you may not strictly 'borrow' funds for the purchase of the property however you have raised capital funds, which was sourced from the X unit holders. In return the unit holders have rights to a distribution on the basis of the number of units

•                    you applied for and received an ABN, effective DD/MM/YYYY

•                    you opened a bank account

•                    you lodged income tax returns and describe your main business activity as Land Development and Subdivision

•                    you recorded the land as an asset in your accounts

•                    you claimed expenses in your income tax years resulting in carried forward losses.

The above steps taken are typical of the way an entity would conduct themselves when buying this property for investment or other purposes. The establishment of the Trust, including the powers provided in the Deed, opening a bank account, lodging income tax returns, undertaken thorough research and keeping accounts indicate you have undertaken this transaction in a manner that is planned and similar to a business deal.

Based on the facts presented we conclude that during your period of ownership you acquired the property with a profit-making intention, including;

•                    at the time of selecting the best property to purchase, you researched and considered other properties. Determining factors included the extent to which a certain land area of a particular property could be developed, or may have restrictions such as easements, that may limit development potential

•                    as per the special conditions included in the contract and long settlement, you undertook the necessary due diligence to assess the Property's development potential. The Property you ended up purchasing was part of an approved Precinct Structure Plan (PSP). Whilst the other two properties were also part of a PSP, this property was located on a road likely to form part of a major road, and include a future railway station, thereby accentuating the potential resale value

•                    you entered into a contract for the purchase of the property with a X year settlement period for the amount of $X

•                    during the period of ownership you have not undertaken any development activities but have maintained the property

•                    whilst you do not keep formal minutes of decisions made, you decided the market is right to sell and that it coincides with meeting some of the related parties of unit holder's retirement plans

•                    you have entered into a 'Heads of Agreement' with a potential purchaser for the property with a proposed selling price of $X with a X year settlement period.

At the time of acquiring 'the Property', your research demonstrates a profit making intention due to (a) the property had a good chance of sale in the future with a decent return, (b) you chose a property that had the greatest potential at the time of a future sale, including potential for the road to be a major road, including commercial development and a train station, and (c) you have lodged income returns claiming expenses against the property,

Based on the draft 'Heads of Agreement' with a potential purchaser for the sale of the property for $X you would realise a profit (after costs) of approximately $X.

While you did not develop this land yourself during the period of ownership, the facts demonstrate you acquired the land with a view to selling it in due course for a profit. You had no other objectives in mind.

Based on the facts presented and in accordance with MT 2006/1, we consider you have undertaken the transaction in a commercial or business-like manner with the intention to make a profit at the time of your acquisition.

You are conducting a property investment enterprise in a business-like way evidenced by the way you have gone about the task of acquiring and holding the property to achieve your ultimate goal to realise the profit, achieved through the proposed sale process.

As provided at paragraph 270 in MT 2006/1, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade.

We consider your activities are an enterprise in the form of an adventure or concern in the nature of trade, being revenue in nature. Therefore you satisfy the requirements of paragraph 9-20(1)(b) of the definition of enterprise and paragraph 9-5(b).

It is your contention that the property is an investment asset or a capital asset and but for the error of voluntarily registering for GST (based on earlier professional advice), the supply of the property would not be taxable as transfers of capital assets are not included when determining the GST turnover threshold.

Based on the facts presented, there is no evidence to indicate during the period of ownership, the property has been used for a purpose to generate income, or the land has been developed such that it is being used as the profit yielding structure to earn income. The land is not considered a capital asset as part of your enterprise.

Based on our earlier analysis, the property has the character of a revenue asset and this has not changed during the period of ownership.

Therefore you are required to be registered under section 23-5 because you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

You satisfy all the elements of section 9-5 of the GST Act therefore the supply of the Property is a taxable supply. GST is payable under section 9-40.