Edited version of private advice

Authorisation Number: 1051935929084

Date of advice: 21 December 2021

Ruling

Subject: GST and the sale of subdivided lots

Question

Will you be liable to pay GST pursuant to section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 when you subdivide the land at the address and sell the proposed Lots, in accordance with the Development Consent?

Answer

No.

Relevant facts and circumstances

You are employed as an executive general manager at a firm. You are not registered for GST. You have no prior experience in land subdivision and development.

Purchase and description of the Land

On DD MMM YYYY you entered into a contract of sale to purchase land at the address (the Land). The purchase price stated in the contract of sale was $X. You financed the purchase with your own savings and a bank loan. The key details of the loan are as follows:

• loan approved on DD MMM YYYY
• total loan amount of $X
• loan term of X years
• interest only repayments for X years.

You selected a loan with an interest only component to enable you to fund renovations and improvements to the Land. You are in the process of refinancing this loan to a principal and interest loan.

Settlement of your purchase of the Land took place on DD MMM YYYY.

Your use of the Land and intentions for future use

You promptly moved into the dwelling situated on the Land after settlement took place and have used the Land as your primary place of residence since settlement. You have never rented out the premises. Your only intention for the use of the Land when you purchased it was to use it as a residence. You did not have any other intentions for the use of the Land.

At the time of purchase, the zoning of the Land did not permit you to subdivide the Land. You were not aware of any proposals to change the zoning to allow subdivisions at the time you purchased the Land.

In YYYY the Land was rezoned and subdivision was permitted subject to Council approval. The Land currently remains subject to this zoning.

After the rezoning, your intention for the use of the Land changed and you intended to subdivide the property into three lots. You intend to keep one of the three lots as your primary place of residence, while selling the other two to partially release the capital value of the Land and use the proceeds from their sale to discharge the mortgage described above, and use any remaining proceeds to fund your retirement.

In <year> after the zoning changed, you engaged a surveyor to provide cadastral surveying services and to assist you in preparing an application for development consent to subdivide the Land into three lots. You are paying for the surveyor's fees from your wages that you earn as a general manager.

You submitted an application for development consent on DD MMM YYYY and you received an approved development consent from the Council on DD MMM YYYY (Development Consent). The Development Consent permits you to subdivide and develop the Land into X lots, as set out on the draft plan of subdivision attached to the Development Consent.

Lot X is intended to be the lot which contains the dwelling you currently reside in and is the lot you intend to retain as your primary place of residence after the subdivision is complete. You intend to engage a selling agent to sell the other Lots as vacant land at a later stage after you have satisfied the subdivision conditions imposed by the Development Consent.

The Development Consent imposes a number of conditions on the proposed subdivision of the Land. These conditions centre around undertaking works and creating easements for the connection of utilities to the three lots (water, sewerage, electricity, gas and telecommunications), and ensuring certain environmental and bushfire safety controls are in place. You are intending to only do as much as necessary to satisfy the Development Consent conditions and will not do any further works or build on the Land.

You are engaging contractors and consultants as required to undertake the necessary works and activities to satisfy the Development Consent conditions on your behalf. Your engagement of these contractors and consultants is being done in a piecemeal fashion as and when your wage payments permit. You are not borrowing money to finance any of your activities in relation to the subdivision and the fulfilling of the Development Consent conditions.

So far you have engaged a contractor to undertake the necessary electricity connections for the three lots. As noted above, you are paying for these works from your wages.

You have never engaged, nor do you intend to engage, any project managers as part of the subdivision of the Land. You have not brought the Land into account as a business asset. You have not claimed any loan interest charges with respect to the Land as a business expense, and will not do so in the future. You have not claimed input tax credits on expenses in relation to the subdivision and the works being carried out to satisfy the Development Consent conditions.

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 195-1

Reasons for decision

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 your case, when you sell the Lots for their respective sale prices, the sales will be supplies for consideration. They will also be sales that take place in Australia, and so will be connected with the indirect tax zone. In addition the supplies will not be input taxed or GST free. However you are not registered for GST.

Therefore it needs to be determined whether the sale of the Lots will be supplies made in the course or furtherance of an enterprise separate to the consulting enterprise that you carry on and therefore whether you are required to be registered for GST.

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

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.

On these facts, the relevant activities are the activities associated with your purchase of the Land, subdividing the Land into the Lots, and preparation for the sale of the Lots. These activities will now be examined in light of the relevant types of enterprises listed under section 9-20, described above. We consider the other types of enterprises listed under section 9-20 are not applicable on these facts.

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.

Given the facts provided, we 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.

Furthermore your activities do not appear to be carried out in a systematic, organised, and businesslike manner, nor do you appear to have the intention to engage in commercial activity. This based on the fact that you are doing the minimum required to satisfy the conditions of the Development Consent in a piecemeal fashion as and when your financial circumstances permit. You intend to sell the Lots as vacant land to partially release the capital value of your land to discharge your mortgage and fund your retirement, while continuing to live on Lot X. This demonstrates you do not have the intention to maximise the potential profit you could generate from the sale of the Land.

For the above reasons, we do not consider that your actions of acquiring the Land and subdividing it for partial sale as vacant land constitute activities in the form of a business.

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, the majority of the salient factors listed in paragraph 264 of MT 2006/1 are not present. While you did take out a secured interest only loan to acquire the Land, this is a common activity done in the course of acquiring a high value asset and, by itself, does not suggest the undertaking of an adventure or concern in the nature of trade. You have not claimed interest on the loan as a business expense. Furthermore, you selected a loan with an interest only component to enable you to fund renovations and improvements to the Land. These facts are also not conducive to the undertaking of an adventure or concern in the nature of a trade.

As noted above, your activities in relation to the subdivision of the Land have not been done in a businesslike manner. You have also not retained any project managers to coordinate and manage the development of the Land. While there is a coherent plan of subdivision as evidenced by the Development Consent, you have only taken, and will continue to only take, steps that go no further than meeting the conditions of the Development Consent. You will also not erect any buildings on the Lots which are to be sold, while you will retain Lot X (which contains your home) as your principal place of residence.

Your circumstances bear some similarities to Example 33 of MT 2006/1:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

In your case, while you have only held the Land since <year>, you have used it as your primary place of residence since you acquired it. As in Example 33, your subdivision of the Land into X lots, and your intention to sell the Lots as vacant land, is a way to dispose some of the land which your home is situated, whilst still retaining some of the Land as your primary residence. This is a mere realisation of a capital asset.

For the above reasons, we consider your relevant activities in relation to the Land do not amount to an enterprise in the form of an adventure or concern in the nature of a trade.

Given your relevant activities in relation to the Land are neither in the form of a business, nor in the course or furtherance of an adventure or concern in the nature of a trade, you are not carrying on an enterprise under section 9-20 in relation to the subdivision of the Land and sale of the Lots as vacant land.

Therefore you will not be required to register for GST in relation to the sale of the Lots. Therefore the sales will not be a taxable supply under section 9-5, and GST will not be payable under section 9-40.