Edited version of private advice

Authorisation Number: 1051946061968

Date of advice: 11 February 2022

Ruling

Subject: GST and the sale of real property

Question

Will your supply of subdivided land (the property) be a taxable supply?

Answer

No. The supply of the property will not be a taxable supply.

This ruling applies for the following periods:

From the financial year commencing 1 July 20XX until the tax period ending 30 June 20XX.

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You together with two other individuals, (A&B) purchased an investment residence as one quarter share tenant in common owners.

As you are friends with A&B, there is no formal agreement between you but you share the income and expenses equally with them.

You and A&B have no property development experience.

In the last few years you began the process of subdivision of the property which is nearly complete as you expect titles to issue imminently.

The land at all relevant times has been zoned rural residential.

The land is situated in Australia.

The subdivision has been approved and titles are pending. The subdivision will divide the property into two lots.

The land area for one lot is over XXXm2 and is vacant land. The other lot larger and contains an older residence.

Both lots are under contract for sale and settlement is set for 30 days from the date that titles issue in relation to the two newly subdivided lots.

It has only been held as a rental property for investment since you acquired it about XX years ago. Since then you have paid all holding costs and made only minor improvements to the property.

Since acquisition, you have reported the income and expenses which have been calculated after the end of each tax year in order to complete tax returns. There are no financial accounts as such as the owners have not been operating a business.

You have obtained the services of a development consultant, whom was engaged to submit an initial development application. After you received the initial decision notice you have done everything else yourselves. You advised that you have been fortunate that some costs were reduced as you did not have the means to cover them. This includes appealing and negotiating local council decisions and negotiating outcomes with other suppliers.

Expenses incurred to date are as follows:

•         Slope Stability Report $x

•         Bushfire Management Plan $x

•         Surveyors' Fees $x

•         ERGON (electricity) Application Fee $x;

•         Planning Consultant $x;

•         Council Fees $x;

•         Waste Water Report $x;

•         Council Infrastructure Charge $x;

•         Legal Fees (Lodgment of easement and new survey plan $x;

•         Driveway $x;

•         There was initially an estimate of $x for the electricity connection charge however, that will be waived.

Total confirmed and estimated costs are less than $XXX.

All costs are required by council in order for approval to be given for the subdivision. There is no additional infrastructure other than the above required by the Council.

You collectively borrowed $XXX. Initially each couple put in $XX. At all times the borrowings have been via an investment loan.

You did not have a business plan.

You do not have any plans to conduct any further developments.

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 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

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

Reasons for decision

All references to legislation are to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise specified.

In order for the sale of the property to be taxable supplies, they must meet the definition of a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999.

Section 9-5 provides that you make a taxable supply if:

• you make the supply for consideration
• the supply is made in the course or furtherance of an enterprise that you carry on
• the supply is connected with the indirect tax zone, and
• 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.

The subdivision of what was the original lot into two lots created a lot which has an old residence on it and the other smaller lot which is vacant. The larger lot being the sale of an older residence will be an input taxed supply under section 40-65. As it is an input taxed supply it is excluded from analysis under section 9-5 and the focus is on lot 2 which is vacant land.

'You' in this case means the entity making the supplies. You, with A&B, are one quarter tenants in common interest holders over both lots and will be making the relevant supply of interests in the property to the ultimate purchasers.

To be a taxable supply, all of the requirements of section 9-5 must be satisfied.

In respect of your sale of the subdivided lots there is clearly a supply, being a supply of real property. Consideration is also present as the subdivided lots will be sold for an amount of money and the supply is connected with the indirect tax zone because the subdivided lots are located in Australia. In addition, there are no provisions or facts that would make the sale of the vacant subdivided lot either GST-free or input taxed.

The issues to be considered in this case are:

•         whether the sale of the vacant lot is being made in the course or furtherance of an enterprise that you carry on, and

•         as you are not currently registered for GST, whether you are required to be registered for GST.

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) to include, among other things, an activity or series of activities, done:

•         in the form of a business, or

•         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, licence or other grant of an interest in property.

As you have been renting the property to tenants well over 10 years, it is clear that you were engaged in a leasing enterprise. That enterprise is now terminating as the principal asset is being subdivided and sold. Assessment must be made to determine if the act of subdividing the property amounts to some other enterprise of dealing with the property either as a series of activities in the form of a business or in the form of an adventure in the nature of trade.

The Commissioner 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) provides guidance on the meaning of the term 'enterprise' for GST purposes.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. That is, an enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria for being regarded as a business or an adventure or concern in the nature of trade, do have the appearance or characteristics of these activities.

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•         a significant commercial activity;

•         the purpose and intention of the taxpayer in engaging in the activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         repetition and regularity of activity; and

•         the activity is organised and carried on in a businesslike manner.

Whether a business is being carried on is generally the result of a process of weighing all the relevant factors.

Considering your arrangement, you purchased the property with the intention of renting it to tenants long term, rather than a short term profit motive. The arrangement is small scale, where possible you have tried to pursue the steps of the subdivision yourselves. You have indicated that you did not have a specific business plan and had no idea about the costs of subdivision until you approached a consultant. They prepared your initial application to the Council and after that you chose to keep your costs down by trying to do it yourselves. This is not necessarily evidence of intention to make a profit. You do not intend to conduct this kind of activity in the future as it was more complicated and carries more risk than you realised. There is low repetition but the activity will be profitable.

On balance we consider the activities were not conducted in the form of a business as they do not amount to significant commercial activity and the informality does not carry a commercial flavour.

We also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression.

An adventure or concern in the nature of trade refers to transactions that have a commercial nature which are entered into for a profit making purpose.

Paragraph 237 of MT 2006/1 states:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, See McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 6 in Taxation Ruling 92/3 (TR 92/3) provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph in 13 TR 92/3 provides that

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a)  the nature of the entity undertaking the operation or transaction

(b)  the nature and scale of other activities undertaken by the taxpayer

(c)   the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d)  the nature, scale and complexity of the operation or transaction

(e)  the manner in which the operation or transaction was entered into or carried out

(f)    the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g)  if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h)  the timing of the transaction or the various steps in the transaction.

Considering these factors, you are a group of friends operating together under an unwritten arrangement. You have been, up until the recent past, an association of individuals not necessarily seeking profit so much as an income stream from the land that you held together. As such, you were operating on a small scale and with minimal funding. The arrangement is not complex and the nature of the property is of a capital asset as it has been used since 2009 in a residential renting enterprise. Again the relationship between the parties is not as business partners but primarily as friends with no formal agreement between them.

Miscellaneous Tax ruling MT 2006/1 also discusses isolated transactions and sales of real property and at paragraph 265, it presents a list of factors which, if present, may be an indication that a business or an adventure or concern in the nature of trade is being carried on. Those factors are:

• 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.

Again these factors must be considered as a whole to assess the one-off nature of the activities to determine whether they may be business-like. Arguably you have not changed your use of the property as you held the property as a rental and you are now terminating that enterprise. There are no other land parcels being adjoined to yours, you do not operate as a property developer as you have never done this before and have no future plans.

You borrowed to acquire it but you have not claimed interest as an expense in this series of activities, you have only done what you needed to do to get council approval. Additionally, you have not built on the subdivided land as one lot contains the existing residence and the other is vacant land.

After weighing up all of the information, it is considered that you are not carrying on an enterprise of subdividing the land and the facts viewed as a whole indicate a terminating leasing enterprise based on your history of the land holding to date.

Required to be registered for GST

You are not currently registered for GST. As the sale of the property does not amount to and is not sold in the course of a property development enterprise, it is unnecessary to determine if you are required to be registered for GST.

However, even if the sales are made in the course of the leasing enterprise, they would be excluded from the calculation of your turnover. This is because section 188-25 specifically excludes from the calculation of projected annual turnover:

•         the supply of a capital asset by way of transfer of its ownership, and

•         any supply made as a consequence of ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise.

In this case the property was a capital asset from which you derived leasing income. Therefore paragraph 188-25(a) acts to exclude the sale price of the subdivided lots of land from the calculation of your projected GST turnover.