Edited version of private advice

Authorisation Number: 1051946302624

Date of advice: 3 February 2022

Ruling

Subject: GST and property development

Question

Is the supply of the two properties taxable supplies under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the supplies of the two properties are taxable supplies under section 9-5 of the GST Act.

This ruling applies for the following period:

1 July 20XX to 30 September 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, you in joint proprietorship with your spouse entered into a Contract of Sale for the purchase of land known as Property X. The street address of the property according to the Title Search document is X.

You purchased Property X from two individuals for the purchase price of $X.

On XX XX 20XX, the Bank provided you with a facility for a credit limit of $X.

You advise that you began construction of what was intended to be your family home and primary place of residence on Property X in 20XX. However, a Building Permit for the construction of a dwelling and a carport on Property X was only issued on XX XX 20XX. The Building Permit listed you and your wife as the owner, agent and builder of the dwelling and carport. The Building Permit states that the construction work must be commenced by XX XX 20XX and must be completed by XX XX 20XX.

You and your spouse took a loan to fund the purchase of Property X and the construction of the dwelling and carport on the property.

An Occupancy Permit was issued to you and your spouse as the owner and the builder on XX XX 20XX.

You advise that early in 20XX you found that your primary residence intruded onto crown land and you have had to enter into negotiations with the Department of Environment, Land, Water & Planning (DELWP) to acquire the crown land. As a result, you have been unable to sell your primary residence.

You further advise that costs associated with the construction of the dwelling on Property X "blew out and your finances dried up" and in order to achieve your goal of residing on Property X, you decided to subdivide Property X into three blocks and sell two of the subdivided blocks.

You advise that the subdivision of Property X commenced on XX XX 20XX. Property X was subdivided into three lots: Lot A and Lot B which were vacant land and Lot C on which the dwelling and carport was constructed.

Works undertaken during the subdivision was to provide power, water and pressure sewer connection on the property and amounted to $X. You hired a surveyor, engineer and plumbing contractor to undertake works in connection with the subdivision. The subdivision was completed on XX XX 20XX.

You advise that around XX XX 20XX, the Title to Lot C was transferred to your child who "took over" your mortgage. You advised that your mortgage was with the Bank and your child undertook a new home loan to fund the acquisition. You also advised that this property lay vacant between XX XX 20XX (the date the occupancy certificate was issued) to XX XX 20XX, when your child took over the property.

You registered for GST on XX XX 20XX and lodged Business Activity Statements (BAS) making claims for input tax credits associated with expenses incurred on the subdivision of Property X.

In XX 20XX, you hired real estate agent to advertise the sales of Lot A and Lot B.

On XX XX 20XX, you entered into a Contract of Sale for the sale Lot B to two individuals for $X.

On XX XX 20XX you entered into a Contract of Sale for the sale of Lot A to an individual for $X.

The sales of both Lot A and Lot B settled in the XX 20XX quarter.

On the settlement of the sales of Lot A and Lot B, your conveyancer withheld and remitted GST to the ATO amounting to $X for the sales.

You lodged your XX 20XX BAS showing a $ Nil GST collected amount at Item 1A which triggered a refund to you of $X.

You cancelled your GST registration on XX 20XX.

Other Information

You and your spouse purchased Property Y for which a settlement transfer occurred on XX XX 20XX. The property had a residence with two titles and a house built over the common boundary. You developed the property by realigning the boundary for the house to be on its own lot. The property was then sold in 20XX. Currently you have no interests remaining in Property Y.

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

Reasons for decision

Section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable that you make.

Section 9-5 of the GST Act states as follows:

Taxable supplies

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.

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

(*denotes a defined term in the GST Act).

You have not sought clarification from us regarding which entity would be making the supply; you individually or as part of a partnership entity which is a partnership between you and your spouse. You have only asked us to determine whether the sale of Lot A and Lot B would be subject to GST.

Regardless of whether the supply of Lot A and Lot B is made by you individually, or as part of a partnership entity that you are a partner in, the answer to the question whether the supply of Lot A and Lot B will be subject to GST will, in the current circumstances, be the same.

Your sales of Lot A and Lot B, which comprised vacant land, were made for consideration, were connected with the indirect tax zone and you were registered for GST at the time of the sales.

It is noted that none of the provisions in the GST Act that make a supply GST-free or input taxed are applicable to the supply of Lot A and Lot B.

It remains to be determined whether the supply of Lot A and Lot B was made in the course of furtherance of an enterprise that you carried on.

Carrying on an enterprise

The term 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise; while the term 'enterprise' has the meaning given by section 9-20 of the GST Act (refer to section 195-1 of the GST Act).

Section 9-20 of the GST Act relevantly provides that an 'enterprise' is an activity, or series of activities, done:

(a)  in the form of a *business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

Miscellaneous Taxation Ruling 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 guidelines on the meaning of enterprise for ABN purposes.

MT 2006/1 provides at paragraph 153 that the ABN Act does not define an 'activity, or series of activities', so in the absence of a statutory definition these terms take on their ordinary meaning. An activity is essentially an act or series of acts that an entity does, ranging from a single undertaking including a single act to groups of related activities to the entire operations of the entity.

MT 2006/1 goes on to provide at paragraph 154 that for an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise; some activities will be specifically excluded while others may not fall within the definition of enterprise.

Regarding how to determine the extent to which an activity or series of activities amounts to an enterprise, paragraph 159 of MT 2006/1 provides that whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all the circumstances of the case.

Paragraph 1 of Goods and Services Tax Determination 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 MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Given the ordinary meaning of an 'activity, or series of activities' (which is reiterated in paragraph 10 of GSTD 2006/6), an enterprise could therefore incorporate a single or one-off transaction such as the building and sale of real property.

Paragraph 13 of GSTD 2006/6 provides 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

Further, paragraphs 233 to 242 of MT 2006/1 discuss "In the form of an adventure or concern in the nature of trade". In particular paragraph 234 of MT 2006/1 provides 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.

The characteristics of trade, including the badges of trade are discussed in paragraphs 243 to 257 of MT 2006/1. The 'badges of trade', as mentioned in MT 2006/1, include the following:

•         the subject matter of realisation - this badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

•         the length of period of ownership - a trading asset is generally dealt with or traded within a short time after acquisition.

•         the frequency or number of similar transactions - the greater the frequency of similar transactions the greater the likelihood of trade.

•         supplementary work on or in connection with the property realised - improving the property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

•         the circumstances that were responsible for the realisation - trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered.

•         motive - if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. Motive is also important in cases if there is a change in character of the asset.

•         trade v. 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. Assets can change their character but cannot have a dual character at the same time.

Paragraphs 262 to 269 of MT 2006/1 specifically consider isolated or one-off real property transactions in the context of whether an enterprise is being carried on.

The issue to be decided is whether the activities 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.

A list of factors ascertained from cases assist in determining whether activities are a business or an adventure or concern in the nature of trade. 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 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.

Application of the above to the facts in your case

You contend that the subdivision and subsequent sales of Lot A and Lot B were not undertaken in a nature that would satisfy the carrying on of an enterprise in the form of business. The acquisition of the property was not undertaken with the intention to further an enterprise or with the intention to participate in a scheme to generate profit. The subdivision and sales of property were nothing more than a mere realisation of an asset forced upon them as a matter of necessity.

After having objectively considered and weighed all of the facts and circumstances of your (or the relevant entity's) case, we have concluded that your activities in relation to Lot A and Lot B do amount to a series of activities in the form of an adventure or concern in the nature of trade.

When considered in the context of the badges of trade and factors indicating trade as considered in MT 2006/1, several of the factors are present indicating that a business or an adventure or concern in the nature of trade is being carried on. You improved the original property to bring it into a more marketable condition and gain a better price. There was a change of purpose for which the land was held, you undertook a coherent plan for the subdivision of the land, you borrowed funds to finance the acquisition and the subdivision. You hired a surveyor, an engineer and a plumbing contractor to undertake works in connection with the subdivision. You hired real estate agents to sell the subdivided properties. The development of Lot A and Lot B is not the first property development works you have undertaken given the purchase, development and subsequent sale of Property Y.

We are therefore satisfied that the sales of Lot A and Lot B meet all the requirements of Section 9-5 of the GST Act and are taxable supplies subject to GST.

Other Information

This information is not provided as part of your ruling request but for completeness, it is noted that when Lot A and Lot B were sold, GST was charged and should have been remitted to the ATO. To then lodge a nil activity statement could amount to making a false or misleading statement and may be subject to penalties. In your case, if a refund was due (and per our decision above it is not) it is only available under the rules of Division 142 of the GST Act.