Edited version of private advice

Authorisation Number: 1051947747970

Date of advice: 11 February 2022

Ruling

Subject: Taxability on the sale of a vacant block

Question

Will the sale of the vacant block be considered a taxable supply per s 9-5 of A New Tax System (GST) Act?

Answer

No.

Relevant Facts and Circumstances

You are not registered for GST.

In 20XX you purchased a house and land (the property) in your own name

You rented the property out to tenants for XX years with the exception of a brief period where it was vacated for renovations.

In 20XX you discovered a white ant infestation and decided to demolish the building and subdivide two vacant blocks of land.

In 20XX you sold one of the blocks of land.

You did not charge GST on this sale nor did you apply the margin scheme.

You have not requested for special zoning approval on the land prior to sale

You used funds from an existing mortgage to fund the subdivision.

You have not entered into an agreement with a property developer

You have not erected a new building on either of the blocks.

You have not altered the land in any way (outside of the necessary subdivision)

As at the time of applying for this ruling you are currently in negotiation on the sale of the second vacant block of land

Detailed reasoning

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

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 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.

You must satisfy all the conditions set out in paragraphs (a) to (d) for your supply to be taxable. Your supply is not taxable if you fail one of the conditions.

Of relevance in this case is whether you are making the supply of the vacant subdivided lots in the course or furtherance of an enterprise that you carry on.

Carrying on an enterprise

Sections 9-20(1) (a) and 9-20(1) (b) of the GST Act provide that an enterprise is an activity, or series or activities, done:

•         in the form of a business, or

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

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) contains the Tax Office view on what constitutes an enterprise for the purpose of eligibility for an Australian business number. Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraphs 170 to 232 of MT 2006/1 provide an explanation on when an activity or a series of activities is done in the form of a business and paragraphs 233 to 302 of MT 2006/1 on when an activity, or a series of activities is done in the form of an adventure or concern in the nature of trade.

Paragraph 159 of MT 2006/1 provides that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In the form of a business

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. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

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

Paragraph 262 of MT 2006/1 provides that the question of whether an entity is carrying on an enterprise often arises where there are 'one offs' or isolated real property transactions.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

Paragraph 1 states the term isolated transactions refers to:

a)    those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

b)    those transactions entered into by non-business taxpayers.

Paragraph 6 states that a profit from an isolated transaction will generally be income when both elements are present:

a)    the intention or purpose of a 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 on a business operation or commercial transaction.

In contrast, paragraph 36 of Taxation Ruling TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way.

In order to determine whether a sale of property constitutes an adventure or concern in the nature of trade, paragraph 263 of MT 2006/1 provides that 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 as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 lists a number of factors which, if present, may be an indication that activities are a business or an adventure or concern in the nature of trade. 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 to your situation

Carrying on an Enterprise

From the information received, your supply of the new property satisfies paragraphs 9-5(a) of the GST Act as you make a supply of the new property for consideration. In addition, your supply of the new property satisfies paragraph 9-5(c) of the GST Act because you make a supply of real property in Australia therefore the supply is connected with Australia (subsection 9-25(4) of the GST Act).

The next step is to decide if you have an enterprise and if you make the supply in the course or furtherance of your enterprise. The supply of the new property could be an activity that constitutes an enterprise in its own right.

Your enterprise must satisfy the definition in section 9-20 of the GST Act which defines "enterprise" to include an activity done in the form of a business; or in the form of an adventure or concern in the nature of trade.

In the form of business

You state you have never been involved in similar activities around property development before. We consider that the intended sale of the new property is not a series of activities done in the form of a business. You acquired the property and rented the property out for a period of 10 years with a small interlude for when the house was renovated. You used it as your investment property and in all likelihood would have kept this intention if the property was not infested with white ants. You have not received any income and have not claimed any deductions for tax purposes in relation to the new property. The reasons for subdividing and selling the new vacant lots are private.

You are not carrying on a business of property development as this is a one-off activity and not repetitive. However, the sale of the new blocks may be considered to be an enterprise under the GST Act where activities, even one-off, are done in the form of an adventure or concern in the nature of trade.

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

In your case you advise that:

•         You owned the property for 10 years and used it as an investment property for this entire tenure

•         The only reason you are selling was due to the white ant infestation

•         There was simply a subdivision of the land and there was no special development beyond that necessary to secure council approval for the subdivision.

•         You did not engage with council for different zoning approvals nor did you enter agreements with property developers.

•         You have not erected buildings on the vacant blocks, nor have you claimed business expenses on the loan for monies used in the subdivision.

•         You have not accounted for the property as a business asset.

•         You funded your cost of subdivision and construction work from your own funds and borrowings

•         You have not purchased additional parcels of land to be added to these blocks

•         The purpose of the subdivision was to realise your asset in the most advantageous way.

It may be concluded that the mere subdivision does not have the flavour of an enterprise as the original intention was one of investment.

We therefore consider that the activities that you have undertaken are not in the form of an adventure or concern in the nature of trade, but a mere realisation of an investment asset. Accordingly, the subdivision and building activities you have undertaken is not considered as 'carrying on an enterprise' and your supply of the new property does not satisfy paragraph 9-5(b) of the GST Act. We do not need to discuss paragraph 9-5(d) of the GST Act.

All of the requirements of section 9-5 of the GST Act must be met for a supply to be taxable. Since you do not meet the requirement in paragraph (b) of section 9-5 of the GST Act, you do not make a taxable supply when you sell the new vacant block.