Edited version of private advice

Authorisation Number: 1051952112656

Date of advice: 22 February 2022

Ruling

Subject: GST and the sale of subdivided vacant land

Question

Was the sale of the vacant land located in the indirect tax zone a taxable supply under subsection 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were registered for GST from DD/MM/YYYY to DD/MM/YYYY.

In MM/YYYY you purchased a residential property located in Australia. The property was rented for the period between MM/YYYY to MM/YYYY.

In MM/YYYY, the property was placed on the market for sale; however, failed to sell with no reasonable offers presented. Failure to sell the property may have been attributed to:

•         the property being situated on a busy road,

•         the house on the property was aged and required significant repairs,

•         the local Shire Council would not allow the house to be demolished due to their view the property represented part of the character of the area.

In MM/YYYY, you made a decision to take the property off the market and subdivide the property into two smaller lots. You intended to sell both lots once the subdivision had been completed.

The subdivision process commenced in MM/YYYY and was completed in MM/YYYY. You did not receive rental income during this period.

The subdivision activities undertaken were minimal, with tasks completed for the purpose of fulfilling planning, shire, and government requirements only. You engaged a company to oversee the sub-division process including planning, obtaining agreements/approvals from the Shire, liaising with the relevant State water authority, and arranging fencing.

You did not complete any of the sub-division works yourself.

The subdivision resulted in two separately registered lots of Property A (land and existing residential dwelling) and Property B (land only). The land and existing residential dwelling known as Property A is not the subject of this private ruling.

In MM/YYYY, the newly created vacant land at Property B, was placed on the market for sale.

On DD/MM/YYYY you entered into a contract for sale of land or strata title by offer and acceptance (Sale Contract) for the sale of Property B. The property settled on DD/MM/YYYY. The purchase price was $X.

Clause X of the GST Withholding Annexure to the Sale Contract provides the Sale Contract is in regard to a taxable supply of new residential premises or potential residential land as defined in the GST Act.

Clause X of the GST Withholding Annexure to the Sale Contract states the margin scheme was applied to the sale of the property and an amount equal to 7% of the purchase price was required to be paid to the Commissioner at settlement.

You have not been involved in any previous subdivisions or property development activities and you have no intention of engaging in future planning or development activities.

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 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Division 40

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 provides that 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.

For the sale of the property to be a taxable supply, all the requirements in section 9-5 must be satisfied.

In your case, you purchased a residential property in MM/YYYY. You leased the property for the period between MM/YYYY to MM/YYYY. In MM/YYYY you advertised the property for sale; however, failure to sell the property led you to subdivide the property into two lots. In MM/YYYY, the newly created vacant lot was placed on the market for sale and was subsequently sold on DD/MM/YYYY (contract date).

You supplied the property for consideration of $X, the property is located in Australia and you were registered for GST at the time of the supply (settlement date being DD/MM/YYYY).

The primary issue to be resolved is whether the supply of the property was made in the course or furtherance of an enterprise you carry on, satisfying 9-5(b).

Enterprise

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)).

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

The leasing of a property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes. This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

The leasing of residential premises and the subsequent subdivision and sale of the newly created vacant land (in this case Property B) are all considered activities done in the course or furtherance of (including the termination of) your enterprise that you carry on.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively. In your case, there are no provisions in the GST Act under which your sale of the vacant land would be GST-free or input taxed.

On the basis of the facts provided, your sale of the vacant land located at Property B satisfies all of the positive limbs of section 9-5 and is neither GST-free nor input taxed. Therefore, the sale will constitute a taxable supply as defined for GST purposes.