Edited version of private advice

Authorisation Number: 1051965393601

Date of advice: 25 March 2022

Ruling

Subject: GST - sale of vacant land

Question 1

Will the sale of the proposed vacant land lot comprising Xm², located in the indirect tax zone, be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. Your proposal is limited to the sale of the proposed vacant land lot comprising Xm². This supply will not be a taxable supply because the sale will not be made in the course or furtherance of an enterprise that you carry on and you are neither registered nor required to be registered for GST.

Question 2

Will any capital gain or capital loss you make from the sale of the proposed vacant land lot be disregarded?

Answer

No.

Question 3

Will any capital gain you make from the sale of the vacant land lot be a discount capital gain?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

The scheme commences on:

23 April 20XX

Relevant facts and circumstances

X and X (You) are not registered for GST as a partnership or individually, nor have you been registered in the past.

On DD/MM/YYYY, you purchased a property located in the indirect tax zone, known as Lots X and X on X, for $X plus acquisition fees, with the sole intention of using the property as your family residence.

The property comprises an area of Xm²; Lot X is Xm² and Lot X is Xm².

The house on the property currently sits across the boundary line between the two titles.

You occupy the house on the property as your main residence. The property has not been used to produce assessable income.

You are proposing to make changes to the property whereby the two current parcels of land on which the house sits will be realigned.

It is intended that the two current lots will be reconfigured into two new lots comprising Xm² and Xm².

In addition to the realignment, the ageing house on the property will be demolished and new residential premises that meets your family's requirements will be built on the lot comprising Xm².

The lot comprising Xm² (defined as the vacant land lot) will be sold to help finance the build of your new residential premises.

Your proposal does not include selling the lot comprising Xm² being the family home.

The realignment of the Lots will not require significant work or funding. The activities required to undertake the realignment will be entirely attended to by external consultants.

•         You propose to contract with third parties to demolish the house in order to complete the realignment process.

•         You will engage external consultants for a fee to undertake the subdivision process.

•         You will engage a builder to construct new residential premises as your family home.

You will not further develop or build anything on the vacant land lot prior to its sale.

You do not own any other residential or commercial property and you have not been involved in any previous subdivisions or property development activities.

You will be seeking rental accommodation whilst work is undertaken for the construction of your new home. Once the new residential premises have been built, the house on the lot comprising Xm² will be used as your main residence.

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 23-5

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

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 Subdivision 118-B

Reasons for decision

Question 1

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.

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 proposed vacant land lot would be a GST-free or input taxed supply.

You will be supplying the vacant land lot Xm² for consideration. The supply will be connected with Australia. However, you are not registered for GST.

The primary issue to be resolved is whether the supply of the proposed vacant land lot will be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b)). If so, a further issue to be considered is whether you are required to be registered for GST.

Enterprise

Subsection 9-20(1) provides, amongst other things, 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.

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 guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of 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? provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

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;

•         an intention to make a profit from the 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 of this case, we consider your proposed activities resulting in selling the vacant land lot comprising Xm² do not display the indicators of a 'business' listed above.

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

We now consider whether your activities will be in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

Paragraph 244 of MT 2006/1 explains 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. 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.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted 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.

Paragraph 266 of MT 2006/1 provides in part that no single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade and there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Paragraphs 271 to 287 of MT 2006/1 set out examples of subdivisions that are enterprises whilst paragraphs 288 to 302 set out examples of subdivisions that are not enterprises.

Paragraphs 284 to 287 (Example 31) of MT 2006/1 illustrates a scenario with some similarities to the circumstances in your case:

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

•         their house to be demolished;

•         the land to be subdivided;

•         a builder to be engaged;

•         two houses to be built;

•         water meters, telephone and electricity to be supplied to the new houses; and

•         a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

In your circumstance, you have owned the property located in the indirect tax zone for more than X years and you have occupied the house on the property as your main residence.

As set out in the facts you will:

•         arrange for your existing house to be demolished;

•         arrange for the realignment of existing Lot X and Lot X creating two lots comprising Xm² and Xm²;

•         sell the vacant Xm² lot;

•         engage a builder to construct your family home on the Xm² lot and this will be retained.

We consider your circumstances to be distinguishable from Example 31 of MT 2006/1 because whilst you have a plan that includes some of these features, lot Xm² will consist of new residential premises and will be retained as your family home. The sale of the vacant Xm² lot is merely disposing of some of the land on which your home is situated.

By way of contrast, we consider paragraphs 291 to 293 (Example 33) in MT 2006/1, illustrating where a taxpayer has merely subdivided a property into two and sold the land without development, contains some features that are similar to your circumstances.

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.

Despite your intention to engage a builder to construct new residential premises on the proposed Xm² lot, you intend to use this house as your family's private residence; the house is not being built for the purpose of sale. Further, following the realignment of your land, you will not develop or build anything on the vacant land Xm² lot prior to its sale.

We consider your proposed activities are not activities done in the form of an adventure or concern in the nature of trade. Your activities do not fall within the scope of an enterprise as defined in section 9-20. Therefore, you do not satisfy paragraph 9-5(b), as your sale of the proposed vacant land Xm² lot will not be made in the course or furtherance of an enterprise that you carry on.

Section 23-5 provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000 for businesses (and $150,000 for non-profit entities). Subsection 188-25 excludes the value of capital assets when working out whether your GST turnover exceeds the GST turnover threshold.

We consider your proposed activity of disposing some of the land on which your previous home was situated, to be a mere realisation of a capital asset.

Conclusion

On the basis of the facts provided, you are not carrying on an enterprise, nor are you registered or required to be registered for GST. Your sale of the proposed vacant land lot comprising Xm² will not be a taxable supply.

Question 2

Section 118-110 of the ITAA 1997 disregards a capital gain or capital loss that happens to an ownership interest in a dwelling if certain conditions are met. The exemption can also apply to adjacent land if other conditions are met.

Section 118-165 of the ITAA 1997 states that the exemption is not available if a CGT event happens to land unless the same CGT event happens to a dwelling.

Section 118-160 of the ITAA 1997 allows a taxpayer to choose to treat an accidentally destroyed dwelling as still being on land (and still being their main residence) if the land is sold without a new dwelling being constructed on it.

Your situation

You will intentionally demolish the dwelling on the property. CGT event C1 will happen to the dwelling due to the demolition. You will continue to own the land component of the property.

The choice mentioned in section 118-160 of the ITAA 1997 is not available to you because the dwelling will be intentionally demolished.

You are proposing to realign the two current parcels of land into two new lots comprising Xm² and Xm². There will be no change of ownership of any asset due to the realignment and it is not a CGT event.

CGT event A1 will happen when the vacant land lot is sold. This will be a different CGT event to the one that will happen to the dwelling that is currently on the property; so there will not be any exemption due to the sale of the vacant land lot.

Question 3

Section 115-5 of the ITAA 1997 defines discount capital gain as a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

•         The requirements of section 115-10 of the ITAA 1997 are met because you are individuals.

•         The requirements of section 115-15 of the ITAA 1997 are met because the CGT events for the sale will happen after 21 September 1999.

•         The requirements of section 115-20 of the ITAA 1997 are met because the cost base of the vacant land lot is not eligible to be indexed.

•         The requirements of section 115-25 of the ITAA 1997 are met because the respective interests in the vacant land lot were acquired by you more than 12 months before the time of the CGT event.

How the acquisition date is worked out for Subdivision 115-A of the ITAA 1997

You jointly acquired the property on DD/MM/YYYY.

There will be no change of ownership due to the realignment of the Lots. The new Lots will be owned in the same proportions that the property is currently owned by you.

Taxation Determination TD 97/3 states at paragraph 2:

We consider that the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3, to divide the original land parcel into two or more assets (viz., the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.