Edited version of private advice

Authorisation Number: 1051965543285

Date of advice: 11 April 2022

Ruling

Subject: GST and sale of subdivided land

Question

Will the sale of each of the x lots be a taxable supply?

Answer

Yes, the sale of each of the x lots will be a taxable supply.

This ruling applies for the following period:

XX Month 20XX to XX Month 20XX

Relevant facts and circumstances

Information provided by you

•                    You are registered for GST.

•                    You purchased land (property 1) in Month 20XX.

•                    Your stated intention was to own an investment property that was rented out for a period of at least X years hoping the property would double in value.

•                    There was a home on the property and you used a leasing agent for the purpose of leasing the property.

•                    In Month 20XX, you were approached by entity X who wanted to purchase the property for the purpose of xxxx. However, they only required about X% of the land.

•                    You determined this was an exciting opportunity and decided to subdivide the land and sell the portion of the land that was not required for the xxxx.

•                    This would enable you to fund and build the xxxx as an investment for the long term with entity X leasing the xxxx from you.

•                    Your original loan for the purchase of the property was a X year residential loan.

•                    This was later converted to a X month business loan as part of change in plans to construct a xxxx and sell the remaining land.

•                    In Month 20XX, you signed a contract with entity Y for lot #. Conditions included early access to the property so that the buyer could start to develop the site into a number of lots. Settlement was to occur on one lot being lot #.

•                    Entity Y commenced works on the land including demolishing the existing house.

•                    You entered into a lease of the xxxx with entity X.

•                    The term of the lease is for X years commencing from Month 20XX with $X being the annual rent.

•                    For various reasons, there was a falling out between you and entity Y and the parties eventually signed a Deed of Settlement and cancelled the contract. The development of lot # into lots was incomplete.

•                    Various debts in excess of $X were left by entity Y in respect of the development and you took out a loan to pay off a portion of these debts.

•                    You found a new purchaser for lot # being entity Z and a contract for sale was signed in Month 20XX.

•                    Entity Z was unable to settle on the purchase of lot #.

•                    You have decided that the best way forward and to minimise your losses is to complete the subdivision yourself and then sell the lots.

•                    You have borrowed money from a friend for this purpose.

•                    Some of the works still to be completed include roadworks, stormwater and sewer works, earthworks, water reticulation, fencing, electrical work and a detention basin.

Other information

•                    ATO systems and RP data search shows that you purchased another property (property 2) in the vicinity of property 1 with settlement occurring in Month 20XX.

•                    ATO systems and RP data search shows that you purchased property 1 with settlement occurring in Month 20XX.

•                    A search of the local council's system shows that DA approval was provided for:

-        Property 1 to allow for development of x lots and was dated xxx. The system indicates that the request for DA approval was lodged xxxx.

-        Property 2 to allow for development of x lots and was dated xxx. The system indicates that the request for DA approval was lodged xxxx.

•                    You advised that entity Y was also going to purchase property 2 but similar to property 1, settlement did not occur.

•                    You advised that your intention for buying both properties was to hold for ten years as investment properties but not long after you bought them, entity Y approached you and offered to buy both properties if you had a DA approval for both.

Reasons for decision

A sale of vacant land will be a taxable supply if all of the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are met.

An entity makes a taxable supply under section 9-5 if:

•                    it makes the supply for consideration

•                    the supply is made in the course or furtherance of an enterprise that it carries on

•                    the supply is connected with the indirect tax zone (that is, Australia)

•                    the entity is registered or required to be registered for GST, and

•                    the supply is neither GST-free nor input taxed.

In this case, you will sell the vacant lots for consideration, the lots are connected with the indirect tax zone, you are registered for GST and there are no provisions in the GST Act that would make the sale input taxed or GST-free.

Therefore, it needs to be determined whether the sale will be in the course or furtherance of an enterprise you carry on.

An enterprise is defined in section 9-20 of the GST Act and includes an activity or series of activities, done:

•                    in the form of a business

•                    in the form of an adventure or concern in the nature of trade, and

•                    on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In your case, you purchased property 1 for the purpose of leasing. After being approached by entity X, you ceased leasing the residential premises and constructed a xxxx for the purposes of leasing. Therefore, you were and remain to carry on an enterprise of leasing in respect of the property. The property including all of the land was an asset of the leasing enterprise.

As part of your changed plans from leasing residential premises to the construction and lease of the xxxx, you advise that you intended to sell the balance of the land that was not needed for the xxxx and this was to help fund the construction of the xxxx. The balance of the land is represented by lot #. Lot # is an asset of your leasing enterprise.

The sale of an asset of an enterprise, including capital assets, is in the course or furtherance of that enterprise. Therefore, if you sold lot # it would be a taxable supply of vacant land and subject to GST.

However, due to a number of reasons, you have been unable to sell lot # and have decided to complete the project to develop lot # into a number of lots that was initially started by another entity.

Isolated transactions and sales of real property can amount to carrying on an enterprise as discussed 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) at paragraphs 262 to 302.

Paragraph 265 of MT 2006/1 lists a number of factors derived from relevant court cases that provide assistance 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 in the nature of trade is being carried on. These 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.

Paragraph 266 of MT 2006/1 states:

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Paragraph 270 of MT 2006/1 states:

In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade.

In your case:

•                    You purchased property 2 with settlement occurring in Month 20XX. You advised that your intention was to hold as an investment asset for X years and for leasing purposes. However, you applied for DA approval in Month 20XX to subdivide this property into x lots.

•                    You purchased property 1 with settlement occurring in Month 20XX. You advised that your intention was to hold as an investment asset for X years and for leasing purposes. However, you applied for DA approval in Month 20XX to subdivide this property into x lots.

•                    You advised that the DA request was submitted after entity Y approached you and offered to purchase the two properties if you had a DA in place. However, it is noted that the contract for sale of part of property 1 (and presumably property 2) was not signed until Month 20XX even though the respective DA approvals are dated XX Month 20XX and XX Month 20XX.

•                    After being approached by entity X in Month 20XX, you decided to construct a xxxx on part of property 1 and then sell the remaining portion to fund the xxxx. As noted above, the contract for the sale of the remaining portion of land at property 1 was signed XX Month 20XX.

•                    You took out a X year residential loan with xxxx to purchase property 1 which was converted to a X month business loan when you sought to register the xxxx lot.

•                    Due to a number of reasons, the sale of both properties to entity Y did not proceed and further attempts to sell lot # were not successful.

•                    This left you with a lot of debts to pay (in excess of $X) incurred by entity Y and relating to the subdivision project.

•                    You took out a loan to pay out a portion of these debts.

•                    You have now decided to minimise your losses and the best way is to complete the subdivision project for x lots instead of selling lot # as is.

•                    You have loaned money from a friend to complete the project.

•                    Works to be undertaken include roadworks, stormwater and sewer works, earthworks, water reticulation, fencing, electrical work and a detention basin.

Taking all of the above and the relevant paragraphs of MT 2006/1 into account, it is clear that you are carrying on an enterprise of subdivision of land which is in the form of a business or an adventure or concern in the nature of trade. It is arguable that this enterprise commenced when you applied for the DA approval for both properties in 20XX if not earlier. Regardless, at the time you sell the lots of land, the sale will be in the course or furtherance of an enterprise (leasing and/or subdivision of land) that you carry on. As such, all of the requirements for a taxable supply will be met.

Therefore the sale of the x lots of land located at xxx will be taxable supplies and subject to GST.