Edited version of private advice

Authorisation Number: 1051969463617

Date of advice: 13 April 2022

Ruling

Subject: GST and small lot subdivision

Question

Will you be required to register for goods and services tax (GST) when you sell residential land located at xxxxx?

Answer

Yes, you will be required to register for GST when you sell residential land located at xxxxx.

This ruling applies for the following period:

14 April 20XX to 14 April 20XX

Relevant facts and circumstances

You are a company established before 2000.

You purchased a vacant block of land prior to 2000. The initial intention was to subdivide this land.

In xxxx a development application (DA) was lodged with the local Council to subdivide the land into x lots. Approval was granted for this staged subdivision. A second development application was then lodged with Council for a further x lots.

Work commenced to develop the first stage within the following 2 years. This work included surveying and initial roadwork.

In xxxx,one of your shareholders passed away, putting the development of this land on hold indefinitely.

From that time:

•                    the land has remained vacant

•                    the land has not earned any income

•                    no money has been borrowed

•                    rates and incidental expenses have been paid by the sole director

•                    no expenses relating to the land have been claimed in the company tax return

•                    the director was approached by a developer over ten years ago, however the proposal at that time was not an attractive offer, and the land remained vacant, as the sole director could afford to pay the holding costs on this vacant land.

Development of land

The sole shareholder is seeking ways to fund their retirement.

The region has currently experienced substantial growth and land prices have increased accordingly.

Recently, you were approached by a company, to develop the land in line with the original staged and approved DA's. As work had commenced on this land within the required time frame, the DA's are, and remain, active.

This company will be responsible for all aspects of the subdivision work, including dealings with Council, earthworks, engagement of contractors, payment of relevant fees, Council contributions, and marketing.

A local legal firm has drawn a draft agreement between the parties, setting out the terms and conditions that the parties will adhere to during the development process. This ensures that both parties have a clear understanding of who is responsible for all aspects of the required works, including the final split of profits.

Your sole director will have no direct involvement in the subdivision process, except when required to sign documents, etc as the director.

Preliminary budgets show sale prices of approximately $x per lot.

Your only asset is the land. You have traded over the last few years, earning below $75,000. This income will always remain under $75,000 per annum.

You have never been registered for the GST, nor have you been required to be registered for GST.

Draft Joint Venture Agreement

You provided a copy of a draft "Joint Venture Agreement" (the agreement) between you and another entity as the parties.

Under the Recitals, you are named as the proprietor of the land. Part B of the Recitals states:

The parties have agreed to enter into this joint venture agreement for the purposes of developing the Land as fully described in this Agreement.

Part 2 of the agreement provides that solicitors of the joint venture are xxxx and the accountants of the joint venture are xxxx. Further, each party must nominate a person to sign all cheques on their behalf and joint venture cheques are to be signed by one nominated person on behalf of each party.

Part 4 of the agreement provides an overview of the purpose of the joint venture as follows:

The joint venturers propose:

(a)           To subdivide the Land in x Lots in x stages;

(b)           To sell the subdivided lots; and

(c)           To divide the expected profits from the sale of lots amongst the venturers.

Part 6 of the agreement outlines the contribution of capital and share of profits and losses.

Part 7 of the agreement, titled "Program" states:

The parties will prepare a budget and business plan setting out in detail all expenditure for planning, approval, consultancy, construction, finance, marketing and all other usual outlays in such an undertaking and will prepare a program and time line for the project from start to end with appropriate conservative allowances of time for the completion of each stage of the project.

Part 9 of the agreement provides that the parties will appoint a finance manager with certain responsibilities.

Reasons for decision

An entity is required to be registered for GST under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when:

•                    the entity is carrying on an enterprise, and

•                    the entities GST turnover meets the registration turnover threshold.

Carrying on an enterprise

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,....

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 acquired vacant land in xxxx with an initial intention of subdividing it for sale

•                    a DA for this purpose was obtained and early stages of the development commenced including surveying and road development

•                    in xxxx one of your shareholders passed away and the development was put on hold

•                    the land has since then remained vacant and not put to any other use

•                    you have been approached by a local company in regard to recommencing the development of the land

•                    you have a draft joint venture agreement

•                    a budget and business plan will be prepared

•                    each party will make an in-kind contribution with yours being the land

•                    profits or losses will be shared

•                    solicitors, accountants and finance manager will be engaged.

Taking these activities and the relevant paragraphs of MT 2006/1 into account, it is considered 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. As such you are carrying on an enterprise in respect of the subdivision of the land. It does not matter that you are not undertaking the physical activities of the development itself as, given your lack of experience in this matter, it is not surprising that you would engage others to undertake this work. The land was originally bought with intention of subdivision and resale. It has never been put to any other purpose despite the development being put on hold after its initial commencement. You are now completing the subdivision in line with the original intention.

As noted in paragraph 270 of MT 2006/1, the Commissioner considers these activities to be an enterprise.

GST turnover

The second factor to consider under section 23-5 of the GST Act is whether your GST turnover meets the registration turnover threshold. The registration turnover threshold (for entities other than non-profit bodies) is $75,000.

Subsection 188-10(1) of the GST Act is relevant for working out whether your GST turnover meets a turnover threshold. An entity has a GST turnover that meets a particular turnover threshold under subsection 188-10(1) when:

•                    their current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that their projected GST turnover is below the turnover threshold; or

•                    their projected GST turnover is at or above the turnover threshold.

In calculating your current and projected GST turnover, you will need to consider your supplies of the individual subdivided lots of vacant land as well as any supplies of xxxx.

Section 188-15 of the GST Act defines 'current GST turnover'. Current GST turnover at any time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during the current month and the preceding 11 months.

Section 188-20 of the GST Act defines 'projected GST turnover'. Projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months.

There are exclusions in section 188-15 and 188-20 of the GST Act where certain supplies are not included in the calculation of current and projected GST turnover. However, based on the information provided, none of these apply to your circumstances.

You have indicated that your xxxx income is below $75,000. However, you plan to sell each individual subdivided lot for over $75,000.

Therefore, you will need to monitor your projected GST turnover and include an amount for the sales of each individual subdivided lot of land based on when you expect to sell them.

When sales of the individual lots of land are included in your projected GST turnover, you will meet (and exceed) the GST turnover threshold.

This means that at that time, both elements of section 9-20 of the GST Act will be satisfied and you will be required to register for GST.

Please note that you may register for GST from an earlier date under section 23-10 of the GST Act as the only requirement under that section is that you are carrying on an enterprise.