Edited version of private advice

Authorisation Number: 1052000055230

Date of advice: 1 July 2022

Ruling

Subject: Sub-divided vacant land

Question

Is the sub-division and sale of 8 vacant land blocks a taxable supply?

Answer

No, given your relevant activities in relation to the XX (the Property) are neither in the form of a business, nor in the course or furtherance of an adventure or concern in the nature of a trade, you are not carrying on an enterprise under section 9-20 in relation to the subdivision of the land and sale of the Lots as vacant land.

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

XX and XX XX (collectively referred to as 'You') are not registered for GST either as individuals or a partnership.

XX is semi-retired XX who conducts a sole trader enterprise as a XX.

You own a property at XX (the Property) which was purchased for $XXX,XXX in XXXX.

You lived in this property until XXXX when you bought a block of land in XX and built a new main residence to live in.

From XX the property at XX was continuing to be rented out when the ruling request was submitted XX.

in XX re-zoned the property from Park residential to low density residential, allowing you to sub-divide the block.

If the sub-division goes ahead you will demolish the dwelling currently on the property.

You have engaged a surveying and town planning company to provide advice and design for the sub-division.

You are unsure what the exact requirements are for the sub-division and instead will leave this to XX to manage.

You expect the cost of the sub-division will cost $XX with the expectation the sale of the X blocks will generate $XXX.

The following is a breakdown of expenses provided by XX:

XX

•         Of this amount, $XXX will be paid to XX.

•         You intend to fund the sub-division by utilising your own savings, super fund withdrawals and perhaps a small bank loan.

•         On XX further information was requested from you in relation to various aspects of the ruling request.

•         On XX XXXX you replied to the email with the following information:

•         You have moved into your property in XX, after downsizing due to health issues.

•         You sold your XX property after X year of renting it out.

•         XX is currently not employed and has not been since XXXX.

•         Your development application is currently under consideration from XXX.

•         You will be required to install stormwater tanks, pavements and roads.

•         No dwellings will be constructed on the sub-divided blocks.

•         If the application is approved, you intend to begin sub-division work in XX until XX XX.

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 9-40

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

Reasons for decision

Section 9-40 provides GST is payable on taxable supplies. Section 9-5 provides that you make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with the indirect tax zone (Australia)

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.

In your case, when you sell the Lots for their respective sale prices, the sales will be supplies for consideration. They will also be sales that take place in Australia, and so will be connected with the indirect tax zone. In addition the supplies will not be input taxed or GST free. However you are not registered for GST.

Therefore it needs to be determined whether the sale of the Lots will be supplies made in the course or furtherance of an enterprise separate to the consulting enterprise that you carry on and therefore whether you are required to be registered for GST.

Section 9-20 provides an enterprise is an activity, or series of activities, done (among other things):

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or...

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999. However, paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act. 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? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise:

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise, but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

On these facts, the relevant activities are the activities associated with your purchase of the property, subdividing the property into the Lots, and preparation for the sale of the Lots. These activities will now be examined in light of the relevant types of enterprises listed under section 9-20, described above. We consider the other types of enterprises listed under section 9-20 are not applicable on these facts.

Are the relevant activities relating to the property in the form of a business?

Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

As noted in paragraph 176 of MT 2006/1, the meaning of 'business' is considered in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with carrying on a primary production business, the principles discussed in TR 97/11 apply to any business.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, with reference to the principles in TR 97/11:

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;

•                     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 provided, we consider that the activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis.

Furthermore, your activities do not appear to be carried out in a systematic, organised, and businesslike manner, nor do you appear to have the intention to engage in commercial activity. This based on the fact that you intend on doing the minimum required to satisfy the conditions of the Development Application. You intend to sell the Lots as vacant land to release the capital value of your land.

For the above reasons, we do not consider that your actions of acquiring the property and subdividing it for sale as vacant land constitute activities in the form of a business.

Are the relevant activities relating to the property in the form of an adventure or concern in the nature of a trade?

'An adventure or concern in the nature of trade' is not defined in the GST Act.

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':

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 provides additional guidance on the nature of activities that would constitute 'an adventure or concern in the nature of trade':

244. 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. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

In your case, given that the relevant activities concern a single project, consideration needs to be given whether your activities constitute an adventure or concern in the nature of trade.

Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty). Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. 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 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.

In addition to the above, paragraphs 266 and 267 of MT 2006/1 provides that there may be other relevant factors outside this list that a present on the facts of a given case, and that no individual factor is determinative to the question of whether an enterprise is present:

266. 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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

In your case, the majority of the salient factors listed in paragraph 264 of MT 2006/1 are not present. While you may take out a small loan to meet the meet the sub-division requirements from the council, this is a common activity done in the course of acquiring a high value asset and, by itself, does not suggest the undertaking of an adventure or concern in the nature of trade. These facts are also not conducive to the undertaking of an adventure or concern in the nature of a trade.

As noted above, your activities in relation to the subdivision of the property have not been done in a businesslike manner. While there is a coherent plan of subdivision as evidenced by the Development Consent, you have only taken, and will continue to only take, steps that go no further than meeting the conditions of the Development Consent. You will also not erect any buildings on the Lots which are to be sold.

In your case, while you have only held the property since XXX as an input taxed rental property. Your subdivision of the property into X lots, and your intention to sell the Lots as vacant land, is a way to dispose of the land. This is a mere realisation of a capital asset.

For the above reasons, we consider your relevant activities in relation to the property do not amount to an enterprise in the form of an adventure or concern in the nature of a trade.

Given your relevant activities in relation to the Land are neither in the form of a business, nor in the course or furtherance of an adventure or concern in the nature of a trade, you are not carrying on an enterprise under section 9-20 in relation to the subdivision of the Land and sale of the Lots as vacant land.

Therefore, you will not be required to register for GST in relation to the sale of the Lots. Also, the sales will not be a taxable supply under section 9-5, and GST will not be payable under section 9-40.