Edited version of private advice

Authorisation Number: 1052009490624

Date of advice: 21 July 2022

Ruling

Subject: GST - sale of subdivided vacant land

Question 1

Are you (Person A and Person B together), required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. You are not required to be registered for GST under section 23-5 of the GST Act as your GST turnover does not meet the GST registration turnover threshold.

This is provided that on or before the time of supply, you do not voluntarily register for GST or carry on any other enterprise or enterprises where your GST turnover will meet the GST registration threshold.

Question 2

Will you be making a taxable supply under section 9-5 of the GST Act when you sell Property B known as Certificate of Title Volume # Folio # being Allotment # in #?

Answer

No. You will not be making a taxable supply under section 9-5 of the GST Act when you sell Property B as you are neither registered nor required to be registered for GST as determined under Question 1 above. Therefore, GST will not be payable on the sale.

This ruling applies for the following periods:

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B together (You) are in an identified relationship, # and # years of age respectively.

You are not registered for GST as a partnership, nor have you been registered in the past.

In their individual capacity, Person A has been registered for GST as a sole trader from DD/MM/YYYY with ABN XX XXX XXX XXX for a specified enterprise. Person B is employed by Person A on a part-time basis.

You have purchased and sold a number of real properties. These properties were acquired mainly with the original intention of generating rental income and/or capital growth. The properties are summarised in the table below.

Further details in relation to the properties listed in the above table.

(1)       Property A

In MM/YYYY you purchased the residential property located at the specified address (Property Y) for $, funded entirely by way of a bank loan. The loan term was # years with repayments comprising of Interest only for the first # years and Principal and Interest for the remaining # years of the loan term.

The property comprised an area of approximately Xm² and included a X-bedroom standalone house on the land.

Your original intention when you purchased Property Y was to demolish the existing house and build a new dwelling which you would later reside in upon your retirement.

You leased Property Y from MM/YYYY to MM/YYYY. The property was vacant for some months during this period whilst repair and maintenance works were carried out, such as pest control and fixing damages caused by vandalism. The property was old and showing its age. You did not have the funds to renovate or rebuild the property. It was costly to upkeep the property and difficult to get quality tenants.

In YYYY you engaged a project manager to lodge a Development Application (DA) with the Council on your behalf for land subdivision and development in relation to Property Y. The application was approved in MM/YYYY and expired in MM/YYYY. You did not proceed with the subdivision works during this period because you did not have the required funds to proceed.

In YYYY you engaged a different project manager to lodge a new DA with the Council on your behalf for land subdivision approval for Property Y. The DA was approved in MM/YYYY.

In MM/YYYY, when you had a confirmed buyer, you proceeded to subdivide the property into two lots comprising Xm² and Xm², with the intention of selling the larger lot comprising Xm². You made the decision to subdivide and sell part of the property due to high borrowing costs and significant property maintenance expenses.

You financed the subdivision using money borrowed from relatives and bank loans.

Following subdivision, the two lots are known as:

•         Property A of land area Xm² and includes the existing dwelling on the land

•         Property B of land area Xm² and comprises of vacant land only.

In MM/YYYY you signed a contract for the sale of Property A. The property settled on DD/MM/YYYY. The sale price was $. Property A is not the subject of this private ruling.

(2)       Property B

Following the subdivision, you kept possession of the vacant lot which is Property B, maintaining your original intention to build a new residential dwelling on the land for your retirement.

The property identifiers of Property B include:

•         Allotment # in #

•         Certificate of Title Volume # Folio #

In MM/YYYY you engaged a real estate agent to sell Property B because you realised you would not be able to afford the construction costs of building a residential unit, given your age and financial situation. You are at retirement age and do not wish to take on any risk. The sale proceeds will be used to fund your retirement.

On DD/MM/YYYY you entered into a Contract for the sale of Property B. The contract price is $. The settlement period is within a specified number of Business Days of the Australia Taxation Office issuing an Assessment on GST.

You will not be undertaking any further development activities and will be selling the property in an as is condition.

(3)       Property C

This property is a weatherboard residential premises dating # years that you acquired in MM/YYYY for $. You have leased this property since MM/YYYY.

(4)       Property D

Property D is a vacant lot you acquired in MM/YYYY for $.

You purchased D and a specified number of other properties in the same suburb at the same time, with the plan of holding them long-term and, dependent on your financial situation, to build rental properties on the land as a source of income when you retire.

You have not developed or built anything on Property D since you acquired the property and you are currently planning to sell the vacant lot; however, you have not put the property on the market yet. Your reason to sell the land is due to huge capital loss, high borrowing costs and expenses of maintaining a vacant block of land in the specified State.

(5)       Property E

(6)       Property F

(7)       Property G

Properties E, F and G (EFG Properties) are adjoining vacant lots you acquired in MM/YYYY for $ each, $ in total. Each lot of land is slightly over Xm².

You sold these lots in MM/YYYY for $ each, $ in total. The purchasers were related entities.

You did not develop or build anything on any of these properties prior to sale.

You acquired the EFG Properties with the intention to hold the land on a long-term basis and build residential premises for the purpose of rent. All properties were intended to be kept as long-term investments that would provide you with a source of income during your retirement through the rental/leasing of the properties.

You funded your acquisitions of the EFG Properties via a bank loan with repayments comprising of Principal and Interest.

In YYYY you made a decision to sell the EFG Properties as you were unable to afford the high borrowing costs and ongoing expenses of maintaining the land, such as council rates, water rates, service levies and land tax.

In MM/YYYY you obtained a valuation from a Certified Practising Valuer (the Valuer), who valued E, F and G at $ per lot. Comments in the Valuer's report include:

'The micro economy inclusive of real estate assets within the Township of X is affected by a historical event which took place during the YYYYs. The event has no doubt caused significant reputational damage to the township and greatly reduced demand by investors for assets such as housing.'

(8)       Property H

This property is residential premises that you acquired in MM/YYYY for $. This property has been used as your family home.

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 40-35

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25

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

Reasons for decision

Question 1

Summary

Your GST turnover will not meet the registration turnover threshold of $75,000 and you are therefore not required to be registered for GST in accordance with section 23-5.

Detailed reasoning

Section 23-5 states that you are required to be registered for GST if:

(a)  you are *carrying on an *enterprise; and

(b)  your *GST turnover meets the *registration turnover threshold (in your case the threshold is $75,000).

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; or

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

The definition of 'carrying on' an enterprise can be found in section 195-1:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

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 303 to 322 of MT 2006/1 discuss activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents.

The leasing of a property (whether commercial or residential property) will fall within the scope of an 'enterprise' for GST purposes under paragraph 9-20(1)(c). This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

In your case, you own and have sold a number of properties which have been acquired over a number of years. Other than the property with the family home, the properties you acquired were mainly for the purpose of generating rental income and capital growth. Based on the facts, you are currently carrying on a leasing enterprise in accordance with paragraph 9-20(1)(c) and therefore satisfy the requirements of 23-5(a).

GST turnover

As discussed above, you are considered to be carrying on an enterprise. Therefore, if your GST turnover is $75,000 or more you will be required to register for GST.

Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if:

(a)  your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b)  your projected GST turnover is at or above the turnover threshold.

Subsection 188-10(2) provides that your GST turnover will not meet the registration turnover threshold if:

(a)  your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

(b)  your projected GST turnover is at or below the turnover threshold.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Paragraphs 188-15(1)(a) and 188-20(1)(a) provide that input taxed supplies are not taken into account when calculating your current and projected turnovers respectively.

Section 40-35 provides that a supply of residential premises by way of lease, hire or licence (other than a supply of commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises) is input taxed.

Therefore, your turnover generated from the rental of Property C is not included in the calculation of your current or projected GST turnover.

In addition, section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover provides relevant guidelines.

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

•         any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

•         any supply made, or likely to be made, by you solely as a consequence of:

­   ceasing to carry on an enterprise; or

­   substantially and permanently reducing the size or scale of an enterprise.

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53 of this Ruling.)

Note: the legislative reference of paragraphs 188-25(a) and 188-25(b) in paragraph 30 above refer to the first and second dot points respectively in paragraph 29 above.

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of GSTR 2001/7.

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Paragraphs 258 and 259 of MT 2006/1 contain guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

•         Assets can be categorised as trading/revenue assets or capital/investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•         Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Current GST turnover

As stated above, your 'current GST turnover' is the sum of the values of all of your supplies made in a particular month and the preceding 11 months, excluding, among other things, supplies that are input taxed.

In your case, you made a supply of the EFG Properties for the total consideration of $ in MM/YYYY. The amount $ is to be included in your current GST turnover in accordance with paragraph 188-15(1).

Based on the facts, your current GST turnover is $ (which is below the GST registration turnover threshold) and it is relevant to determine your projected GST turnover pursuant to subsections 188-10(1) and 188-10(2).

Projected GST turnover

As stated above, your 'projected GST turnover' is the sum of the values of all of your supplies made in a particular month and the following 11 months, excluding, among other things, supplies that are input taxed or capital assets.

Therefore, we need to determine whether the value of your supply of Property B is to be included in your projected GST turnover.

In your case, your original purpose for purchasing Property Y was to demolish the existing dwelling and build a house for your personal use in your future retirement. However, due to a change in circumstances, your intention has not been realised.

You did not acquire the property as a trading asset for the primary purpose of resale. Furthermore, prior to subdividing the land in MM/YYYY, you derived rental income from the use of the property for a period of approximately # years.

Following the land subdivision and your sale of the other subdivided lot comprising Property A, you maintained your original intention of constructing a private dwelling on the vacant land that you retained known as Property B. Property B was not used by you for any income producing purposes. In YYYY you determined that you would be unable to afford the construction costs of building a residential unit, given your age and financial situation, and you made the decision to sell Property B.

Taking into account the above factors, we consider that your sale of Property B would constitute the transfer of ownership of a capital asset of yours for the purposes of section 188-25 and the expected sale proceeds is therefore disregarded when calculating your projected GST turnover.

Based on the facts of this case, we have not considered your proposed sale of Property D as each case might turn on its own particular facts and as outlined in paragraph 36 of GSTR 2001/7 for the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Given the above, your GST turnover does not meet the registration turnover threshold of $75,000 and you are not required to be registered for GST under section 23-5. This is provided that you do not voluntarily register for GST or carry on any other enterprise or enterprises on or before the time of supply where your GST turnover will meet the GST registration threshold.

Question 2

Summary

Your sale of Property B will not be a taxable supply under section 9-5 of the GST Act because you are neither registered nor required to be registered for GST. Therefore, GST will not be payable on the sale.

Detailed reasoning

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

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 to the indirect tax zone (Australia); and

(d)  you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

As discussed above under Question 1, you are neither registered nor required to be registered for GST.

Consequently, paragraph 9-5(d) is not satisfied. This means that all of the criteria of a taxable supply have not been met and the sale of Property B made by Person A and Person B will not be a taxable supply. Therefore, GST will not be payable on the sale.

Additional information

The decision in this ruling is limited to the supply of Property B only and does not cover the sale of any other property or properties that you have made or will make at a future date.