Edited version of private advice

Authorisation Number: 1052043810368

Date of advice: 14 October 2022

Ruling

Subject:GST - property - unimproved land - premises - residential premises

Question 1

Are the sales of the four subdivided blocks of vacant land (Land 1) at XXX subject to goods and services tax (GST) under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the sales of the subdivided lots at XXX are taxable supplies under section 9-5 of the GST Act. There are no provisions available in the GST Act to allow the supplies GST-free nor input taxed.

Question 2

Is the sale of the property (Land 2) at XXX subject to goods and services tax (GST) under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 2

Yes, the sale of the property at XXX is a taxable supply under section 9-5 of the GST Act. There are no provisions available in the GST Act to allow the supplies GST-free nor input taxed.

This ruling applies for the following periods:

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commences on:

22 June 2022

Relevant facts and circumstances

You are a discretionary trust.

You are registered for Goods and Services Tax (GST) since 1 July 2000.

You are running an enterprise of commercial and residential leasing to third parties.

The corporate trustee was previously controlled by the father and mother, however the father is now in an aged care facility.

The children's mother is still involved in the final decision making on important matters, however the day-to-day administration is carried out by one of the children on behalf of the family. There are four children.

On 5 February 1997, you purchased a vacant land at XXX (Land 1).

On 16 January 1998, you purchased a land with a derelict dwelling on it which was then and has always been uninhabitable at XXX (Land 2).

The titles of the two properties at XXX and XXX are held under XXX as the trustee. The zoning for the subdivided lots and land 2 is agricultural.

The land was purchased by the Trustee for use by the beneficiaries as private recreational purposes. In the past, XXX but did not engage in commercial farming activities.

The land was purchased by the father, when he had control of the Trustee, using cash and no borrowings were involved.

No commercial or development activity has been carried out on the land since it was purchased.

In XXX, the property at XXX was subdivided into four blocks by the Trustee.

Neither the Trustee nor its associated parties have a history of property of subdivision.

Input-taxed credits were claimed in the process of subdivision. However, details on the type of expenses and the respective amount claimed could not be provided as your previous accountant worked on your tax affairs at the time.

You provided a schedule for the input tax credits claimed on capitalised works on the property (Land 1) from financial years 2005 to 2020.

The purchase of the land and subdivision occurred under the control of the founder of the trust.

The work you undertook in subdividing the land include clearing tree and bush by contract labour, surveyors and lawyers handled the application in obtaining all regulatory approvals.

The cost of subdivision Land 1 was funded by the cash reserves of the trust and the controllers of the trust. There were no external borrowings.

You provided that Land 2 remains much as it was when purchased

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 38-480

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

Reasons for decision

In relation to Question 1

Goods and services tax (GST) is payable on taxable supplies.

Under section 9-5 of the GST Act, you make a taxable supply if:

(a)           You make a 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 (Australia); and

(d)           You are *registered for *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (Note: the * denote a defined term within the GST Act.)

In your case, the supplies of the subdivided lots of land will be for consideration, they are connected with Australia and you are registered for GST. Therefore, paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act are satisfied.

There are no provisions in the GST Act allowing the sale of vacant land to be input taxed. This is supported by Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) under paragraph 47:

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

The sale of farm land may be GST-free under section 38-480 of the GST Act where:

(a)           the land is land which a *farming business has been *carried on for at least the period of 5 years preceding the supply; and

(b)           the *recipient of the supply intends that a farming business be carried on, on the land.

If paragraph 9-5(b) of the GST Act is satisfied, then the sale of the subdivided vacant land is made in the course or furtherance of an enterprise that you carry on, the supply will be taxable.

Generally, if you are registered or required to be registered for GST, the disposal of a capital asset in Australia, in the course of carrying on your enterprise, is a taxable supply and you are required to account for GST on that sale.

Miscellaneous Taxation Ruling MT 2006/1 TheNewTaxSystem:themeaningofentitycarryingonanenterpriseforthepurposesofentitlementtoanAustralian Business Number(MT 2006/1) under paragraphs 261 and 264 and their respective footnotes 104 and 106 state that:

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

...

264.     The cases of Statham& Anor v. Federal Commissioner of Taxation(Statham) and Casimatyv. FC of T(Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

[104] Note however that where there is an enterprise registered for GST purposes, the supply of investment assets or non-trading assets in the course or furtherance of an enterprise would still form part of the enterprise activities, see section 9-5 of the GST Act.

...

[106] 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358. Further to footnote 104, isolated sales of land by an enterprise already registered for GST would be subject to GST.

Therefore, the sale of the four subdivided blocks of land will be made in the course or furtherance of your enterprise that you are carrying on and paragraph 9-5(b) of the GST Act will be satisfied.

Furthermore, all the requirements of section 9-5 of the GST Act will be satisfied and the sales of the four subdivided lots will be taxable supplies and subject to GST.

In relation to Question 2

In your case, the supply of the property (Land 2) will be for consideration, they are connected with Australia and you are registered for GST. Therefore, paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act are satisfied.

The sale of *residential premises is input taxed under section 40-65 of the GST Act, but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

Section 195-1 of the GST Act defines residential premises as: Land or a building that:

(a)           is occupied as a residence or for residential accommodation; or

(b)           is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a

* floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) paragraph 20 provides that:

20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

If paragraph 9-5(b) of the GST Act is satisfied, then the sale of Land 2 is made in the course or furtherance of an enterprise that you carry on, the supply will be taxable.

Therefore, the sale of Land 2 will be made in the course or furtherance of your enterprise that you are carrying on and paragraph 9-5(b) of the GST Act will be satisfied.

Furthermore, all the requirements of section 9-5 of the GST Act will be satisfied and the sale of Land 2 will be a taxable supply and subject to GST.