Edited version of private advice

Authorisation Number: 1052054407466

Date of advice: 21 December 2022

Ruling

Subject: GST - sale of two blocks of subdivided vacant land

Question 1

Is the entity required to be registered for GST for the sales of its two blocks of subdivided vacant land?

Answer

No, the entity is not required to be registered for GST for the sales of its two blocks of subdivided vacant land.

Question 2

Will the Commissioner cancel the entity's GST registration effective from its start date of registration?

Answer

No, the Commissioner will not cancel the entity's GST registration effective from its start date of registration.

Question 3

Does the entity's assessed net amount for the relevant tax period include an amount of excess GST? If so, was the excess GST passed on?

Answer

Yes, the entity's assessed net amount for one relevant tax period includes an amount of excess GST. However, the excess GST was not passed on.

In this regard, the entity needs to revise its lodged activity statement for that tax period by reducing Label 1A to NIL to reflect this decision.

In addition, the entity needs to reduce label 1B to NIL in its lodged activity statement for the relevant tax periods to reflect the decision made in Question 1 where it was determined that it is not carrying on an enterprise.

This private ruling applies for the following periods:

Quarterly tax periods ended 31 December xxxx

Quarterly tax periods ended 31 March xxxx

Relevant facts and circumstances

The entity purchased a block of land to build residential premises, but after several years, decided to sell the land.

The block of land was subdivided into two blocks and had the required minimum subdivision works done for the relevant council approval.

The entity sold both the subdivided vacant blocks of land.

The entity considered that as it was not in the business of property development, there was no requirement for it to registered for GST. The entity set the prices for the relevant blocks on the premise that the sales were not subject to GST.

However, on advice that the sale transactions may not be completed without the entity's GST registration, the entity went ahead and registered for GST despite its belief that the sales should not be subject to GST as it was not running a business.

Relevant legislative provisions

A New Tax System (Good and Services Tax) Act 1999 Section 9-20

A New Tax System (Good and Services Tax) Act 1999 Section 23-5

A New Tax System (Good and Services Tax) Act 1999 Section 25-60

A New Tax System (Good and Services Tax) Act 1999 Division 142

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

Reasons for Decision

All legislative references in this ruling are of the GST Act unless otherwise stated.

Question 1

Section 23-5 provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the GST registration turnover threshold.

The term 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise. Section 9-20 defines an enterprise as an activity or series of activities done, of relevance to this case:

•         in the form of a business; or

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

Miscellaneous Taxation Ruling 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) contains the ATO view on what constitutes an enterprise.

Paragraph 159 of MT 2006/1 provides that 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.

In this regard, we need to determine whether the subdivision and the subsequent sale of the subdivided blocks of land are activities that amount to an enterprise. Of most relevance in this case is the character of the property at the time of supply. We start this process by examining the scale and the level of development activities undertaken by the entity.

Paragraph 180 of MT 2006/1 provides that an enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of the whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

Paragraph 186 further provides that there are a range of activities that are of such a small scale that they do not amount to an enterprise. While it is always a question of fact and degree in each particular case, it would be difficult to conclude that activities are an enterprise where they are of a very small size and scale, are carried on in an ad hoc manner, and there is little repetition or regularity.

In addition, paragraphs 262 and 263 of MT 2006/1 provide that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions and the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset.

Paragraph 266 of MT 2006/1 further provides that 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 in paragraph 265, 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.

Based on the facts of this case, we determine that the entity's activities of subdividing the Land and selling both vacant subdivided blocks do not constitute the carrying on an enterprise. As such, it is not required to be registered for GST.

Question 2

Section 25-60 provides that the Commissioner must decide the date on which the cancellation of an entity's GST registration takes effect. That date may be any day occurring before, on or after the day on which the Commissioner makes the decision.

Practice Statement Law Administration PS LA 2011/8 sets out the policy and procedures Australian Taxation Officer (ATO) staff must follow and comply with on a range of issues relating to GST registration of entities, including the cancellation of GST registration.

Paragraph 83 of PS LA 2011/8 provides that the Commissioner will not cancel the registration with effect from a date on which the entity was required to be registered, and will not usually do so from any date when the entity was operating as if it were registered for GST.

Paragraph 85 of PS LA 2011/8 advises that when an entity that is registered but was not required to be registered (a voluntary registration) applies to cancel its registration:

•         If the Commissioner is satisfied that the entity has never operated on a GST-registered basis, the Commissioner may accept the application to cancel the GST registration from a retrospective date chosen by the entity.

•         If the entity has operated on a GST-registered basis but has ceased doing so before the application to cancel registration is made, the Commissioner may accept the entity's application to cancel its GST registration from the start of the tax period which commences on or after the date it stopped operating on a GST-registered basis.

•         If the entity is still operating on a GST-registered basis at the time of the application to cancel registration, the date of cancellation will generally not be retrospective. The Commissioner will negotiate a prospective date if the application does not state one.

Paragraph 87 of PS LA 2011/8 further advises that the Commissioner will be satisfied that an entity has stopped operating (or never operated) on a GST-registered basis from a certain date if, from that date or an earlier date, the entity:

•         did not hold themselves out to other businesses as being registered for GST

•         did not issue any tax invoices or adjustment notes

•         did not claim any input tax credits, special transitional credits or indirect transitional credits, and

•         has made a declaration to the ATO that satisfies all of the above points.

In this case, even though the entity subsequently cancelled its GST registration and notified the Commissioner that it ceased operating, we consider the following factors:

•         it voluntarily registered for GST

•         it held itself out to its purchasers as being registered for GST during the sale of both the subdivided vacant land in the application of the margin scheme to the sales

•         it claimed input tax credits in its lodged activity statements for the relevant tax periods, and

•         it lodged NIL BAS for the subsequent tax periods until the cancellation of its GST registration.

Based on the specific facts pertaining to this case, it is determined that the Commissioner will not cancel the entity's GST registration effective from its start date and the cancellation of its GST registration will remain effective as previously approved.

Question 3

Section 142-5 provides that Subdivision 142-A will apply if, after disregarding certain amounts from an entity's assessed net amount for a tax period, the entity's assessed net amount for that tax period takes into account an amount of GST exceeding that which is payable.

As discussed above, the entity was registered for GST when it sold both the subdivided vacant blocks of land under the margin scheme, and it reported GST transactions relating to the sales in the relevant tax period. However, as we had determined that it was not required to be registered for GST in Question 1 (and as a consequence, it did not make taxable supplies), its assessed net amount for the tax period has an excess GST amount because it included an amount which is not payable.

Section 142-10 provides that an amount of excess GST will be refundable:

•         if it has not been passed on to the recipient, or

•         if it has been passed on to the recipient, the recipient has been reimbursed.

In this regard, we need to determine whether or not the excess GST amount in the relevant tax period had been passed on.

The Commissioner explains his view on the meaning of the terms 'passed on' and 'reimburse' for the purposes of determining whether section 142-10 applies to an excess GST amount in the Goods and Services Tax Ruling 2015/1 Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax Systems (Good and Services Tax Act 1999 (GSTR 2015/1).

Paragraph 23 of GSTR 2015/1 explains that it is a question of fact whether the excess GST has been passed on and must be determined on a case by case basis by taking into account the particular circumstances of each case. However, section 142-25 and the policy and scheme of the GST Act more generally, give rise to an expectation that the excess GST will be passed on in most cases.

Paragraph 28 of GSTR 2015/1 further explains that a supplier should have regard to the following matters when determining whether or not it has passed on the excess GST, including whether or not its circumstances are out of the ordinary:

(i)    the manner in which the excess GST arose

(ii)   the supplier's pricing policy and practice

(iii)  the documentary evidence surrounding the transaction, and

(iv)  any other relevant circumstances.

We have considered the above factors against the specific circumstances in this case and determined that GST has not been passed on.

Paragraph 16 of GSTR 2015/1 provides that if the excess GST has not been passed on, section 142-10 does not apply and the supplier may, subject to the period of review, request an amendment to their assessment for the relevant tax period to reduce the amount of GST attributable to that tax period. Any resulting refunds will be paid or applied in accordance with Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953 (TAA).

As it is determined that the excess GST in the entity's net amount for the relevant tax period was not passed on, it needs to revise its lodged activity statement for that tax period.

In addition, it needs to reduce label 1B to NIL in its lodged activity statement for the relevant tax periods to reflect the decision in Question 1 that it is not carrying on an enterprise.