Edited version of private advice

Authorisation Number: 1052059581438

Date of advice: 16 November 2022

Ruling

Subject: Subdivision

Question 1

Are you required to be registered for GST in relation to the subdivision of your property?

Answer

No.

Question 2

Will GST apply to the sale of the subdivided lots?

Answer

No.

This ruling applies for the following period:

16 November 20XX to 16 November 20XX

The scheme commences on:

16 November 20XX

Relevant facts and circumstances

You are a private company, incorporated in Australia in 19XX. You acquired a sizeable amount of land shortly afterwards for the purpose of conducting farming activities. The property was applied in these activities continuously from the time it was acquired until 20XX. Shortly after acquiring the property, a residence was constructed on a portion of the land that was used for private purposes by your owners.

In 20XX, your land and the surrounding area was rezoned as residential land. You and your associates were not involved in the rezoning process and did not make any submissions to council or other authorities to petition for the rezoning to occur. Following this rezoning, a precinct structure plan was developed for the long term urban development of the area, which was approved by the minister for planning in 20XX.

The developer approached landowners in the area, including yourself, in 20XX with a proposal to develop the land. The developer's view was that a consolidated development project across multiple parcels of adjoining land would collectively achieve a greater value than if each parcel of land was sold or developed individually.

You viewed the development opportunity as the best way to realise the property for its maximum value, entering into the Property Development Agreement (PDA) in June 20XX. No previous attempts had been made to sell the land and you were not actively marketing your property prior to being approached by the developer. You have not previously been involved in or associated with any similar land development projects. Additionally, you have never leased your land to others.

Under the terms of the PDA, the developer was responsible for carrying out the development activities and the landowners granted all authority to the developer to undertake the necessary activities. A Power of Attorney was granted in favour of the developer by each landowner to enable an efficient process for conducting the development activities.

The responsibilities of the landowners in respect of the development were to provide the land to the developer to allow the development activities to occur. You were entitled to retain occupancy of the residence on the land until such time as that portion of the land was required by the developer, or until at least a specified amount of the proceeds had been paid to you. As consideration for the contribution of their landholdings towards the development, landowners were entitled to receive 25% of gross sale proceeds in respect of the sale of lots relating to their land, net of applicable GST.

The development of the landowners' properties involves the subdivision of land into mostly residential lots, with some areas allocated as commercial land, and the addition of roads, conservation reserves and parkland to service the area. The construction of residential or commercial properties is not included in the development activities.

Your portion of the land is expected to hold approximately one third of the available residential lots within the development upon completion, which will occupy XX hectares of the land, with the balance of the property used for roads, conservation areas and parks.

To date, contracts have been signed with purchasers for more than half of the lots on your land. These contracts are for vacant lots, with construction of residential properties to be undertaken by the purchasers.

The remaining unsold lots are available for sale but are not actively being marketed to allow for progressive settlement of lots and appropriate time available for construction of housing on lots that have already been sold.

At the time of signing the PDA, a mortgage was held over your land. This mortgage was taken out in 19XX for the initial purchase of the land and was not used to provide financing for the development activities. The PDA provided you the right to keep the mortgage in place provided that proceeds received under the agreement were used for repayment of the outstanding balance. The balance of the mortgage was repaid in full in with private funds. No proceeds from the development were used to repay this debt.

In 20XX, all farming assets were removed from the property and the residence demolished to allow for progression of the development activities by the developer. Your owner continues to conduct farming activities as a sole trader on a new property via a share farming arrangement.

You registered for GST in 20XX as you were carrying on an enterprise and your turnover at that time exceeded the threshold for GST registration. In recent years, as the farming business has wound down and transitioned to operations via a sole trader structure, your turnover fell below the registration threshold.

In November 20XX, you requested that your tax agent cancel your GST registration on the basis that you were no longer required to be registered for GST. Your GST registration was cancelled in November 20XX, with effect from 31 December 20XX.

In addition to the information above, you provided a copy of the Property Development Agreement (PDA) and the relevant supporting documentation to that agreement. Under the PDA:

•         You are the registered proprietor and the beneficial owner of the land until transferring the land to purchaser or vesting the land to relevant Authorities.

•         You agreed to appoint the Developer to carry out the development on your land, which includes the subdivision of the development land via one or more stages into a multiple lot residential development and or mixed use residential and commercial development, and the sale and settlement of those lots.

•         You shall pay the Development Fee to the Developer progressively according to the Stage Forecast, as those amounts are disbursed from the lot sales.

•         The Development Fee includes Development Costs plus a margin.

•         You are only required to pay the Development Fee to the Developer. In return, the Developer shall pay all Development Costs incurred after the effective date without seeking reimbursement or refund from yourself or other landowners.

•         You shall be entitled to the Landowner Amount. A percentage of which is retained by yourself with the remainder shared with the other parties per their entitlement proportions.

•         Schedule 1 contains the Developer's responsibilities - including all activities required to complete the Development.

•         Schedule 2 contains the Landowner's responsibilities - including to execute, sign and deliver documents as required by the developer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

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) Regulations 2019 section 23-15.01

Reasons for decision

Under section 23-5, you are required to be registered if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold

Subsection 9-20(1) provides that an 'enterprise' includes an activity, or a series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. Section 195-1 of the GST Act clarifies that 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the 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 guidance on what activities will amount to an enterprise.

Paragraph 234 of MT 2006/1 highlights a key difference 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' - a business encompasses trade engaged in, on a regular or continues 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 262 of MT 2006/1 provides that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 264 of MT 2006/1 discussed the cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T (1997) 151 ALR 242 (Casimaty) and provides some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme.

The following factors, drawn from the Statham and Casimaty cases, may indicate that a business or an adventure or concern in the nature of trade is being carried on:

•         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.

Applying the above factors to your circumstances:

There is a change of purpose for which the land is held

You purchased the property for the purpose of conducting farming activities. From the time the property was purchased to 20XX, in line with your original intent, the property was applied in farming activities. You did not lease this land to other farmers, nor did you employ anyone to aid in these activities.

In 20XX your land and the surrounding area was rezoned as residential land. Following the rezoning, a precinct structure plan was developed for the long term urban development of the area. You did not initiate, or play a part in, the rezoning of the land and subsequent precinct structure planning.

Shortly after the land was rezoned, the Developer approached landowners in the area, including yourself, with a proposal to develop the land. You had no involvement in drafting the property development project. You continued to apply the land in your farming activities until you could no longer do so under the PDA.

Schedule 2 to the PDA contains the responsibilities of the landowners under the PDA. Schedule 2 provides that you are to execute, deliver & sign documents required by the developer alongside a number of other minor responsibilities, including to deliver up vacant possession of your land once a works commencement notice is issued. You are not involved in any of the development activities.

It's reasonable to conclude that the purpose for which you hold the land has not changed. You have entered into the PDA as you believe it to be the best way to realise your property for its maximum value.

Additional land is acquired to be added to the original parcel of land;

You have not acquired any additional land to be added to your original parcel of land. Although your land forms a part of what is referred to as the 'Development Land' it is the Developer who separately acquired a number of land parcels to aggregate.

The parcel of land is brought into account as a business asset;

You did not bring the land into account as a business asset, nor is there any indication that the land should be considered a business asset.

There is a coherent plan for the subdivision of the land

The PDA & associated schedules, based on the information that they contain, are indicative of a coherent plan for the subdivision of the land. However, these documents were drafted by the Developer and represent the Developer's plan for the land. You have played a largely passive role in the process and will continue to do so under the terms of the PDA, you do not have a coherent plan for the subdivision of the land.

There is a business organisation - for example a manager, office and letterhead;

With regard to the subdivision & development of your land you have not conducted your role in a business-like manner.

Borrowed funds financed the acquisition or subdivision;

You have not borrowed funds to finance the subdivision. Furthermore, the Development Fee is financed from the net sales proceeds of the project - there is no upfront cost to you that would require financing.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision

The level of development undertaken by the Developer is beyond what is necessary to secure council approval for the subdivision. However, in considering this, it's noted that you have not played an active role in any of the above development - the Developer believed it to be necessary in order to maximise the property value and undertook the associated activities of their own volition.

Buildings have been erected on the land.

The proposed development does not include the construction of any residential or commercial properties. The lots are to be sold as vacant land.

Other factors

Although not explicitly mentioned in MT 2006/1, it was considered significant in the case of Statham that the owners did not engage any contractors and relied upon the Kingaroy Shire Council to carry out the required work to subdivide the land.

In your circumstances, you were approached by the Developer and have not engaged any other parties to aid you in carrying out the subdivision. The Developer has assumed total control of the project while you have remained a passive participant. This is largely evidenced by Schedules 1 & 2 to the PDA which outline the Developer & Landowner responsibilities.

Conclusion

Considering your circumstances against the factors outlined in MT 2006/1, it's reasonable to conclude that you are not carrying on an enterprise in relation to the subdivision & development of your land. You purchased the land for the purpose of conducting farming activities, you did not intend to sell your land until it was rezoned and you were approached by the developer. You have not played an active role in the subdivision & development process. In signing the PDA you simply chose to realise a capital asset by the most advantageous means. You are not carrying on an enterprise in relation to the property development.

However, you are carrying on an enterprise with regard to your farming activities. Given that you are carrying on an enterprise, it falls to whether your GST turnover meets the registration turnover threshold in order to determine whether you are required to be registered under section 23-5 of the GST Act.

Under section 188-10 of the GST Act, you have a GST turnover that meets a particular turnover threshold if your current or projected GST turnover is at or above the turnover threshold. Relevantly, paragraph 23-15(1)(b) defines the registration turnover threshold, unless you are a non-profit body, to be an amount specified in the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations). This amount is $75,000 as specified by section 23-15.01 of the GST Regulations.

Paragraph 188-15(1)(c) provides that your current GST turnover does not include supplies that are not made in connection with an enterprise that you carry on. Similarly, paragraph 188-20(1)(c) states that, when calculating your projected GST turnover, you do not include supplies that are not made in connection with your enterprise.

As established previously within this ruling, you are not carrying on an enterprise in relation to the subdivision and development of your land. Therefore, any supplies made in connection with the property development do not contribute to your current or projected GST turnover.

Per the facts, your GST turnover is below the registration turnover threshold. You are not required to be registered for GST.

Question 2

Detailed reasoning

Under subsection 7-1(1) of the GST Act, GST is payable on taxable supplies and taxable importations.

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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 with the indirect tax zone; and

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

You are not registered for GST and, as reasoned in Question 1, you are not required to be registered for GST. As such, GST will not be payable on the sale of the subdivided lots.