Edited version of private advice

Authorisation Number: 1052072814667

Date of advice: 16 January 2023

Ruling

Subject: Taxable supply

Question 1

Will the supply of the property be a supply made in the course or furtherance of an enterprise being carried on by the Trust and, as a consequence, be a taxable supply in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of the property will be a supply made in the course or furtherance of the Trust's enterprise being carried on and as a result the supply of the property will be a taxable supply in accordance with section 9-5 of the GST Act.

Question 2

If the answer to question 1 is no, is the Trust required to be registered for goods and services tax (GST)?

Answer

The Trust is currently registered for GST and will be required to remain registered and report the sale of the property.

Question 3

If the answers to question 1 and 2 are yes, will the Trust be eligible to use the margin scheme, pursuant to Division 75?

Answer

Yes. The Trust will be eligible to use the margin scheme pursuant to Division 75.

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

The date this notice of the private ruling issued.

Relevant facts and circumstances

The Trust acquired a commercial property as a GST-free going concern.

The Trust was a special purpose entity and has not undertaken any other activities in connection with the property.

The Trust was registered for GST at the time of purchase and remains registered.

The Trust was not and is not a member of a GST group and the Trust was not and is not a participant in a joint venture.

The property was had development consent granted at the time of purchase.

The Trust applied for a was granted several changes to the existing development consents over the years of ownership.

The property remained vacant land from the time the existing structures were demolished in XXXX.

A contract of sale for the property and the development approvals has been entered into with a third party.

The contract of sale contains a clause stating that the parties agree that the margin scheme will apply if the ATO issues a private ruling stating that the supply is eligible for the margin scheme.

The Trust purchased the property for long term re-development. The enterprise was and continues to be for the purposes of this development.

When acquired, the site initially had retail shop fronts and commercial leases. As the leases expired, they were not renewed and eventually, in preparation for the redevelopment, the site was cleared.

The Trust claimed input tax credits relating to the proposed development of the site and included consultancy fees, estate agent marketing fees for pre-sales and fees for the preparation of financial statements, tax returns and activity statements for the Trust.

The Trust attempted to sell apartments off the plan across various marketing campaigns. These campaigns commenced in or around XXXX and ended in XXXX.

Contracts of sale for these apartments were exchanged during the marketing campaigns referred to above, however no contracts were completed.

The property as a whole was not being actively marketed when the director of the Trustee Company was approached, by a representative of a developer with an offer to purchase the property as a whole.

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 75-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1A)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-5(3)(e

Reasons for decision

Question 1

Will the supply of the property be a supply made in the course or furtherance of an enterprise being carried on by the Trust and, as a consequence, be a taxable supply in accordance with section 9-5?

Answer

Yes. The supply of the property will be a supply made in the course or furtherance of the Trust's enterprise being carried on and, as a result, the supply of the property will be a taxable supply in accordance with section 9-5.

Detailed reasoning

Under section 9-5, an entity makes a taxable supply where the supply:

1.    is made for consideration; and

2.    is made in the furtherance of an enterprise that you carry on; and

3.    is connected with the indirect tax zone; and

4.    is made by a supplier who is registered, or required to be registered, for GST.

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

In this case, the property to be sold will consist of a property that is located in the indirect tax zone, the supply will be for consideration and the supply will be made by a supplier who is currently registered for GST. Therefore, the sale of the property would satisfy three elements outlined above (1, 3 & 4).

Accordingly, we need to determine whether the last element will also be satisfied. If this is the case, the supply of the property will satisfy all requirements of section 9-5 and will be a taxable supply.

The question is whether the sale of the property is a sale in the course of furtherance of the enterprise being carried on by the Trust.

Are you carrying on an enterprise?

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or a series of activities done:

•         in the form of a business (paragraph 9-20(1)(a)).

•         In the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phrase 'carry on' in the context of 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 and enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. 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.

The Trust was incorporated for the specific purpose of purchasing and developing the property. The property had development approval already granted when purchased. Over the years, the Trust have applied for several changes to the development approvals which have been granted by the Council.

Initially, the property was purchased with existing commercial properties which were tenanted. Over the years the commercial premises were demolished once all the tenants vacated.

Marketing campaigns have been run by the Trust from XXXX through to XXXX, attempting to sell units off-the-plan. Some off-the-plan contracts were entered into in XXXX, however, these contracts were never completed.

The Trust have continued to make claims for input tax credits in relation to marketing costs, signage and advertising, commission on the off-the-plan sales and consultancy services in their activity statements.

The Trust has now entered into a contract of sale with a third party to sell the property as a whole.

The Trust contends that they were incorporated for the specific purpose of purchasing and developing the property. It has not undertaken any business, or activities in the nature of trade. Its only activities have been in connection with the property.

Further, it is contended that the Trust had minimal involvement in the development of the site and that there has been no development activity undertaken since XXXX. It is stated that this situation is similar to that in the Aurora Developments Pty Ltd v Federal Commissioner of Taxation (2011) ATC 20-250 (Aurora) where the idea of development of the land had been abandoned in favour of sale.

We do not agree with this view.

In Aurora, at paragraphs 261 - 262 & 264 - 266. the following comments are made:

261. By the date of the contract Aurora was no longer engaged in the development of the land according to the "Development Material" as defined. It was engaged in an en globo sale of land as part of its general business undertaking and it assumed a contractual obligation to undertake the Annexure C works required to be done by Australand. It accepted an obligation to undertake those things required by Special Condition 6 more broadly and provide the buyer with those rights contemplated by Special Condition 12. Aurora entered into the en globo sale of the land and assumed the obligations of the Special Conditions as an incident of that sale. The disposal of lands fell within the business undertaking of Aurora.

262. It was a supply for the purposes of s9-10 of the GST Act and a taxable supply for the purposes of s9-5 of the GST Act.

264. Section 9-20 of the GST Act provides (among 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 basis in the form of a lease, licence or other grant of an interest in property.

265. Aurora was in the business of property development. It had embarked upon a particular project, within that business activity, of development of the Aurora land according to the bundle of project activities characterising the "Aurora Adult Community" by reference to all of the documentation embodying the content of that development later defined in the contract as the "Development Material".

266. That project was abandoned and, in its place, Aurora decided to sell the land. To sell the land it agreed (and became contractually bound) to undertake particular works (physical activities) and assume some no-physical obligations. It is true that those works, and obligations are or involve a "series of activities"

We consider that the development activity being conducted, including the demolition of the remaining structures, does not lend itself to the view that the development enterprise had at this time been abandoned for sale. The Trust continued until XXXX to actively market the property by offering units for sale off-the-plan and in fact, entered into a number of contracts of sale.

The Trust have stated that they were not actively seeking a buyer for the property, so the conclusion can be drawn that the original purpose of property re-development had not been abandoned by the Trust, it had merely stalled.

The Trust contend that they had minimal involvement in the development of the site. This is not accepted as evidence that they were not carrying on an enterprise. It is common business practice to engage suitably qualified persons with the necessary qualifications or skills to complete a project.

In a recent Administrative Appeals Tribunal (AAT case) Colins & Anor ATF The Collins Retirement Fund v FC of T 2022 ATC 10-627 (Collins), although related to the subdivision of property without the construction of any buildings, the issue of the degree of involvement relating to a property development can be applied here.

In Collins, at paragraphs 63 and 64 the following comments are made:

63. That the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land, is I would have thought, a hallmark of modern subdivision projects. While that may mean the Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work.

64. Likewise, that the applicant chose to sell vacant land and, as the applicant expressed it, left further profits on the table by not constructing and selling houses on the lots for further profit, in my view provides little assistance to the applicant. Every operator of a land development business that chooses to sell allotments rather than house and land packages has made such a choice.

65. The applicant also noted that the sale proceeds from the land sales were reinvested in capital assets of the applicant fund. Respectfully, I am unable to see how that is relevant to the character of the antecedent subdivision and sale of the lands from which those proceeds were generated. It is commonplace for an entity, especially a superannuation fund, to invest excess income in income-earning capital assets; that does not affect the character of the income.

Substantial works, in the form of the demolition of the previously existing structures/shops and the clearing of the site, have been completed to improve the property for re-development at a scale that can be seen as significant and not merely to enable a vacant plot of land to be sold. The fact that the Trust have decided now to on-sell the property instead of continuing with the proposed development is just a choice they have made as part of the enterprise they are carrying on.

Based on the facts and evidence of this case, we consider that the Trust were carrying on an enterprise of leasing and property development. The leasing enterprise ended with the commercial leases expiring and the demolition of the commercial premises. This leaves the only enterprise being carried on by the Trust as property development.

The decision to sell the property as a whole (being the asset on which the development would have been constructed) instead of continuing with the development, will be a supply in the course or furtherance of the enterprise being carried on by the Trust.

As the Trust is selling the asset, being the property, the sale will meet all four requirements under section 9-5 and will be a taxable supply when sold as the property forms part of the enterprise being carried on by the Trust.

Question 2

If the answer to question 1 is no, is the Trust required to be registered for GST?

Answer

The Trust is currently registered for GST and will be required to remain registered and report the sale of the property.

Reasoning

The Trust is already registered for GST, reporting its GST obligations on a quarterly basis. We will look at the requirements to be registered under section 23-5 to determine whether the Trust is required to remain registered for GST as a result of the sale of the property.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

Division 188 provides the meaning of GST turnover. Section 188-20 states that your projected turnover at a time during a month is the sum of the values of all supplies that you have made, or are likely to make, during that month and the following 11 months, other than supplies that are:

(a)  Supplies that are input taxed, or

(b)  Supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c)   Supplies that are not in the connection with an enterprise that you carry on.

Section 188-25 states, that in working out your projected turn over, disregard:

(a)  Any supply made, or likely to be made by way of a transfer of ownership of a capital asset of yours; and

(b)  Any supply made, or likely to be made, by you solely as a consequence of:

                      i.        Ceasing to carry on an enterprise; or

                     ii.        Substantially and permanently reducing the size of an enterprise.

Goods and Services Tax Ruling GSTR 2001/7 Goods and service tax: meaning of GST turnover, including the effect of section 188-25 on projected turnover (GSTR 2001/7) discusses how section 188-25 affects the calculation of projected GST turnover, including the meaning of terms including capital asset.

Paragraphs 31 to 36 of GSTR 2001/7 states:

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'¹⁴ 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'.¹⁵

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'.¹⁶ An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock¹⁷) 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'.¹⁸

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 of this Ruling.

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.

Further GSTR 2001/7 states in relation to isolated transactions:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade.²⁰ As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

In this case, the Trust purchased the property as a going concern with several commercial leases in place, as well as development approval to develop the property. The Trust's previous and current activities indicate that prior to the unsolicited offer to purchase the property, they were still treating the property as part of their property development enterprise.

The property is the only asset that the Trust owns and was purchased as part of its property development operations. The disposal of that asset is of trading stock as opposed to a capital asset. Additionally, the disposal of the property is not a result of the enterprise ceasing. Rather, it is the sale of the property in the course of the Trust's enterprise that will likely cause that enterprise to cease.

Based on the facts of this case, the Trust will be required to remain registered for GST as the sale of the property will result in their turnover exceeding the registration turnover threshold.

The sale of the property will be a taxable supply and, as a result, the proceeds of the sale will require the Trust to remain registered for GST and report the sale of the property accordingly.

Question 3

If the answers to questions 1 and 2 are yes, will the Trust be eligible to use the margin scheme, pursuant to Division 75 of the GST Act?

Answer

Yes. The Trust will be eligible to use the margin scheme in relation to the sale of the property as they meet the requirements under Division 75.

Reasoning

Section 75-5 provides that an entity can use the margin scheme in working out the amount of GST on a taxable supply of real property by selling a freehold interest in land, selling a stratum unit or granting or selling a long-term lease provided that the vendor and the recipient of the supply have agreed in writing that the margin scheme will apply.

Subsection 75-5(1A) states that the agreement must be made on or before the making of the supply, or within such a period as the Commissioner allows.

Paragraph 75-5(3)(e) provides that a supply is ineligible for the margin scheme where it is a supply in relation to which all of the following apply:

      i.        you acquired the interest, unit or lease from an entity as, or as part of, a supply of a going concern to you that was GST-free under Subdivision 38-J;

     ii.        the entity was registered or required to be registered, at the time of the acquisition;

    iii.        the entity had acquired the entire interest, unit or lease through a taxable supply on which GT was worked out without applying the margin scheme.

The contract of sale the Trust have entered into pertaining to the sale of the property contains an agreement in writing between the parties. Therefore subsection 75-5(1A) is satisfied.

The evidence provided by the Trust confirms the following:

•         The Trust acquired the property in XXXX as a GST-free going concern;

•         The Trust was registered at the time of the acquisition; and

•         The vendor had acquired the entire interest of the property prior to 1 July 2000 and therefore, could not have been a taxable supply at that time.

Therefore, the Trust is not excluded from applying the margin scheme under paragraph 75-5(3)(e).

As the supply of the property has been determined to be a taxable supply and the contract of sale indicates that there is an agreement in writing between the parties, the Trust is eligible to apply the margin scheme to the sale of the property.