Edited version of private advice

Authorisation Number: 1052083330814

Date of advice: 13 February 2023

Ruling

Subject: Subdivision

Question 1

Are you carrying on an enterprise with respect to the sale of lot 2 of the proposed subdivision plan?

Answer

No.

Question 2

Are you required to pay GST on the sale of lot 2 of the proposed subdivision plan?

Answer

No.

Question 3

Is the Company carrying on an enterprise with respect to the sale of lot 2 of the proposed subdivision plan?

Answer

No.

Question 4

Is the Company required to pay GST on the sale of lot 2 of the proposed subdivision plan?

Answer

No.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You are the sole director and shareholder of the Company. Neither you nor the Company are registered (or required to be registered) for GST.

You purchased a property in YYYY. This property is your principle place of residence.

You purchased another property in YYYY. This property has operated as a residential rental property from its purchase date to the present.

Both of these properties were purchased jointly with another individual.

In 20XX, the Company purchased a third property. The Company's sole activity is owning and renting this investment property - the Company was established for this purpose.

Although 2 properties were purchased jointly, as a result of a recently finalised divorce, you are now the sole owner of these properties. One property remains in possession of the Company.

You borrowed money against these properties to settle the divorce and You are now looking to subdivide and sell the properties in order to pay off this borrowing as it is no longer financially viable to operate them as rental properties. In order to pay for the costs associated with the subdivision, you are refinancing the properties.

You have provided an image of your proposed subdivision plan.

You will not make any improvements to the subdivided lots, beyond what is necessary to secure council approval for the subdivision, prior to the sale. This involves the construction of a road on an easement in order to accommodate access & services for the new lots.

Neither You nor the Company have claimed input tax credits for expenses related to the properties. Likewise, no input tax credits will be claimed in relation to the subdivision or sale of the lots.

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 9-5

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

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

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

A New Tax System (Goods and Services Tax) Regulations 2019 section 23-15.01

Reasons for decision

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines 'enterprise' as an activity, or 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 anything in the course of the commencement or termination of the enterprise - meaning that one-off transactions can constitute 'carrying on 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 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 continuous 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 references 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), providing guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme.

The following factors, drawn from Statham & Casimaty, 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.

Considering your circumstances against the above factors, the Commissioner accepts that neither yourself nor the Company are carrying on an enterprise with regard to the sale of subdivided lots. Although some factors are indicative of an enterprise being carried on, the majority are not. The subdivision has not been approached in a business-like manner with a view to maximise profits, rather, it was simply necessitated by the divorce settlement.

Under subsection 7-1(1) of the GST Act, GST is payable on taxable supplies and taxable importations. Under section 9-5 of the 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 selling the lot(s) for payment, therefore, paragraph (a) is satisfied. As the property is located within Australia, the supply is connected with the indirect tax zone (paragraph (c)). What remains is to determine whether paragraphs (b) & (d) are satisfied.

As the sale of the subdivided lot in your possession is not made in connection with an enterprise that you carry on, paragraph (b) is not satisfied and you are not liable to pay GST on that sale. However, circumstances differ regarding the Company.

Although the Company is not carrying on an enterprise of property development, the Company did apply the property in its enterprise of generating rental income. As a result of this, the sale of any lots carved from the property owned by the Company will be connected with the Company's enterprise - satisfying paragraph (b).

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 188-25 of the GST Act provides that, in working out your projected GST turnover, disregard:

(a)          any supply made, or likely to be made, by you by way of 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 or scale of an enterprise

The Company's sole activity is generating rental income from the property. In both demolishing the dwelling on the property and transferring ownership of the land, the Company is supplying a capital asset as a consequence of ceasing to carry on its enterprise. Therefore, the sale of the property will not be included in the Company's projected GST turnover and the Company will not be required to be registered.

As the Company is not registered or required to be registered for GST, paragraph 9-5(d) is not satisfied and it is not making a taxable supply.