Edited version of private advice

Authorisation Number: 1052127455676

Date of advice: 24 July 2023

Ruling

Subject: GST - sale of real property

Question

Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell Lot 1 which is subdivided from the Property?

Answer

Yes.

Relevant facts and circumstances

You are the owner of the Property.

On September Year 1, you entered into a contract to purchase the Property for a specified amount. The Property contained a house and a large back shed. The sale of the Property to you was an input taxed supply of residential premises.

The purchase of the Property was entirely funded from proceeds of sale of your previous residence.

You purchased the Property to build your new principal place of residence.

You moved into the Property on the settlement date in October Year 1 and occupied it as your principal place residence.

Shortly after moving into the premises, you realised that the property as it stood was not suitable long-term so decided to apply for subdivision of the block but had no immediate plans to demolish or subdivide, or even proceed with selling off the subdivided land.

In November Year 1 you enlisted the services of a surveyor who advised you and applied for all the relevant consents/approvals.

At the time the decision was made to subdivide the land you intended to build on one block for yourself and was thinking of keeping the second block for investment purposes or sell it to your son so he could live next door.

To effect the subdivision you needed to obtain council approval, demolish the existing house and shed, and arrange for a surveyor to peg the boundary.

You provided a copy of the Plan of Proposed Division" dated November Year 1 prepared by the surveyor. It notes the existing dwellings and structures to be demolished and the site cleared. The Plan shows Lot 1 and Lot 2 with equal land area. The Plan contains a note for a new water meter for Lot 2. The Plan shows the existing cross-over in Lot 2 and a proposed cross-over on Lot 1.

You provided a copy of the plan decision notification form which shows that you lodged the development application on November Year 1 for the conventional land division creating two allotments from one allotment. The development approval was granted less than two weeks from lodgement.

After the subdivision was approved, you were still deciding if it was feasible to demolish and build or just sell the house as it was.

Lot 1 was first advertised for sale in January Year 2. The planning consent was put online when the block was advertised.

In October Year 2, you vacated the Property and moved to your current address.

You engaged a contractor for the demolition work. The structures on the land were demolished during a two-week period in November Year 2.

Your demolition and subdivision costs, which were funded from proceeds of the sale of your previous primary residence, include:

•         Surveyor

•         Sale by Homeowner web ad

•         Demolition

•         Sign board

•         Water Authority

•         Planning Authority

•         Surveyor

•         Legal - Conveyancing - Titles

•         Legal - Contract for sale.

Nothing has happened on the site since November Year 2 when demolition work finished.

You provided a link to a real estate listing for Lot 1. The ad states that house and land packages are available. The ad also includes a floor plan for a single storey dwelling.

In relation to the ad, you advised that:

•         there was no agreement with any entity/builders for the sale of a house and land package as indicated in the ad. There were builders who approached you and wanted to advertise the block as part of a house and land package. You agreed to let them as it might have made it easier for the block to sell as a house and land package.

•         the floor plan included with the ad was for the house to be built for you on Lot 2 and there was never any plan submitted for approval on Lot 1.

In March Year 3 the new Certificate of Titles were issued.

In May Year 3 you entered into a contract for the sale of Lot 1 (the Sale Contract) for a specified amount (inclusive of GST) with settlement in August Year 3. The Sale Contract includes the following in the Schedule:

•         there is an X in the box marking yes for the sale "is a taxable supply of real property, to which the margin scheme under GST Law Division 75 applies".

•         There is an X in the box marking "No - the Vendor, will separate to this contract, give the Purchaser written notice pursuant to section 14-255 of Schedule 1 of the TA Act".

You stated that Lot 2 was never on the market.

You provided a copy of the Plan for a proposed residence at Lot 2 dated June Year 3 created by Builder. You also provided a copy of a sales advice estimate for the construction of a single-storey 3-bedroom home. You are still fine-tuning the quote but are close to signing.

You are a part-time health worker.

You have not previously undertaken any subdivision activities or any business of land development You have no future plans to undertake any subdivision activities or any business of land development.

Our records show that in May Year 3 you applied for GST registration. This was processed in July Year 3 with the effective start date of October Year 1, as you requested.

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 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) Act 1999 section 188-25.

Reasons for decision

Summary

You are making a taxable supply when you sell Lot 1 which is subdivided from the Property, because all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied.

Detailed reasoning

GST is payable on the sale of Lot 1 if you are making a taxable supply.

Section 9-5 of the GST Act sets out the requirements of a taxable supply and it states:

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 for GST.

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

(* denotes a term defined in section 195-1 of the GST Act.)

Based on the information provided, the sale of Lot 1 is for consideration, the sale is connected with the indirect tax zone as the land is in Australia, and you are registered for GST. As such, the requirements in paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act are satisfied.

The sale of Lot 1 is not GST-free or input taxed under any provision of the GST Act or another Act.

Therefore, what remains to be determined is whether the sale of Lot 101 is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) of the GST Act.

Whether the sale is made in the course or furtherance of an enterprise that you carry on

Section 9-20 of the GST Act provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•         in the form of a business

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

Section 195-1 of the GST Act clarifies that the term '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 the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion on MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

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 the form of a business

Paragraph 177 of MT 2006/1 provides that to determine whether an activity, or series of activities amounts to a business, the activity needs to be considered against the indicators of a business established by case law. Some indicators are included in paragraph 178 of MT 2006/1, as follows:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in

•         commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of

•         other businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a

•         businesslike manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

Based on the facts and circumstances of your case, we do not consider the activities in relation to Lot 1 display the indicators of a 'business' listed above.

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

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions (paragraph 262 of MT 2006/1).

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraph 254 of MT 2006/1 provides that if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. The person's motive may be relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade.

Paragraphs 264 and 265 of MT 2006/1 refer to factors that indicate whether the activities undertaken are an adventure or concern in the nature of trade and state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty V. 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.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present, it may be an indication that a business or an adventure or concern in the of trade is being carried on. These factors are as follow:

•         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.

You stated that your intention when you purchased the Property was to build your new principal place of residence.

However, your activities indicate that your intended use of the property changed shortly after the purchase.

You moved into the premises in October Year 1. In November Year 1 you engaged surveyors to prepare a subdivision plan. The plan of subdivision was lodged with the relevant authorities in November Year 1 and the development approval was granted less than two weeks from lodgement.

You stated that after the plan of subdivision was approved you were still deciding if it was feasible to demolish and build or just sell the house as it was.

Before the subdivision work was completed, you engaged a real estate agent to market one of the lots. You also allowed some builders to advertise Lot 1 for sale as a house and land package. Lot 1 was first advertised for sale in January Year 2.

The structures on the land were demolished during a two-week period in November Year 2 and titles for the subdivided lots were issued in March Year 3.

Taking into account all the facts and circumstances in your case, we consider that the development of the Property and the sale of Lot 1 are activities in the form of an adventure or concern in the nature of trade. Accordingly, the sale of Lot 1 is made in the course or furtherance of an enterprise that you carry on and the requirement of paragraph 9-5(b) of the GST Act is satisfied.

Therefore, as all the requirements of section 9-5 of the GST Act are satisfied, the sale of Lot 1 is a taxable supply.

Additional information

Generally, the amount of GST payable on a taxable sale of real property is equal to one-eleventh of the sale price. If eligible, you may be able to use the margin scheme on the sale of the proposed lot. Under the margin scheme the amount of GST payable on the sale is one-eleventh of the margin for the sale.

The guide GST and the margin scheme will assist you in working out your eligibility to use the margin scheme. You can also refer to Goods and Services Tax Ruling GSTR 2006/8 Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000 which outlines how the margin scheme applies to a supply of real property acquired on or after 1 July 2000.

You are entitled to input tax credits for your acquisitions to the extent that they relate to the subdivision and sale of Lot 1 and provided they meet the requirements of section 11-5 of the GST Act. Refer to information on our website on Claiming GST credits.

All publications referred to above are available on our website www.ato.gov.au