Edited version of private advice

Authorisation Number: 1052260652455

Date of advice: 4 September 2024

Ruling

Subject: GST - sale of vacant subdivided lots of land

Question 1

Are the sales of the number lots of vacant land (the Lots) subdivided from the Property input taxed supplies pursuant to subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supplies of the Lots are not input taxed pursuant to section 9-30(4) of the GST Act.

Question 2

Where it is determined that the sales of the Lots are input taxed supplies pursuant to subsection 9-30(4), does Division 142 of the GST Act apply in respect of sale amounts that have been included as an assessed net amount within the Relevant Period?

Answer

Response not required due to answer given to question 1.

Question 3

Where it is determined that the sales of the Lots are input taxed supplies pursuant to subsection 9-30(4), does Division 142 of the GST Act apply where amounts have not been included as a net amount within Business Activity Statements?

Answer

Response not required due to answer given to question 1.

This ruling applies for the following periods:

DDMMYYYY to DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Entity (You) are registered for GST as an individual/sole trader since DDMMYYYY because the turnover from your commercial leasing activities exceeds the GST registration turnover threshold.

As part of your long-term investment strategy, you have an extensive history of acquiring properties to hold as capital assets for the sole purpose of deriving rental income.

Over the years, you and your partner have acquired several properties (both commercial and residential).

You have not acquired the properties for the purpose of disposing them, as your goal has always been wealth accumulation by holding the properties long-term (i.e., having a property portfolio) for rental purposes. You and your partner derive rental income from the properties, not from buying and selling property, nor through the development of the properties. The rental income is used to fund your various other investment portfolio and/or the medical business enterprises.

You have only disposed of one property previously, which was a result of a forced acquisition by the Council as the property was zoned to be used as a public road.

On DDMMYYYY, you acquired a residential property situated at address for $amount (the Property).

As per all other investment properties held by you, the Property was leased to tenants and derived rental income from YYYY until YYYY.

When acquired, the Property had a land size of number and contained a single dwelling.

In line with your broader investment goal of building wealth by deriving rental income through a property portfolio, given the size of the land, you identified an opportunity to build additional residences on the land. You intended to build additional residential premises and lease the residences to derive rental income, which would result in multiple residential rental streams from your investment at the Property. You had no intention to sell any of the newly developed premises nor any vacant land that would result from the subdivision.

In late YYYY/early YYYY you began the process of subdividing the Property.

The existing dwelling on the Property was demolished on or around DDMMYYYY.

The Property had an irregular shape, and in order to facilitate the building of the additional properties on the land, you entered into an agreement with a neighbour to undertake a boundary adjustment and swap a small piece of the land with the neighbour. This would create a regular shaped block for both you and the neighbour.

To facilitate this swap, the Property was subdivided into a number of lots. The plan of subdivision was registered on DDMMYYYY. The plan of subdivision was registered on DDMMYYYY.

In addition, a boundary adjustment occurred and the subdivision resulted into the formation of number lots. Settlement of the boundary adjustment took place on DDMMYYYY.

You transferred one of the lots to the neighbour, while the remaining lot was transferred to you by the neighbour.

On DDMMYYYY, the lot that was transferred to you was further subdivided, resulted in the formation of a number of lots. A portion of the vacant land was used for public roads and the remaining portion of the land was apportioned over number lots (the Lots).

The development works for the subdivision of the Property were undertaken during YYYY and were completed in YYYY.

On DDMMYYYY, you received a valuation for the Lots.

Following the subdivision, due to external factors, you were unable to commence the construction activities as you had encountered a shortage of free cash-flow and redirected the funds to finance your personal project.

During the construction phase it was identified that you would need to invest an approximate amount of $amount into your personal project.

In MMYYYY, you were notified that valuations would be required for the Lots to enable you to source external funding.

Whilst it was still your intention to construct additional residential premises at the Property, the funding shortfall to fund your personal project meant that you had no option but to sell the Lots.

After some consideration you made a decision to sell the Lots and this was communicated to your bank on DDMMYYYY.

You engaged a real estate agent to organise and manage the sale of the Lots as vacant land. The exclusive agency period commenced on DDMMYYYY.

The total sales proceeds from the sale of the Lots was $amount.

The selling prices were based on valuations comparing similar property market values. The costs incurred to create the Lots were not considered when determining the selling prices of the Lots. In addition, any potential GST liability was also not factored when determining the selling prices of the Lots.

You engaged a local real estate agent who recommended the sale prices and conducted the sales/marketing campaign for the sale of the Lots. You did not have direct contact with potential buyers. Your lawyer handled the negotiations with the real estate agent and set out the sale terms, penalties and extensions.

The Contracts of sale for the Lots stated that the Lots were to be subject to GST and to be sold under the margin scheme.

You have provided details of the sales made in the Relevant Period.

You have entered into contracts for the sale for the remaining lots located at the Property, with all contracts stating that the supply is taxable under the margin scheme.

You have since completed the sale of a number of lots within the MMYYYY to MMYYYY period.

You have not claimed any GST credits in relation to the demolition, subdivision or sale of the Lots.

You completed the subdivision to the minimum standard required by the local council.

The Property has always been held on capital account.

Expenses relating to the Lots have been capitalised by you (that is, not claimed as tax deductions).

At all times during demolition and subdivision you maintained the intention to construct residential premises for the purpose of leasing the premises. You may continue to undertake future developments for leasing purposes. However, you have no intention of ever undertaking development and subdivision for sale in the future.

You have previously been involved in property development as you have a history of converting single parcels of land into multiple residential dwellings that have all been used solely for leasing purposes.

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 9-30

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

Reasons for decision

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

You make a taxable supply where you satisfy the requirements of section 9-5, which provides:

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 (Australia); and

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

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

Your sales of the number lots of vacant land (the Lots) subdivided from address (the Property) meet the requirements of paragraphs 9-5(a) to 9-5(d). This is because:

•         your supplies of the Lots are for consideration

•         your supplies are made in the course or furtherance of an enterprise that you carry on

•         your supplies are connected with the indirect tax zone (as the Lots are located in Australia), and

•         you are registered for GST.

There are no provisions in the GST Act under which your sales of the Lots are GST-free.

The primary issue in this case is whether your sales of the Lots are input taxed supplies.

Subsection 9-30(4) states:

A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies.

ATO Interpretative Decision ATO ID 2009/18 Goods and Services Tax: GST and sale of vacant land after removal of a damaged house that had been used solely in connection with input taxed supplies (ATO ID 2009/18) considers the application of subsection 9-30(4). In considering the application of subsection 9-30(4) to the supply of the vacant land it is necessary to identify the uses to which the entity has put the land and whether these uses are solely in connection with the entity's input taxed supplies (other than financial supplies). This requires that the land, whether by itself or as part of the residential premises, has not been used in any way other than in connection with the entity's input taxed supplies.

The Commissioner's view is that 'used' has a broad meaning in the context of subsection 9-30(4) (see the interpretation of 'use' in other statutory contexts in Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1; Ryde Municipal Council v. Macquarie University (1978) 139 CLR 633; and Lennard v. Jessica Estates Pty Ltd [2008] NSWCA 121).

The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'use' as including 'to employ for some purpose'. In considering whether land has been used solely in connection with input taxed supplies, it is important to consider throughout the period of ownership by the entity:

•         how the land has been exploited or enjoyed (for example, private use by the entity, business use by the entity, or leasing to a third party)

•         what the entity has done to change or develop the land, and whether those things can be said to be connected to input taxed supplies, and

•         what the entity's purpose has been in holding the land (for example, if the land is dormant for a period of time, whether the purpose of holding the land is to achieve profits through appreciation in the capital value).

It is necessary to look at the surrounding circumstances to determine if the entity's activities can be said to be connected with the entity's input taxed supplies, or whether they instead should be regarded as having a separate purpose.

Paragraph 40-35(1)(a) provides that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of residential premises (other than a supply of *commercial residential premises or a supply of accommodation in commercial residential premises provided to an individual by the entity that owns or controls the commercial residential premises).

Since YYYY, you supplied the Property by way of lease to generate rental income. As you leased out residential premises, you made input taxed supplies under section 40-35. These input taxed supplies were not financial supplies.

Paragraph 97 of Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) considers the application of subsection 9-30(4) and states:

97. Where the owner of rented residential premises later subdivides the land into two blocks, one with a residential building and the other a vacant block, subsection 9-30(4) does not apply to the supply of the vacant block. The subdivision of the land is a use of the land that is not in connection with input taxed supplies. Vacant land is not residential premises as defined in section 195-1 of the Act. The supply of the vacant block needs to be considered under section 9-5.

Your subdivision of the Property was a use of the Property that was not in connection with your input taxed supplies (being the leasing of the residential premises that previously existed on the Property). Your activities of subdividing the Property and the subsequent sale of the Lots are a separate use of the land and not merely incidental to your leasing activities.

Therefore, for the purposes of subsection 9-30(4), you have applied the Lots for a purpose other than making input taxed supplies. Consequently, you have not used the Lots solely in connection with your supplies that are input taxed throughout the period of your ownership of the Property and your sales of the Lots are not input taxed supplies under subsection 9-30(4).

There are no other provisions in the GST Act under which your sales of the Lots are input taxed.

As all of the requirements of section 9-5 are satisfied, the sales of the Lots are taxable supplies and GST is payable on your supplies of the Lots.