Edited version of private advice

Authorisation Number: 1052337200049

Date of advice: 29 November 2024

Ruling

Subject: GST - enterprise

Question 1

Are you required to register for GST under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) for the purpose of selling vacant residential land?

Answer 1

No. You are not carrying out an enterprise as defined by section 9-20 of the GST Act. As you do not carry out an enterprise you do not meet the requirements for GST registration, and therefore not providing a taxable supply under section 9-5 of the GST Act.

This ruling applies for the following period:

XX November 20XX to XX November 20XX

The scheme commenced on:

XX November 20XX

Relevant facts and circumstances

Person 1 and Person 2 (You) jointly purchased vacant land (with residential zoning) located at an address in Month 20XX with the intention of building your principal place of residence.

There were no buildings or structures existing on the land when purchased.

You currently reside in a rental property where you planned to await the build of your new home on the vacant land.

You are both not registered for GST, nor where you both registered at the time of acquiring the vacant land.

The purchase price as detailed in the contract was $X.

No capital improvement has been made in relation to the property. Further costs for the purchase of the land included stamp duty, legal fees and conveyancing costs.

You also incurred costs in maintaining the land which included mowing and slashing of the block, council rates and water rates from date of settlement until the date of the prospective sale detailed below.

Due to the cost required to build your principal place of residence exceeding your original budget and expectations, you have jointly decided to sell the property to an unrelated third party. The estimated sale proceeds will be $X.

The selling costs are estimated to be approximately $X.

You anticipate making a capital loss of approximately $X.

This loss has been calculated after the application of purchase costs and the additional holding costs to the estimated sale proceeds.

Your intentions with this property have never changed from being for the purpose of building your principal place of residence.

You have never undertaken property development and did not purchase this property with the intention of making a profit.

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 23-5

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

Reasons for decision

Where a supply of real property is land that could be used to build new residential property it is a taxable supply where the conditions of section 9-5 of the GST Act are met.

Section 9-5 provides that 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 to the indirect tax zone (Australia); and

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

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

In this case, the sale of the property will be made for consideration and is located in Australia. As such, we will consider whether the sale of the property is made in the course or furtherance of any enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

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 or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

The phrase 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise which includes sale of the residence. You purchased the property but have not derived any income from it by way of leasing or any other activity, nor have you conducted a business on the land.

Other activity or series of activities you conducted may be considered to be an 'enterprise' for GST purposes to determine if they amount to a business, or are in the form of a business, or is a one-off adventure in the nature of trade.

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) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for an Australian business number.

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 (GSTD 2006/6)extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon for GST purposes.

Paragraphs 94, 120 and 140 of MT 2006/1 provides the following guidance on carrying on an enterprise:

Enterprise

[...]

94. Carrying on an enterprise includes activities done in the commencement or termination of the enterprise.

[...]

When is an enterprise being carried on?

120. In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. The definition ensures that activities done in the course of commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.[...]

[...]

Termination of an enterprise

140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

Indicators of a business

177. 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.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•                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.

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

The question of 'whether a business is being carried on' is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. Considering your arrangement, you purchased the property with the intention of holding it long term as your home and residence. This indicates that, when you purchased it, you did not have the intention to acquire and sell at a profit. Having regard to the facts, you contemplated constructing your home before your intended date of sale. The facts also indicate that you assessed that the proposed constructions costs were too high and therefore unable to build your home resulting in the need to sell the vacant block.

In terms of assessing the scale of your activity, it is one suburban block. On the facts presented, there is no repetition and it is a small scale activity.

The facts indicate that you do not have a commercial purpose or intention on your part in this arrangement. This arrangement is not a subdivision as you acquired the block as a vacant single lot. You contemplated building your home but the costs were too high. These factors do not point to an enterprise.

You acquired the property for $X. You also spent around $X for the cost of acquisition and holding costs on the property. This amounts to $X. The facts indicate that a profit is unlikely to be made based on your estimated selling calculations. However, the facts indicate that you did not have the intention to profit from this activity. It is not sufficient to point to the activity being in the form of a business as it needs to be considered against the entirety of the facts.

On balance, we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not at all large scale. You do not have a business plan for developing the property as the original intent was to build a home to live in.

As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade.

Paragraph 237 of MT 2006/1 states:

The term 'profit-making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Here, the land was purchased to build a home on and it is accepted it is a personal asset, not a business deal or undertaking. The arrangement is a planned personal activity that had to be altered significantly due to the high cost of construction. The arrangement is not complex and the nature of the property is that it was not acquired with profit in mind but rather as a place to build a home.

After weighing up all of the information, we consider that you are not carrying on an enterprise of developing the land. As you are not carrying on an enterprise you are not required to be registered for GST under section 23-5 of the GST Act.

Section 23-5 of the GST Act states that you are required to be registered for GST if:

(a) you are carrying on an enterprise; and

(b) your GST turnover meets the registration turnover threshold (currently $75,000).

Conclusion

The sale of the property will be made for consideration and is located in Australia. You are neither registered nor required to be registered for GST. Consequently, you will not be making a taxable supply when you sell the property.