Edited version of private advice

Authorisation Number: 1052342591373

Date of advice: 19 December 2024

Ruling

Subject: GST - subdivision of land

Question 1

Will the sale of land, subdivided from the property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No, the sale of the subdivided land will not be a taxable supply as you are not carrying on an enterprise of property development.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

You purchased land prior to GST commencing to run a business and build a house.

The business ceased a number of years ago and no business activity has been undertaken on the property since.

You are not registered for GST.

You operated the business through a separate entity however, no GST credits were claimed in relation to the property.

You are no longer able to maintain the property.

You propose to subdivide the property and sell part of it to a property developer.

You do not have a business plan in relation to the subdivision.

You will pay half the subdivision costs and the developer will pay the other half. Your costs will be funded from savings.

You are not involved in the property development. The developer assumes all risks and costs associated with the development and subsequent sale of the property.

You do not have any previous history of property development.

You have engaged surveyors to help subdivide the property into two lots. The surveyors will undertake all necessary processes up to and including the creation of the two new certificates of title.

You will not make improvements to the subdivided property, beyond what is necessary to secure council approval for the subdivision prior to the sale of the property to the property developer.

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 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b)

Reasons for decision

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply that you make.

Section 9-5 of the GST Act 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 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.

There are no provisions in the GST Act under which the sale of the land would be a GST free or input taxed supply.

You will make a supply of real property located in Australia for consideration. Therefore, your supply satisfies the requirements of paragraphs 9-5(a) and (c) of the GST Act.

We will need to determine whether paragraphs 9-5(b) and 9-5(d) of the GST Act is met.

Supply in the course or furtherance of enterprise

The term 'enterprise' for GST purposes is defined in section 9-20 of the GST Act and includes (amongst other things) an activity or series of activities, done:

•                     in the form of a business (paragraph 9-20(1)(a) of the GST Act); or

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

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 guidelines on the meaning of carrying on an 'enterprise'.

Paragraph 1 of 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 guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Paragraph 9-20(1)(a) and (b) of the GST Act

Paragraph 234 of MT 2006/1 distinguishes 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'. The ruling provides that the term business would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraphs 258 to 261 of MT 2006/1 discusses the concept of trade versus investment assets. Investment assets are assets purchased with the intention of holding them for income producing purposes or assets such as the family home and other private assets held for the pleasure or enjoyment of a person. Further, assets can change their character but cannot have a dual character at the same time.

Paragraphs 262 to 302 of MT 2006/1 consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

A mere realisation of investment assets does not amount to 'trade'. That is, more than a mere realisation of an investment asset is required for an activity to amount to a trading activity and the character of the activity as a whole needs to be considered. Depending on the facts, an isolated transaction, such as subdividing or developing land, may amount to the carrying on of an enterprise where the activity has the characteristics of a business deal.

In Scottish Australian Mining Co Ltd v. FC of T (1950) 9 ATD 135; (1950) 81 CLR 188 (at ATD p 140; CLR p195) his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said:

The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out.

Paragraph 265 of MT 2006/1 refers to Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 which established a number of factors that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. These factors are as follows:

•                     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

•                     buildings have been erected on the land.

As stated in paragraph 266 of MT 2006/1, no single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your facts

You purchased the property to run business and build a house which would be your principal place of residence. The property was used for the business, which was run through a separate entity. We do not consider that the sale of the subdivided land is something done in the course or furtherance of the business. The business ceased a number of years ago and the property has not been used for any other purpose.

You propose to subdivide the land into two lots. You will retain the land which contains your residence and sell the rest to a property developer. You are undertaking the subdivision as you are no longer able to maintain the property.

You have engaged professionals to undertake all necessary work involved in this subdivision. You will sell the subdivided land to a developer and will not undertake any activity beyond what is necessary to obtain council approval, subdivide the land, and obtain two certificates of title. You have not been involved in subdivision or property development activities in the past, nor have you borrowed any money to finance the subdivision.

Based on the facts of your case, your sale of the subdivided land from the property will be the realisation of a capital asset, rather than the sale of a trading asset. Therefore, your subdivision and sale activities do not amount to a business or an adventure or concern in the nature of trade.

We are satisfied that neither paragraph 9-20(1)(a) or (b) of the GST Act is satisfied.

As paragraph 9-5(b) of the GST Act is not met, we do not need to consider the application of paragraph 9-5(d) of the GST Act.

Conclusion

The sale of the subdivided land from the property will not be a 'taxable supply' as defined in section 9-5 of the GST Act, as you are not carrying on an enterprise and consequently, you will not be liable for GST in respect of the sale under section 9-40.