Edited version of private advice

Authorisation Number: 5010066012322

Date of advice: 16 April 2020

Ruling

Subject: GST and sale of vacant residential lots

Question 1

Is the sale by xx (you) of the subdivided vacant residential lots at XYZ a taxable supply under section 9-5 of a New Tax System (Goods and Services Tax) Act 1999 ("GST Act")? If so, at what point does the taxpayer need to register for GST?

Answer

Yes - the sale is a taxable supply if all the requirements under section 9-5 of the GST Act are met. In this case, it is a taxable supply, therefore you are required to be registered once the projected GST turnover exceeds $75,000.

Question 2

Are you entitled to use the margin scheme under section 75-5 of the GST Act when you sell the vacant residential lots?

Answer

Yes

Question 3

If the GST Margin Scheme can be used, at what date does the sworn valuation need to be made?

Answer

It would be the date at which you register for GST as per Subsection 75-10(3) of the GST Act

This ruling applies for the following period:

xx January 20xx to xx June 20xx

The scheme commences on:

xx January 20xx

Relevant facts and circumstances

1.You previously have not carried on an enterprise and is currently not registered for GST.

2.You own farmland (the Land) at xx on which your parent had farmed about xx years ago.

3.You have not conducted any farming on the land; however you have run livestock just for the purpose of maintaining it, such as keeping the grass down.

4.The land is currently vacant.

5.You lived in the residential premises on the land until xx and currently reside in an Aged Care Facility.

6.As you are now in retirement, you want to maximise the value of the land. Therefore, you are in the process of sub-dividing the land into xx residential lots. No re-zoning has occurred.

7.Of the xx residential lots, x of them are ready to be sold as a new road, culverts, power and telephone has already been installed on them. The existing house on the land will be sold separately after the completion of this project.

8.According to your tax agent, xx you did not hire a construction company to do these works, they were completed by individual contractors.

10. You have not undertaken any previous subdivision or development activities.

11. Your tax agent has also advised us as you are in an aged care facility; your xx has been undertaking the works under a power of attorney granted (POA) by you. The POA was granted to xx and xx. A copy of the POA was provided to us on xx.

Reasons for Decision

Detailed reasoning

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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.

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

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

If all the elements of section 9-5 of the GST Act are satisfied, an entity will be making a taxable supply.

In your case, you will be selling the vacant residential lots for consideration and it is connected with the indirect tax zone as the lots are situated in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied.

Accordingly, we must determine whether:

(a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among other things, 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. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Tax 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.

Accordingly, we must determine if the sale of the property satisfies paragraphs 9-5(b) of the GST Act as this will affect your registration requirement in paragraph 9-5(d).

The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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; ...

The question of whether an entity is carrying on an enterprise is examined in MT 2006/1.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

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.

·         A business encompasses trade engaged in on a regular basis.

·         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.

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 A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6) confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

The principles outlined in these rulings have been applied in your circumstances.

Paragraph 10 of GSTD 2006/6 states:

An activity or series of activities

10. Essentially, this is any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

As the acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity, an enterprise can incorporate a single or one-off transaction such as the acquisition, subdivision and sale of real property.

In your case, the activity of subdivision and sale of the vacant residential lots is an isolated transaction.

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 they are considered to be an adventure or concern in the nature of trade (profit making undertaking or scheme), as opposed to the mere realisation of a capital asset.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. 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.

A list of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade are provided in paragraph 265 of MT 2006/1. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

In your case, it seems that significant amount of works has been done on the land. We consider the size and scale of the development of the 14 lots to be extensive. This is because there was a substantial amount of works required to be undertaken on the land to bring it into a condition ready for residential sale such as clearing, construction of roads and phone lines.

As such, we consider your activities in this situation as an adventure or concern in the nature of trade and therefore that an enterprise is being carried on.

GST Registration

Having established that an enterprise is being conducted, we need to determine whether your GST turnover meets the registration turnover threshold.

The registration turnover threshold for an entity (other than a non-profit entity) is $75,000.

Pursuant to subsection 188-10(1) of the GST Act, you have a GST turnover that meets a particular turnover if:

(a)  your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b)  Your projected GST turnover is at or above the turnover threshold.

Given that you are not currently registered for GST, your current GST turnover will be nil. As such, your projected GST turnover must be determined.

Subsection 188-20(1) of the GST Act provides that your projected GST turnover is the sum of the values of all the supplies that you have made, or are likely to make, during the current month and the next 11 months, other than:

(a)  supplies that are input taxed; or

(b)  supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c)  supplies that are not made in connection with an enterprise that you carry on.

As your tax agent has advised us that x of the lots are ready to be sold and the remaining x will be sold in the near future, it is likely that your projected GST turnover will exceed the registration turnover threshold. Therefore, you will be required to be registered within 21 days of exceeding the threshold.

Question 2

Margin scheme

Subsection 75-5(1) provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes by selling either a freehold interest in land or a unit or granting or selling a long term lease if that entity and the recipient have agreed in writing that the margin scheme is to apply.

The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However, the margin scheme does not apply if you acquired the entire freehold interest through a supply that was ineligible for the margin scheme. It is noted that the exclusions (as specified in subsection 75-5(3) of the GST Act) are not relevant in this case.

On the facts provided, you did not acquire the property through a supply that was ineligible for the margin scheme. Hence, the sale of the xx residential lots will be eligible for the margin scheme.

The sale of these lots is a taxable supply. On or before settlement, you and the purchaser will enter into a written agreement that the margin scheme is to apply to the sale. Therefore, you will be able to apply the margin scheme in working out the amount of GST on the sale of the taxable supply that you make.

Question 3

Valuation

Subsection 75-10(1) of the GST Act states that if a taxable supply of real property is under the margin scheme the amount of GST on the supply is 1/11th of the margin, which is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest, unit or lease; unless subsection 75-10(3) or section 75-11 applies.

Subsection 75-10(3) of the GST Act states:

Subject to section 75-11, if:

(a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and

(b) an *approved valuation of the freehold interest, *stratum unit or *long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made;

the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease.

You have stated in your ruling application that the property was acquired xx years ago. As this was prior to the introduction of GST, item 2, 2a and 3 would be relevant to you. In your case, the date of effect of your registration, or the day on which you applied for registration (if its earlier) is the day the valuation should take place for the margin scheme.