Edited version of private advice

Authorisation Number: 5010072898632

Date of advice: 11 December 2020

Ruling

Subject: GST and sale of subdivided land

Question 1

Will the sale of the subdivided vacant residential land at xx be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act")?

Answer

Yes. The disposal of the subdivided lots is a taxable supply as you will be considered as carrying on an enterprise of development of land and is required to be registered for GST.

Question 2

Will the sale of the subdivided vacant residential land in relation to the investment property at xx be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act")?

Answer

Yes. The disposal of the subdivided lots is a taxable supply as you will be considered as carrying on an enterprise of development of land and is required to be registered for GST.

Relevant facts and circumstances

You are an insurance broker.

You are currently not registered for GST and do not hold an ABN in your individual capacity.

You are one of the directors of xx Pty Ltd.

In 19xx, you purchased an existing residential property at xx ("the Property").

As per the certificate of title, you and your spouse own the Property as joint tenants.

In 20xx, you and your wife purchased the neighbouring residential property as an investment at xx (the "Investment") for $XXX.

As per the draft subdivision agreement provided, the below clauses are relevant for the purpose of this ruling:

Clause 1.2

The Principal engaged xx to, and xx agrees to affect the proposed subdivision of the Land in accordance with the subdivision proposal presented to the Principal and arrange and supervise the marketing and sale of subdivision Lots ("Services"), including:

e) engaging on behalf of the Principal one or more real estate agents to take reasonable steps to market and sell the Lots (as House and Land packages) prior to subdivision (and supervising an assisting such agents) :

(i) at prices such that the Principal shall receive the Total Sale Price upon settlement of all Lots, after all sale and settlement costs (but not settlement adjustments as between Vendor and Purchaser); and xx and or its nominated contractors will receive any and all funds over and above the Total Sale Price

Clause 1.3

The Principal, in consideration of the Services:

a)    Grants exclusive rights to xx to:

i)              Take steps to subdivide the Land into lots; and

ii)             Thereafter, market and sell the Lots as house and land packages;

iii)           Nominate settlement agent;

b)    Shall enter into contracts of sale for the Lots, presented by xx or the real estate agent appointed by xx, provided such contracts of sale are consistent with the terms of the Agreement, and will result in the Principal receiving the Total Sale Price upon settlement of sale of all Lots.

c)    Shall include a special condition in any contracts of sale and purchases for the Lots providing that the Purchasers shall execute building contracts with xx at or before the execution of the contracts of sale and purchaser of the Lots (and shall enforce that special condition);

d)    upon written request, shall grant access to the Land to xx, its officers, employees, agents and contractors at such times xx requires, and shall grant sole possession of the Land to xx at any time sub division works are being undertaken; and

e)    execute, acknowledge and deliver all further documents, and perform such other acts as are reasonable required for implementing the subdivision and this document (including but not limited to an application to the xx Planning Commission and xx documents required to subdivide the Land into the lots, and an authority appointing xx's selected real estate agent to sell the Lots).

Your tax agent advised us of the following in your private ruling application:

•         You have been approached by a property developer to construct house and land packages.

•         The developer, on behalf of the owner is planning on subdividing the x blocks on where both properties are located into x equal sized blocks.

•         These blocks will be sold as house and land packages whereby the purchase will individually buy each of the x blocks directly from yourself and your spouse. (As evidenced by clause 1.3c in the subdivision agreement, the purchases will then need to execute the building contracts with xx).

•         The total land size is approximately xxm2 of which the residential property is xxm2 and the investment property is approximately xxm2.

•         The new blocks will be approximately xxm2 each.

•         The property developer would meet all planning and subdivision costs.

•         Prior to this subdivision, no business activity has been conducted in relation to the land.

•         The x blocks will be sold as vacant land by you and your spouse on the condition the purchaser executed a building contract with xx co-currently.

•         You and your spouse have not sold or subdivided land in the past and have no intention of doing so in the future.

•         The current buildings that are on these blocks will be demolished to make way for these x new blocks. The cost of which will be absorbed by the property developer.

•         Electricity, gas, water, telephone connections will be provided in relation to the subdivided blocks. These costs will also be absorbed by the property developer.

•         The property developer will:

-        contract with a real estate agent and conveyancers in relation to marketing of the subdivided blocks;

-        contract with a surveyor and contractors for the demolishment and the land subdivision;

-        cover the costs for the preparation of land for sale and subdivision.

On xx, your tax agent provided us the purchase contract of the investment property, certificate of title of both properties and the draft subdivision agreement. He also provided confirmation of the following items:

•         The developer will be responsible for selling the x blocks and

•         You and your spouse will be the vendors on the contract of sale for the x blocks.

Reasons for Decision

Summary

Based on the information received, the sale of the x blocks which is the combination of the land from xx and xx will be a taxable supply. Therefore, you will be required to be registered for GST when you satisfy the GST threshold.

Detailed reasoning

Taxable supply

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, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the sales of the proposed subdivided vacant bocks will be for consideration and the sales will be connected with the indirect tax zone as the subdivided blocks are situated in Australia.

Therefore, what needs to be determined is:

•         whether the sales of the proposed subdivided vacant blocks will be in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act) and

•         whether you will be required to be registered for GST (paragraph 9-5(d) of the GST Act).

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

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 subdivided lot satisfies paragraphs 9-5(b) of the GST Act as this will affect your registration requirement in paragraph 9-5(d).

Subsection 9-20(1) in part defines enterprise as:

(1)  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 ......

The question of whether an entity is carrying on an enterprise is examined in 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).

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.

The term business ordinarily would encompass a trade that an entity is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or

one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

You advised us that you have never been involved in property development in the past and that your activities represent a one off transaction and that you are simply trying to maximise the return on your investment.

As the activities include demolition of existing buildings, clearing of land, development and sale of properties, it is necessary to determine whether the all the activities undertaken are of a commercial nature that goes beyond the mere realisation of an investment asset or private asset.

At Paragraphs 13 and 14 of GSTD 2006/6 it explains in the form of an adventure or concern in the nature of trade, it states:

13. 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

Therefore, from the above isolated transactions with a commercial flavour are included as in the form of adventure or concern in the nature of trade. Such transactions are of a revenue nature.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. At paragraph 263 of MT 2006/1 it states:

263. 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 activities of carrying on a business or 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 an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions...

The change in intention

As evidence in the Statham and Casimaty case, a taxpayer can embark on a venture in the nature of a business or in the nature of trade, where the property is applied for a different purpose, after the property was first acquired.

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 MT2006/1).

The relevant intention or purpose of the taxpayer is not the subjective intention or purpose of the taxpayer but rather it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

We consider that the facts in your case can be distinguished from those in Statham and Casimaty as outlined below.

You advised that you have lived in XX XXX Street Suburb X State A, since acquiring it in 19XX and has not been used for income producing purposes. You are undertaking this development as you were approached by a developer.

Whilst we acknowledged that the property has been your principle place of residence, after taking into account the circumstances of your case, we consider that the activities undertaken will considerably change the character of the residential land the investment property land. It is no longer being used for private purposes for which it was initially acquired and is now being applied for the purpose of land development. That is, both the residential and investment property land is being developed and subdivided into x lots.

There is a coherent and complex plan for this development, we consider this venture to be organised as there will be a considerable amount of pre-planning work that will go into this subdivision including water management and electricity.

Importantly, as advised by your tax agent, you will continue to hold the title of the land at all times and are only transferred once the sub-divided lots are sold.

Draft Subdivision Agreement

As per the terms of the draft subdivision agreement, you are at all times the landowner as you retain the title of both Properties throughout the project and remain the vendor listed on all sale contacts.

The following summarised paragraphs are relevant for the purpose of this ruling:

From the clauses listed in number 7 under the facts, we consider xx is providing you with project management services and you have engaged them for the purpose of completing the development of the land. In exchange for xx carrying on the works for the project, you have granted exclusive rights to them as evidenced by Cause 1.2 and Clause 1.3 mentioned above.

For the above reasons, whilst we recognise your original intention for acquiring the land was for private purposes however we consider there is a change in intention and on balance the activities undertaken in developing the land goes beyond that of a mere realisation and is an enterprise in the form of an adventure or concern in the nature of trade (isolated property undertakings). That is there has been a clear change in purpose for which the land is being used, and the undertaking is being in a commercial/ business-like manner.

Consequently, under paragraph 9-5(d) of the GST Act, where you are not registered, we need to consider if you are required to be registered.

GST registration

Requirement to register for GST

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

(a)  You are carrying on an enterprise, and

(b)  Your GST turnover meets the registration turnover threshold.

You are required to be registered where both the above requirements are met.

In your case, as you satisfy the first requirement in the form of an adventure or trade, it is therefore necessary to consider the second requirement.

We need to determine whether you GST turnover meets the registration turnover threshold. The registration turnover threshold for an entity (other than a non-profit entity) is $75,000.

Subsection 188-10(1) of the GST Act provides that your GST turnover will meet a particular turnover threshold 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.

Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months.

When calculating your current and projected GST turnover, some supplies, including supplies that are input taxed are disregarded. However, turnover from leasing commercial properties is not excluded when calculating the current and projected GST turnovers.

You advised that it should be excluded on the basis that the disposals of the subdivided lots are a capital asset.

Whether the sale of the subdivided lots will be a transfer of a capital asset

Section 188-25 of the GST Act provides that in working out your projected GST turnover you should disregard:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours, and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise, or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The meaning of capital assets is not defined in the GST Act. Goods and Services Ruling GSTR 2001/7 considers the meaning of 'capital asset' for the purposes of section 188-25 of the GST Act.

The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7.

GSTR 2001/7 provides that, generally, the term capital assets refer to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits.

A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of an enterprise. That is, if the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital nature even if such a disposal is an occasional or one-off transaction.

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

In your case, the sale of the subdivided lots is inherent in carrying on an enterprise in the form of the nature of trade. As stated earlier, the development of the vacant lots will change the character of them from a capital asset into a trading/revenue asset. Therefore, the sale of these lots will not be a transfer of a capital asset. Accordingly, the sale of the subdivided lots will not be disregarded under section 188-25 of the GST Act when calculating your projected GST turnover.

As you have not provided to us the expected selling price of the lots, you will be required to be registered for GST when you expect your projected GST turnover to meet the registration threshold of $75,000. At that point in time, the requirement of paragraph 23-5(b) of the GST Act will be satisfied.

As both requirements of section 23-5 of the GST Act will be satisfied you will be required to be registered for GST. Consequently, the requirement of paragraph 9-5(d) of the GST Act will be met.