ATO ID 2009/19: GST and sale of vacant land used in connection with input taxed supplies and property development activities
Date of decision: 25 March 2009
Business line: Indirect Tax

Issue
Is the entity, a residential property owner, making an input taxed supply under subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when, as part of its property development activities, the entity sells its property as vacant land after having demolished a house on the land that it had used together with the land solely to make input taxed supplies by way of lease?

Decision
No, the entity is not making input taxed supplies under subsection 9-30(4) of the GST Act when it sells its property as vacant land in these circumstances.

Facts
The entity is a residential property owner and is registered for GST. The entity carries on an enterprise of leasing and selling residential premises, and developing property. As part of its property development activities, it regularly acquires properties to demolish the existing houses and to sell the properties as vacant land (whether subdivided or not) or to construct new houses for sale or lease. The entity owns a property that was residential premises for the purposes of the GST Act. Since acquiring the property many years ago, the entity had used it solely to make supplies by way of lease that are input taxed under section 40-35 of the GST Act. The entity's property is located in an area that has undergone extensive redevelopment where a lot of the older houses have been replaced by the construction of new houses. There has been an increasing demand for vacant residential land in the area which meant land prices have risen significantly. The entity is able to generate a higher financial return by selling its property rather than continue to use it for leasing. The entity terminated the residential lease so that it could sell the property unencumbered. The entity took advantage of the opportunity created by the increased demand for vacant land by undertaking significant works in demolishing and removing the house to improve the value of the property for sale as vacant land. The entity incurred significant costs in undertaking the works but was able to have the house demolished and removed at a lower cost than potential purchasers were likely to achieve. This is because of its expertise as a property developer and the economies of scale it could achieve in regularly demolishing houses as part of its enterprise. The entity sells the property as vacant land. The sale is for consideration, is made in the course or furtherance of the entity's enterprise and is connected with Australia. The sale is not an input taxed supply or a GST-free supply under any other provision of the GST Act.

Reasons for decision
Summary: Subsection 9-30(4) of the GST Act 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. In considering the application of subsection 9-30(4) of the GST Act 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) of the GST Act (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 edn, 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: 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. In this case, the facts indicate that the entity was no longer using the land solely in connection with its input taxed supplies of residential leasing when it undertook works to demolish the house. There are two factors which together lead to this conclusion: As the entity's use of the land has not been solely in connection with its input taxed supplies, the sale of the vacant land is not taken to be an input taxed supply under subsection 9-30(4) of the GST Act. The sale of the vacant land is a taxable supply as it satisfies all the requirements of a taxable supply under section 9-5 of the GST Act.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 subsection 9-30(4) section 40-35
Case references: Council of the City of Newcastle v. Royal Newcastle Hospital (1959) 100 CLR 1
Related public rulings and determinations: Goods and Services Tax Ruling GSTR 2003/3
Related ATO interpretative decisions: ATO ID 2009/18 | ATO ID 2009/20
Other references: The Macquarie Dictionary, 2005, 4th edn, The Macquarie Library Pty Ltd, NSW
Subject references: Goods and services tax GST property & construction GST residential premises GST sale of real property GST supply Input taxed supplies