Private ruling: Subdivision and sale of land
Published: June 2012

Ruling: Q1: Is the subdivision and sale of my acreage home block of land the mere realisation of a capital asset? | A1: Yes

Relevant facts and circumstances: The individual (you) is not registered for goods and services tax (GST) You and then spouse acquired the property, (the land) in 19XX. You have provided a copy of the Title. You became the 100% owner of said land under a Family Law Agreement. The land has been used wholly and exclusively for domestic/family purposes from the date of acquisition and is still (to this day) used for said purpose. It has never been used for any income producing purpose. You originally acquired the home lot for domestic/private use by your children and grandchildren and because you wanted to live in a rural/farming environment. When you first occupied the property, there were very few houses in the area, it was all farms. It is only recently that smaller lot sizes have been permitted and only now is the area to be rezoned Residential 1. You intend to sell the land to provide for your maintenance and retirement and for the maintenance, education and wellbeing of your children. You have significant health issues that preclude you from working full-time. You have never had any connection or involvement with any property development previously. You considered selling the broad acreage and consulted with your Tax advisor in relation to same and their research and advice was that the "Statham option", that is, "Realising the capital asset in the most enterprising way" was best. The firm discussed with various real estate agents the amount the raw land would realise and said amounts were very low and as such unacceptable. You intend to subdivide the land, retain one lot as your principal residence, and sell the remaining lots. You intend to acquire part of an adjoining property to be used as a second access to the subdivision. You would not realise any financial gain if this is pursued and would more likely incur a financial loss. If the property was purchased it could be surrendered as road reserve. This is being negotiated on the advice of your Surveyor and has been supported by the local Council and State Government department You own the land and it is your tax advisor's advice that from a risk management perspective, you should borrow the minimum amount required and stage the realisation (i.e., development) of the land. You anticipate maximum borrowings in the order of one and a half million dollars for stage one and thereafter you expect the project to be self-funding. You are unsure if this will be the case, as no cash flows or detailed budgets have been prepared yet, all you have is overall estimates provided by Surveyors. Your advisor has advised you that to minimise and mitigate potential losses in the event the market takes a down turn (eg, if the current situation in Europe prompts another "GFC") the project should be staged. It is also their advice to minimise the stages due to additional costs. It is expected that the project will be completed in two (best case) to four (worst case) stages. You do not have a business plan. All that you have used when completing projections is per lot estimates provided by surveyors. You have no business organisation, no manager, no office, no secretary, no letterhead. It is your intent to carry out the absolute minimum amount of clearing and earth works as required by the statutory bodies. There will be no buildings/structures of any type constructed by you. There is not a site office or any other buildings erected on the land, other than the family home and its outbuildings which you intend to retain. You intend to appoint Surveyors to project manage the total project/development. They will be responsible for engaging and organising all contractors and you will have minimal involvement. The number of anticipated/projected lots is less than seventy. You provided a copy of the draft plan of the subdivision. You intend to list the lots for sale with two local agents (dual listing) in the standard manner. You do not intend to undertake any sort of concerted advertising campaign. You will not be actively involved with the sale and/or marketing of the lots. You have not taken time off from your normal activities to work on the project/development. No records have been kept yet, but your advisor has recommended the use of "Cashflow Manager" software in relation to same, which they will most likely maintain. You do not intend undertaking any further developments of this nature in future. No lots have been realised as yet, as no permits or approvals have been applied for or granted. You are the entity undertaking the project in your own name. Your Self Managed Superannuation Fund) acquired the land. You intend for your SMSF to retain this land and construct rental properties on same as funds permit. This lot will be part of the subdivision application, but construction on same will not occur for sometime (unlikely to be within five years). No applications have been made to local government (or any other) authorities at this point in time and as such no permits have been issued.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | 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 9-25

Reasons for decision: Summary: Because your activity is not in the course of an enterprise the sale of the land in the form of subdivided lots will not be taxable supplies because paragraph 9-5(b) of the GST Act will not be satisfied. | Detailed Reasoning - The basic rules: Section 7-1 of the GST Act states that GST is payable on *taxable supplies Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies. | Detailed Reasoning - Taxable Supply: Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make a 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 Australia; 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 under the exemptions. *Note: Definitions of asterisked terms are provided in the Dictionary under section 195-1 of the GST Act. | Detailed Reasoning - Making a taxable supply: The sale of a subdivided lot is making a supply for consideration. The application of the GST to your supply of vacant lots depends primarily on whether such a supply is made in the course or furtherance of an enterprise that you carry on. Because the land is situated in Australia, the supply is connected to Australia (subsection 9-25(4) of the GST Act). You are not registered for GST therefore it needs to be considered if you are required to be registered. | Detailed Reasoning - Carrying on an enterprise: The essence of the concept is an organised activity on a regular or recurrent basis in which goods or other property are acquired and sold, goods are produced for sale or services are provided for reward. 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 - considers the meaning of certain key words and phrases used to define an enterprise and provides assistance to entities in determining whether their activities constitute an enterprise and their entitlement to an Australian Business Number under the A New Tax System (Australian Business Number) Act 1999. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. Subsection 9-20(1) of the GST Act relevantly defines an enterprise as 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. Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity or series of activities done as a private recreational pursuit or hobby. Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee. | Detailed Reasoning - In the form of a business: An enterprise includes activities done in the form of a business. The phrase 'in the form of a business' has not been defined. However, the phrase clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' alone. The term 'business' is defined with the same definition of 'business' as that provided in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Further guidance on the meaning of 'business' is provided in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business. This is confirmed by MT 2006/1 from paragraph 177; it provides: | Detailed Reasoning - 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: '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. You acquired the property as your main place of residence and you were subsequently granted sole ownership under the family law settlement. You have decided to sell the subdivided land and have engaged professionals to ensure the sale is to best advantage. Your activity in relation to the planning and development of the land, since this will be performed by professionals engaged for the purpose, is minimal. In Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation [1950] HCA 16; (1950) 81 CLR 188 the taxpayer company purchased a large area of land near Newcastle known as the Lambton Freehold Estate. It carried out coal mining operations on the land and, in 1864, set aside 45 acres for miners' homes. Williams J. concluded (at CLR 195) that: A sale in sub-division inevitably requires the building of roads. If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities, this does not convert the transaction from one of mere realization into a business. It is simply part of the process of realizing a capital asset. You propose to sell the land except for one of the lots which will be retained as your main place of residence. There is no indication that the activity will be recurrent and regular in nature. You will not be involved in the planning or management of the project since this activity will be performed by the professional you propose to engage. In these circumstances, your activities are not carried out as a business or in the form of a business. Your activity is the disposal of land from your main place of residence to the best advantage. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: Paragraph 265 of MT 2006/1 recognises that the question of whether an entity is carrying on an enterprise arises where there are 'one-offs' or isolated real property transactions. Factors that provide an indication that an adventure or concern in the nature of trade is being carried on include: · there is a change of purpose for which the land is held; · there is a coherent plan for the subdivision of the land; · there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and · buildings have been erected on the land. Again, you were awarded the property under the court order and have decided to sell the excess land. You have not developed a coherent plan; you have engaged professionals to undertake this planning on your behalf to ensure the sale is to best advantage. You have stated that the level of development of the land will not go beyond that necessary to secure council approval for the subdivision. You do not intend to construct any buildings; you intend to sell the land as vacant lots. You intend to retain the land you occupy as your place of residence. MT 2006/1 provides the following example of circumstances, similar to yours, where it was considered that an enterprise of property development had not arisen: Example 35 297. Oliver and Eloise have lived on a rural property, Flat Out for the last 30 years. They live a self-sufficient lifestyle. As a result of a number of circumstances including their advancing years, Oliver's deteriorating health, growing debt and drought conditions they decide to sell. 298. Oliver and Eloise put Flat Out on the market and are unable to find any buyers. They then receive advice from the real estate agent that they may be able to sell smaller portions of it. They initially arrange for council approval to subdivide part of Flat Out into 13 lots. They undertake the minimal amount of work necessary and sell the lots. They continue to live on the remaining part of their property. 299. A few years later Oliver and Eloise decide to sell some more land to meet their increasing debt obligations. They arrange for council approval to subdivide another part of Flat Out into four lots. Again they undertake the minimal amount of work necessary to enable the lots to be subdivided and arrange for the real estate agent to sell these lots. 300. Three years later Oliver's and Eloise's personal and financial circumstances are such that they again decide to sell some more land. They arrange for further council approval to subdivide part of their remaining property into three lots. Again they undertake the minimal amount of work necessary to enable the lots to be sold and arrange for the real estate agent to sell the lots. 301. Over the years involved Oliver and Eloise have subdivided 30% of Flat Out. They continue to live on the remaining part of their property. 302. Oliver and Eloise are not entitled to an ABN as they are not carrying on an enterprise. They are merely realising a capital asset. In this example the following factors are relevant: · There is no change of purpose or object with which the land is held - it has remained their home. · There is no coherent plan for the subdivision of the land - the subdivision has been undertaken in a piecemeal fashion as circumstances change. · A minimal amount of work has been undertaken in order to prepare the land for sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision. This example closely aligns with the Federal Court's decision in Casimaty's Case which involved the creation of approximately 90 lots over 8 subdivisions. In providing the Federal Court's decision, Ryan J. referred to a number of precedential cases from the Federal Court through to the House of Lords. He approved the comment by Farwell LJ in Hudson's Bay Co v Stevens (1909) 5 TC 424 that: Again, a landowner may lay out part of his estate with roads and sewers and sell it in lots for building, but he does this as owner, not as a land speculator. Ryan J. noted that the source of the distinction developed in later cases between an entrepreneur and a landowner who realizes the land in an enterprising way can be traced to the judgment of Rowlatt J in C.H. Rand v The Alberni Land Co Ltd (1920) 7 TC 629 where the respondent company was incorporated to acquire, manage and develop, with a view to ultimate sale, certain lands in British Columbia … His Lordship observed at 638: Now the Company proceeded in a very enterprising way undoubtedly. It cleared the land and formed roads. It sold parts of it and kept some of the money and put it back into the land, and so on, and it gave a share in its capital to certain people who were instrumental in bringing a railway there. Undoubtedly it has done very well. Under those circumstances the Attorney-General and the Revenue contend that it has gone beyond the stage of merely realising the property, and has embarked upon a business in land … If a land-owner, finding his property appreciating in value, sells part of it, and uses part of his money still further to develop the remaining parts, and so on, he is not carrying on a trade or business; he is only properly developing and realising his land. Based on the common law decisions and the example provided in MT 2006/1, the circumstances of your activities do not constitute an adventure or concern in the nature of trade. The supplies of the vacant lots represent the realisation of a capital asset; your activities are not carried on in the form of an adventure or concern in the nature of trade. | Detailed Reasoning - Conclusion: Because your activities are not carried out in the form of a business or as an adventure or concern in the nature of trade, the activities do not constitute an enterprise under section 9-20 of the GST Act. As you are not conducting an enterprise you are not required to be registered for GST Accordingly, the supplies of the vacant lots of land by way of sale will be the mere realisation of a capital asset and will not be made in the course or furtherance of an enterprise that you carry on. The requirements of a taxable supply under paragraph 9-5(b) and 9-5(d) of the GST Act will not be satisfied; your supplies of the vacant lots will not be taxable supplies.