Private ruling: GST and the sale of property
Date of advice: 30 August 2018
Published: October 2018

Ruling: Q1: Does the sale of Lot 1and Lot 2 as vacant undeveloped land constitute a supply made in the course or furtherance of an ‘enterprise’, as defined by section 9-20 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) for the purposes of section 9-5 of the GST Act? | A1: No | Q2: Do the activities of constructing a residential dwelling on Lot 3 either for the purpose of sale as a house and land package or to retain as an investment for the purposes of generating rental income constitute an ‘enterprise’, as defined by section 9-20 of the GST Act for the purposes of section 9-5 of the GST Act? | A2: Yes | Q3: Does the sale of Lot 3 as a house and land package constitute a supply made in the course or furtherance of an ‘enterprise’, as defined by section 9-20 of the GST Act for the purposes of section 9-5 of the GST Act? | A3: Yes | Q4: Are you making a taxable supply pursuant to section 9-5 of the GST Act when you sell Lot 3? | A4: Yes

Relevant facts and circumstances: Individual A is not registered for GST. Individual B is not registered for GST. Individual A and Individual B (You) are registered as a partnership for GST and carry on an enterprise of leasing commercial property. In xx/xxxx you purchased property located at a specified location (the Property).The Property is x,xxx m 2 and contained a number of horse stables at the time of your acquisition. You acquired the Property with the intention of constructing your family home to be used as your principal place of residence for you and your three children. You have not brought the Property into account as a business asset of your GST registered partnership and you have not accounted for expenses (including any interest expense) related to the subdivision and development of the Property in the accounts of the partnership. In xx/xxxx you sold your former main residence which you had resided at for xx years prior. In xxxx you constructed a new four bedroom residence on the Property with construction being completed in xx/xxxx. You and your three children moved into the Property on xx/xxxx. In the following few years you made a number of capital improvements to the Property including the erection of perimeter fencing, installation of an in-ground swimming pool and extensive landscaping. In xxxx you were involved in a dispute with a resident of a neighbouring property. The dispute continued for a period in excess of 18 months in which time you were physically and verbally assaulted which included threats against you and your family with a firearm. Following these events you and your family were fearful for your safety if you continued to reside at the Property. As a result and in an attempt to protect your family you arranged for your children to move out of the Property and live elsewhere. You also installed security cameras and additional outside lighting. In xx/xxxx you made the decision that you and your family would sell the Property and leave the area and the Property was put on the market for sale. You did not receive any offers to purchase the Property as a whole however you did receive enquiries regarding splitting the Property into smaller lots for sale. On xx/xx/xxxx you applied to the relevant Council to subdivide the Property into four lots with separate individual titles in order to sell the Property. As a part of obtaining approval for the subdivision you were required to have sewer, stormwater and water connected to each new lot. Power was not connected however certification was provided that power was available to be connected. Minor earthworks were also required bring the lots to a required level/height. Expenses related to the subdivision process were funded by utilising a pre-existing line of credit facility. On xx/xx/xxxx the relevant Council approved the subdivision of the Property into four separate lots. On xx/xx/xxxx you appointed a real estate agent to sell the Property either as separate lots or as a whole. The sale marketing campaign was unsuccessful and none of the lots were sold. In xx/xxxx four new titles were created (Being Lots 1, 2, 3 and 4) with Lot 4 remaining as a separate lot on which your residence is located. The newly created Lot 1adjoins the neighbouring property involved in the previously mentioned dispute. Each lot was registered to Individual A and Individual B as joint tenants. On xx/xx/xxxx, an auction of the lots was held. The auction was unsuccessful and the lots did not sell. During the period xx/xxxx to xx/xxxx you engaged a number of real estate agents to market and sell all four lots. In xx/xxxx a buyer was secured for Lot 4 being the lot containing your residence. The sale settled in xx/xxxx and you vacated the premises in the days immediately prior to settlement. On xx/xxxx you entered into a contract for the sale of Lot 1 and Lot 2 as vacant land. Settlement date is 120 days from the contract date. You are contemplating constructing a residential dwelling on the remaining lot (Lot 3) to retain as an investment for the purposes of generating rental income. Alternatively, you may sell the developed lot as a house and land package.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Section 9-40 | Paragraph 9-20(1)(a) | Paragraph 9-20(1)(b) | Paragraph 9-20(1)(c) | Section 40-75

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au The term ‘enterprise’ is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done in the form of a business (paragraph 9-20(1)(a)) or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. We are of the view that this venture is not an activity or a series of activities in the form of a business. Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. Paragraph 244 of MT 2006/1 explains that 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. It refers to ‘the badges of trade’ and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of ‘trade’ and held for income producing purposes, or held as an investment asset or for personal enjoyment. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing the following: ● Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. ● Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on. Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are ‘one-offs’ or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: ● 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; and ● buildings have been erected on the land. No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. | Detailed Reasoning - Application to your situation: In this case the Property was initially acquired for private purposes being the construction of a dwelling to be used as your principal place of residence. Due to personal circumstances you made the decision to subdivide your property to create 4 individual lots. You subsequently made a decision to sell the lot that contained your residence and this settled in xx/xxxx.This left you with 3 vacant lots of subdivided land. You then decided to sell two vacant lots. You have recently entered into a contract for the sale of two of the other lots as vacant land. In your case, the activities required by you to achieve subdivision into 4 separate lots for sale in our view are small in scale and done to meet council requirements. The activities are not considered an enterprise for GST purposes, but a mere realisation of your asset. You intend to construct a house on the remaining lot (Lot 3) either to be retained as an investment to generate rental income or alternatively, sold on completion of construction. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. Where the transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. We consider that there has been a change in the purpose for which the Property is held when you originally acquired the property as your main residence/home, namely you subsequently entered in a venture to develop Lot 3 for sale or lease. When you sold Lot 4, your remaining holdings were lot 1, 2, and 3 as vacant subdivided land. As stated above you then decided to sell Lots 1 and 2 as vacant land, and then decided to develop Lot 3. The date you decided to enter into the venture of developing Lot 3 for the purposes of sale or lease, is the relevant date in determining whether you carry on an enterprise for GST purposes. Whilst you have not brought the property into account as a business asset, did not seek new or additional borrowings and did not acquire additional land, you have taken the opportunity presented from your plan to subdivide the property to create additional lots to then develop Lot 3. The level of development is beyond that required by council for either sale or lease. This includes seeking advice from specialists in respect to preferable ways to dispose of or invest in your lots. You will enter into building contracts regarding the construction of the new dwelling and enter arrangements to sell the premises or lease the premises when completed. In your case the extent of your development of Lot 3 goes beyond a ‘mere’ realisation’ of the asset acquired as discussed in MT 2006/1. Your activities constitute an ‘enterprise’ for GST purposes (property development enterprise). Where the property is for lease then your activities will be considered an ‘enterprise’, being an activity or a series of activities, done on a regular of continuous basis, in the form of a lease, licence, or other grant of an interest in property, as defined in sub section 9-20(1)(c). Where the property is for sale then your activities will therefore be considered an ‘enterprise’, being an activity or a series of activities, done in the form of an adventure or concern in the nature of trade as defined in sub section 9-20(1)(b). Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides 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. In this case, the sale of Lot 3 will satisfy the above criteria of a taxable supply. The sale of Lot 3 will be for consideration, in the course or furtherance of an enterprise that you carry on (as discussed above), connected with the indirect tax zone (Australia) and you are registered for GST. Whilst the sale of residential premises is generally considered an input taxed supply (and as such not a taxable supply), the sale of ‘new residential premises, is excluded from being classified as a supply that is input taxed. Section 40-75 provides that ‘residential premises’ are ‘new residential premises’ if they have not been previously sold as residential premises (unless the premises have been leased or rented out for a period of 5 years after being built). As such, the sale of Lot 3 will be a taxable supply and GST will be applicable to the sale.