Private ruling: Sale of subdivided land
Published: July 2012

Ruling: Q1: Are you making taxable supplies when you dispose of the lots following your subdivision of land? | A1: No, in relation to lots 1 & 2 you are not making taxable supplies. Yes, in relation to the remaining lots you are making taxable supplies.

Relevant facts and circumstances: You purchased an area of vacant land in an Australian State after 1 July 2000 at a specified cost. You are not registered for goods and services tax (GST) either individually or as a partnership. The land was purchased as Tenants in Common in specified shares: You each contributed to the land cost based on your specified share. Loan funds required were obtained in your separate names. The land was subsequently subdivided into a specified number of lots. Two of you intend to keep one lot each, to build your principal residences on. These two lots, Lot 1 and Lot 2 have since been transferred into the names of the two named respectively and they are now each the sole proprietor of their own lots. The other lots will or have been sold to the general public and the details of all the lots and values were specified. You do not have a business plan or any profit and loss statements. You have no projected profit and loss statement. You do not have a joint bank account. All subdivision and settlement financial transactions have been carried out through the private joint account of one of you There is no formal equipment or facilities used in the activity. You have no formal bookkeeping and are basically keeping receipts and contracts and settlement statements. You have no expertise or qualifications in the activity undertaken and have outsourced to consultants who have completed all necessary documents for the subdivision. The subdivision and total cost was specified. Additionally, Interest paid on borrowings amounted to a specified amount. Separate loans were obtained by each of you. You are not members of any organisation or body relating to the activity. There is no written arrangement or deed covering the purchase, subdivision and eventual sale of the land. All agreements and arrangements have been made verbally. The amount of time spent on the activity is approximately one hour per week. Some of the lots are under contract of sale. You provided a copy of the purchase contract for the total land and the sale contract for one of the lots. Further information: We obtained information in relation to the land from RP Data and Google Map searches. This information provides that Lots 1 and 2 were transferred for no consideration. Contentions: Your tax agent advised that the land was purchased jointly as both AA and BB each wanted to purchase a large block in the area for their own residential purposes. It was found that it would be cheaper to buy a larger tract of land and subdivide. Other parties joined in to help defray the overall cost. As you had some understanding of the value of land in the area the undertaking was not made without considering the overall financial outcome from the sale of the remaining lots.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5, Section 9-20, Paragraph 9-20(1)(a), Paragraph 9-20(1)(b), Section 11-5, Section 11-15, Section 23-5, Regulation 23-15.01.

Reasons for decision: Summary: You are liable for any GST payable on taxable supplies that you make. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if: (a) you make the supply for consideration, (b) the supply is made in the course or furtherance of an enterprise that you carry on, (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. In your case you purchased land jointly and arranged for its subdivision into a specified number of lots. Following subdivision, two of the vacant lots were transferred to two of the joint tenants for no consideration. The sale of the remaining vacant lots will be for consideration and the lots are connected with Australia. Therefore, it remains to be considered whether you are carrying on an enterprise in relation to all or part of the land and if so whether you are required to be registered for GST. There is nothing in the GST legislation that would indicate that the supply of the subdivided lots could be considered to be GST-free or input taxed in the circumstances that you have described. Subsection 9-20(1) of the GST Act defines that an enterprise is, amongst other things, an activity, or a series of activities, done: · in the form of a business, or · in the form of an adventure or concern in the nature of trade. Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian business number (ABN). This ruling is considered to also apply to the term enterprise in the GST Act. (Goods and Services Tax Determination GSTD 2006/6 refers). Both public rulings are available on our website at www.ato.gov.au Paragraphs 262 to 302 of MT 2006/1 provide guidance on the issue of isolated transactions and sales of real property and explains that to be conducted in the form of a business, the activities would need to have the essential appearance or characteristics of a business. Based on the facts provided, we are satisfied that your activities of acquiring and subdividing the land in regards to lot 1 and lot 2 for the purposes of AA and BB constructing their individual places of residence were not carried on in the form of a business as they were of a private nature. In addition because of the isolated nature of this activity of acquiring a single area of land and subdividing it to produce the additional lots would not be in the form of a business as it does not have the requisite continuity to be business like in nature. Therefore we need to consider whether the activities associated with the production of the remaining lots are in the form of an adventure or concern in the nature of trade. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but has the characteristics of a business and may include isolated transactions. Generally the sale of private assets is not, in the absence of other factors, an adventure or concern in the nature of trade. The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. With respect to property transactions where land is merely held for private purposes and sold at a later date, this will not amount to an enterprise. However, where land is sold that was purchased with a view of resale at a profit, we consider this to be an adventure or concern in the nature of trade. Paragraph 270 of MT 2006/1 provides: | Detailed Reasoning - Land bought with the intention of resale: 270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. For further explanation you may wish to refer to example 29 at paragraph 273 of MT 2006/1. In your case, you are not in the business of property development. However, you have undertaken to jointly purchase a sizeable area of vacant land in an existing residential subdivision in your State. Within a short time after the purchase of the land you commissioned a consultant to complete a subdivision of the land into a specified number of residential lots. Two lots were to be retained by AA and BB for their private purposes. You then actively promoted the remaining lots for sale via a real estate agent with at least one of the lots (according to the copy of the sale contract that you provided) being sold subject to the approval of the subdivision plan. Your tax agent has submitted that the motivation for your joint purchase of the large tract of land was to limit the cost of obtaining separate large blocks of land in the area suitable for the residential purposes for two of the joint tenants, namely AA and BB. By buying the larger area of land this allowed you to reduce the cost of the two blocks designated for AA and BB. The other parties joined in the purchase of the land to assist defray the overall cost to AA and BB. It is considered that, before making the commitment to proceed, you expected not only to obtain the benefit of the reduced cost of the two lots for the private use of AA and BB but profit or gain from the subdivision exercise. That is, the profit or gain made from the eventual sale of four of the six subdivided lots could offset the cost to AA and BB of buying land for their own private residential purposes as well as provide a positive return for the other parties. Paragraphs 382 to 386 of MT 2006/1 discuss the meaning of reasonable expectation of profit or gain. In particular paragraph 384 provides: | Detailed Reasoning - Reasonable expectation of profit or gain …: 384. The test is an objective one. This means that the determination of whether there is a reasonable expectation is not solely based on the subjective view of the individual concerned. It is determined by whether a reasonable person looking at all the circumstances would come to the conclusion that there is a reasonable expectation of profit or gain. … As there is no documentation covering the arrangements made between you we have relied on your tax agent's written submission and further information subsequently obtained from your tax agent and our research of the sales record of the properties through RP Data. After weighing up all the information mentioned above we are of the view that you are carrying on, in partnership, an enterprise of property subdivision in regards to the remaining lots. This is because you undertook to acquire the relevant land, in excess of the personal requirements of AA and BB, with a view to selling the surplus for a profit. Goods and Services Tax Ruling GSTR 2004/6 which is about tax law partnerships and co-owners of property explains at: | Detailed Reasoning - What is a tax law partnership?: 18. A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership) … in receipt of ordinary income or statutory income jointly'. 19. If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership. And | Detailed Reasoning - Receipt of income: 27. The expression 'in receipt of ordinary income…jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. And | Detailed Reasoning - Time of association approach: 30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach. When your situation is examined in light of the above explanations, it is clear that you have undertaken an activity which amounts to an adventure or concern in the nature of trade and satisfies paragraph 9-20 (1)(b) of the GST Act. As a consequence subsection 9-5(b) of the GST Act will also be satisfied. It remains to be determined whether you (the partnership of all four partners) are required to be registered for GST Under section 23-5 of the GST Act you are required to be registered for GST if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold. The current registration turnover threshold is $75,000 (or $150,000 if you are a non-profit body). As you are carrying on an enterprise and the expected proceeds from the sale of the remaining lots totals more than $75,000 you meet the requirements of section 23-5 and will be required to register for GST. It follows that in your case, all the requirements of section 9-5 of the GST Act are met and you will therefore be making a taxable supply when you sell the resultant subdivided Lots. Consequently, you have an obligation to remit GST in relation to those sales. | Detailed Reasoning - Further information:: You will be entitled to claim GST credits in relation to the GST included in the cost of any creditable acquisitions that you have made in carrying on your enterprise. This would not include any costs related to acquisitions that are of a private or domestic nature (Please refer to sections 11-5 and 11-15 of the GST Act). Goods and Services Tax Ruling GSTR 2006/4 provides the Commissioners view on the meaning of creditable purpose and the extent of creditable purpose. It also provides examples of apportionment methods that an entity can use to determine its correct entitlement to input tax credits. Paragraph 34 of GSTR 2006/4 states that the apportionment method an entity chooses needs to: · Be fair and reasonable · Reflect the planned use of that acquisition (or in the case of an adjustment, the actual use); and · Be appropriately documented in the entities individual circumstances. Paragraph 35 of GSTR 2006/4 states that where a direct method is available to you, the Commissioners view is that such a method would best reflect the intended or actual use of your acquisitions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.