Private ruling: GST and Property and the subdivision of land
Date of advice: 12 August 2016
Published: September 2016

Ruling: Q1: Will your subdivision and sale of land be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes.

Relevant facts and circumstances: You are not registered for GST. On DDMMYYYY, Mr and Mrs A purchased the Property. The land area of the Property is X square metres. Mr and Mrs A built their main residence on the Property. Mr and Mrs A want to downsize the Property by subdividing the property and selling the vacant land. The proceeds from the sale of the subdivided vacant lots of land will be used for their retirement. You will purchase the Property from Mr and Mrs A, subdivide the Property into X lots, including one on which the house is currently located. You will lease the subdivided lot on which the house is located to Mr and Mrs A for a market value rental amount. You will sell the remaining subdivided vacant lots of land. Mr and Mrs A created you for asset protection and to limit their personal exposure. Your sole purpose is to purchase the Property from them, undertake the subdivision, and sell X of the subdivided lots (the Project). It is anticipated that you will use the market value as a fair purchase price when purchasing the Property and will borrow the full amount to cover the purchase price of the Property and stamp duty. On DDMMYYYY, a quotation for the Project was provided by a consultant with the subdivision being undertaken in two stages. On DDMMYYYY, your real estate agent provided valuation estimates. The services of the consultant have been engaged to undertake all activities in relation to the Project. The consultant has prepared the subdivision application which will be lodged shortly, and dependant on the approval of the subdivision application the infrastructure works are expected to commence around MMYYYY, with the completion of the subdivision estimated to occur around MMYYYY. The infrastructure that will be undertaken as a result of the subdivision will be as follows: • Power - local electrical contractor and B. • Fencing - local fencing contractor will be engaged to construct the fencing. • Roads - local earthworks contractor will be engaged for the construction of the roads to the subdivided lots. You will engage the services of real estate agent/s to sell the remaining subdivided vacant lots of land. You believe that the sale price for the subdivided vacant lots of land will be $X to $Y per lot. You intend to sell the subdivided vacant lots of land as quickly as possible, dependent on the property market, to reduce the loan. You have not undertaken any similar activities in the past and do not intend undertaking any similar activities in the future.

Relevant legislative provisions: 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 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 188, and | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision: Summary: In this reasoning please note, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all terms marked by an *asterisk are defined terms in the GST Act • all reference materials, referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au. Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 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 the indirect tax zone (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. When you sell the subdivided vacant lots you will make a supply of land in Australia for consideration, satisfying paragraphs 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in these circumstances. The issues here are whether the supplies of the subdivided lots are made in the course or furtherance of an enterprise you carry on and whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: 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. Paragraph 234 of Miscellaneous Taxation 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) distinguishes between these activities: • 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. In this case we do not consider your activities amount to a business engaged in on a regular basis. However we must consider whether, in entering into a one off or isolated real property transaction, you are carrying on an enterprise in the form of an adventure or concern in the nature of trade, having the characteristics of a business deal. Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that 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 an adventure or concern in the nature of trade (profit making undertaking or scheme), as opposed to the mere realisation of a capital asset. You will purchase the property at market value from Mr and Mrs A and undertake the development of the property. You have been created for reasons of asset protection and have the sole purpose of purchasing and subdividing the Property, with the intention to sell X of the subdivided lots. Paragraph 270 of MT 2006/1 considers the meaning of carrying on an enterprise in the context of land purchased with the intention of resale and states: 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. As outlined in paragraph 270 of MT 2006/1 we consider you are carrying on an enterprise. The supplies of land will be made in the course or furtherance of the enterprise you carry on and consequently paragraph 9-5(b) is satisfied. | Detailed Reasoning - Registration: Section 23-5 provides that you are required to be registered for GST if: (a) you are carrying on an enterprise, and (b) your GST turnover meets the registration turnover threshold. The registration turnover threshold is currently $75,000. Section 188-10 provides that you have a GST turnover that meets 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. Section 188-20 provides that 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 other than input taxed supplies. Of relevance here is your projected GST turnover. We have already established that you are carrying on an enterprise. In undertaking the sale of the subdivided blocks you will be required to be registered when your projected GST turnover is at or above $75 000. | Detailed Reasoning - Conclusion: As all the requirements of section 9-5 have been met and the supply is not GST-free or input taxed, the supply of the subdivided blocks will be taxable supplies.