Private ruling: GST Enterprise and Property Development
Published: September 2014

Ruling: Q1: Does goods and services tax (GST) apply to the subdivision and sale of land that is attached to your principal place of residence? | A1: No.

Relevant facts and circumstances: • You own a rural property (the property). • You are a partnership registered for GST. • You previously conducted a commercial leasing enterprise. • The enterprise has since ceased. • You hold a single residential investment property which is currently leased. The property • You purchased rural land in the early 1990s as you were seeking a large allotment for lifestyle purposes. • You built your principal place of residence on this land and lived and raised your family on the property. • You continue to reside on the property. • In early 2003 you were approached by local council in regard to your land as permission was needed from you in regard to a neighbouring sub development where roads were required to be constructed bordering your property. • The area that your land is held is high growth and council rezoned the land all around the area to residential in 2003. • As you were not intent on subdividing your land, you deferred any development which incurred a sizable fee with council in 2005, 2006, 2008, 2009, 2010 and again in 2012. • In 2013 council again approached you in regard to developing your land as the government was building a new school and demand for land in the area was high. • The council advised that no further extensions would be granted. The development • To complete the sub-division as per council specifications, you engaged contractors to design works and carry these out, which included roads (internal and external), street lighting, underground power, telephone, water, kerb and channel, storm water path ways, bollards and landscaping. • The property was sub-divided into a number of smaller blocks, 1 of which has the existing house and remains your residence. • Development costs did not substantially increase the value pre sub-division. • No new loans were taken out to complete the development, no additional land was acquired and no new buildings have been erected. • You have not developed any land previously and the blocks have not been advertised for sale.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) 1999 | Section 9-5 | Section 9-20 | Section 23-5

Reasons for decision: Summary: The subdivision and sale of the property is not subject to GST, the subdivision and sale of the subdivided lots is not an enterprise but a mere realisation of a capital asset. | Detailed Reasoning - Detailed reasoning: Section 7-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supply that you make. Section 9-5 of the GST Act defines a taxable supply. It states: 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 Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that is *GST-free or *input taxed. Items marked with an asterisk (*) are defined in the Dictionary at section 195-1 of the GST Act. In your case, you have made or will make supplies for consideration and the supplies are/will be connected with Australia. It must now be determined whether the supplies are/will be made in the course or furtherance of an enterprise that you carry on, and whether you were required to be registered for GST. Under section 23-5 of the GST Act you are required to be registered if: • You are carrying on an enterprise; and • Your GST turnover meets the registration turnover threshold. 'Enterprise' is defined in subsection 9-20(1) of the GST Act. It states: An enterprise is an activity, or series of activities, done: (a) in the form of a *business; or (b) in the form of an adventure or concern in the nature of trade; … 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 discusses when an entity can be said to be carrying on an enterprise. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? GSTD 2006/6 provides that the reasons in MT 2006/1 are considered to apply equally to the term 'enterprise' in the GST Act and can be relied on for GST purposes. Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity or a series of activities that amount to an enterprise. Paragraph 159 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. Example 15 in MT 2006/1 provides that an activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if an enterprise has been carried on. | Detailed Reasoning - In the form of a business: An enterprise includes an activity, or series of activities, done in the form of business. MT 2006/1 presents some indicators of business derived from case law. These 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. There is no single test to determine whether a business is being carried on. In your case, you have not conducted a significant commercial activity in the subdivision of the property and you do not intend to engage in a significant commercial activity. You have not subdivided property before. The subdivision activity was carried on in a businesslike manner and records were kept. To complete the sub-division as per council specifications, you engaged contractors to design works and carry these out, which included roads (internal and external), street lighting, underground power, telephone, water, kerb and channel, storm water path ways, bollards and landscaping. The activities were of a reasonable size and scale. No business plan exists and there were no commercial sales of product. You do not have relevant knowledge or skill in subdividing property, and you engaged contractors and a real estate agent. Considering these factors, the sale of subdivided lots was not in the form of a business. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: There is also no single test to determine what is an adventure or concern in the nature of trade. MT 2006/1 recognises case law stipulating that an adventure or concern in the nature of trade implies a commercial, profit-making undertaking or scheme. Paragraph 244 of MT 2006/1 provides that this undertaking must have the characteristics of a business deal and be of a revenue nature. Paragraph 247 of MT 2006/1 provides that where the property being sold provides personal enjoyment to the owner it is more likely to be an investment rather than a trading asset. Paragraphs 249 to 255 of MT 2006/1 provide that the length of ownership, the frequency of the transactions, supplementary work on the property, the circumstances that were responsible for the realisation and the motive are also relevant factors when determining whether an activity is in the form of an adventure or concern in the nature of trade. In your case, you have owned the property for a long period of time as your primary residence. The property has provided personal enjoyment to you as your home. You engaged in the subdivision activity due to council pressure and also in an attempt to realise the value of your property. This subdivision activity is infrequent, as you have not made any other earlier attempts to subdivide the property. Considering these factors, the sale of the subdivided lots was not in the form of an adventure or concern in the nature of trade. | Detailed Reasoning - Isolated transactions and sales of real property: MT 2006/1 also provides guidance on whether an entity is carrying on an enterprise where there is a 'one off' sale of real property. Paragraph 266 of MT 2006/1 provides that in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Paragraph 265 of MT 2006/1 states factors to consider when determining whether an isolated sale of real property is a business or a concern in the nature of trade. These are: • 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. In your case, there is no change of purpose for which the land was held; it was your primary residence. You did not acquire any additional land. The parcel of land as a whole was not brought into account as a business asset. You did not borrow money to finance the subdivision. You engaged contractors to carry out the subdivision. You did not develop the land beyond that necessary to secure Council approval for the subdivision. You have not erected any buildings on the land as part of the subdivision. Considering these factors, your sale of subdivided lots is/will be the mere realisation of a capital asset. As the sale of the property is a mere realisation of a capital asset, it is not made in the course or furtherance of an enterprise that you carry on. As all the requirements in section 9-5 of the GST Act are not met the sales of your subdivided lots are not taxable supplies. There is no requirement to report GST on the sale of the lots and you cannot claim input tax credits for the associated acquisitions.