Private ruling: GST and sale of subdivided land
Date of advice: 2 November 2018
Published: December 2018
Ruling period: 1 July 2018 – 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 on the sale of subdivided lots situated at a specified location? | A1: No

Relevant facts and circumstances: You are not registered for GST. Approximately specified time ago you acquired property situated at a specified location (the Property). The Property is xxxm 2 and has been used as your principal place of residence since the date of acquisition. You intend to demolish the existing residential dwelling and subdivide the Property into three lots. You intend to sell two of the subdivided lots to your children. You will not conduct any development of the lots prior to the lots being sold to your children. The lots will be vacant land when sold. You intend to retain the remaining subdivided lot and build a new residential dwelling for use as your principal place of residence. You are currently retired and your current income is sourced from receipt of superannuation and pension amounts. You do not carry on any other enterprise or business. You have not previously been involved in the subdivision and/or development of property. You will not borrow funds to finance the subdivision costs. The expenses related to the demolition of your existing residence and subdivision of the Property will be funded from existing savings.

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 9-40

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 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. Of relevance in this case is whether you are making the supply of the vacant subdivided lots in the course or furtherance of an enterprise that you carry on. If so, as you are not registered for GST, a further question will be whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: 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 ● 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. 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. | Detailed Reasoning - In the form of a business: Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? , lists indicators of carrying on a business: ● 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. Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. 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. | Detailed Reasoning - Application to your situation: Given the facts of this case, we consider that the activities you have undertaken do not display the indicators of a ‘business’ listed above. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: We now consider whether your activities are in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). 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. Paragraph 245 of MT 2006/1 refers to ‘the badges of trade’ with paragraphs 247 to 257 discussing the various ‘badges of trade’ 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. 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. Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist 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. Paragraph 266 of MT 2006/1 provides in part that 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, you acquired the Property in xxxx and have used the Property as your principal place of residence since that date. You propose to demolish your existing residence and subdivide the Property into three lots. You intend to sell two of the vacant subdivided lots to your children and build a new residence on the remaining lot to use as your primary residence. A scenario similar to your situation is illustrated in Example 33 at paragraphs 291 to 293 of MT 2006/1: | Detailed Reasoning - Example 33: 291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years. 292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold. 293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset. You did not acquire any additional land for the purpose of the subdivision. You do not conduct any business activities. In addition, the subdivision of the Property was not conducted in a business-like manner as there was no ‘business organisation’. The vacant subdivided lots were not brought into account as business assets. The expenses related to the subdivision were not claimed as business expenses. You did not conduct any development on the vacant subdivided lots that was beyond the level necessary to secure council approval for the subdivision. You did not borrow funds to finance the subdivision costs. The demolition of the existing dwelling and subdivision costs were funded by accessing existing savings. No buildings were erected on the vacant subdivided lots. Given the above, we do not consider your activities to constitute an adventure or concern in the nature of trade. Therefore, you do not carry on an ‘enterprise’ for the purposes of GST. The subdivision and sale of the two vacant subdivided lots is considered to be the mere realisation of a capital asset. | Detailed Reasoning - GST registration: Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000). As discussed above, it is considered that the sales of the vacant subdivided lots do not constitute an ‘enterprise’ for GST purposes. As such, you are not required to register for GST. | Detailed Reasoning - Conclusion: Your activities of subdividing land and selling the vacant subdivided lots are not done in the course or furtherance of an enterprise. You are not required to register for GST. As such, the sales of the vacant subdivided lots do not meet the definition of a ‘taxable supply’. It follows that, you do not satisfy section 9-40 and are not liable for GST on the sale.