Private ruling: GST and the sale of developed parcels of land.
Published: June 2013

Ruling: You are not registered for Goods and Services Tax (GST) you do not hold an Australian Business number (ABN) | You own a X hectare property at xx (Property) as tenants in common. | You acquired the property in xx as your primary residence, in the same year, you were granted town planning consent to construct a driving range on the property and to renovate the existing premises on the property. | You have not commenced the development of the commercial driving range. | You have not claimed tax deductions in relation to the development of the property. | In xx, the State Government requested the xx (council) prepare a draft structure plan xx (structure plan) | The structure plan shows Y% of the property was to be rezoned resulting in a reduced or limited use of the land and you considered it would reduce the value of the property. | You sort the advice of a town planner to protect the property from the impact of the structure plan | On xxx, you submitted a development application for a Material Change of Use (MCU) from 'residence' being one lot to 'park residential' zone consisting of a number of lots. The property was zoned 'park residential' therefore the decision to be made by Council was to reconfigure the lots. | Following an appeals process and a number of successive hearings, you were granted a reconfiguration of the initial lot into Z lots for the property on xx | You incurred legal costs in excess of $xxx to have the MCU approved, financed though a combination of sale of rental properties and bank loans. | The subdivision of one lot into Z is subject to obtaining the operation works approval (approval) | You have engaged engineers to undertake the approval application which is expected to be lodged by 20XX. | One of the joint owners is employed by the council and xx is employed in particular role. | You do not have expertise in sub-division or construction and you will engage a full-time project manager to oversee the development of the property into Z park residential blocks including the existing house block (project). | The project will include creating a new road linking xx to the new lots, a new park and a new dam. | The road, park and dam are all compulsory minimum requirements placed on you in order for the proposal to be accepted by the council. The dam is already in existence on the property in accordance with the MCU approval it will be moved to a new position. | You intend to finance the project by selling a number of the vacant blocks to cover the cost of development and to reduce debts incurred. | You intend to use the services of a real estate agent to sell the blocks. | You estimated the sale price of a vacant block to be between $xx and $xx with real estate sales commissions and conveyance costs ranging from $xx to xx for each block. | You do not have a common law partnership in place for income tax purposes. | We have considered the following documents as part of this application: | · The Private Binding Ruling application | · Attachment 1 - facts describing the scheme or circumstance. (2 pages) | · Attachment 2 - your arguments and references (4 pages) | · Attachment 3 - precinct and sub-precinct descriptions (1 page) | · Attachment 4 - court hearing documents (25 pages) | · Attachment 5 - conditions for development permit (12 pages) | · Attachment 6 - proposed Lot reconfiguration Lot Z on xx (1 page) | · The facts describing the scheme or circumstance as reviewed and amended. (2 pages)


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 9-10. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-30. | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 188-25 | A New Tax System (Goods and Services Tax) Act 1999 Section 195

Reasons for decision: Summary: The issue of carrying on an enterprise is one relevant element in determining whether GST applies to a supply. A supply is defined in subsection 9-10(2) (d) of the GST Act includes a grant, assignment or surrender of real property. A supply is only subject GST when all the requirements of section 9-5 of the GST Act are met. This section 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 it is *GST-free or *input taxed. * To find definitions of asterisked terms, see the Dictionary, starting at section 195-1. From the facts presented, you intend to sell three or four vacant lots of land, subdivided from one parcel of land. You intend to sell these lots of land under a standard land contract and the title of each lot will transfer to the purchaser. Therefore, when the transfer of lots occurs the supply will meet the definition of a 'supply' of real property. Furthermore, you will satisfy subsection 9-5(a) and (c) of the GST Act, you intend to supply three to four lots to a proposed purchaser for monetary consideration and the property is located in Australia (subsection 9-25 (4) of the GST Act) . Further, the supply of the property is not GST-free under any of the provisions of Division 38 of the GST Act or input taxed under Division 40 of the GST Act. Therefore the issues to be addressed here include whether: (i) the supply of vacant land lots will be made in the course or furtherance of an enterprise that you carry on (subsection 9-5(b) of the GST Act) and (ii) you (as joint owners of the property) are required to be registered (subsection 9-5(d) of the GST Act) | Detailed Reasoning - (i) Are you carrying on an enterprise? (Subsection 9-5 (b) of the GST Act): The issue of whether an entity is carrying on an enterprise is examined in Miscellaneous Tax Ruling MT 2006/1 (MT 2006/1). The ruling examines a number of activities which an entity may carry on, including isolated transactions. In regard to such transactions, paragraphs 262 and 263 of MT 2006/1 state: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. 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 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 contains a list of factors which, if present, may be an indication that a business or adventure or concern in the nature of trade is being carried on. The factors 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. Further, paragraph 266 of MT 2006/1 states: 266. In determining whether activities relating to isolated transactions are an enterprise……, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion…. From the facts provided, these activities represent a single event, you state you have no previous experience in property development or subdivision. Therefore these activities can be represented as a 'once off' transaction on the land that you have been using as your primary residence for your personal enjoyment. In this case there has been a change in purpose for the land. The land was originally used for private purposes, you now intend to subdivide the land into Z parcels and these are activities describing a property development. It represents a change in the purpose of the use of the land and requires a coherent plan for the subdivision. Although, no additional land was acquired and added to the property, other factors listed in paragraph 265 of MT 2006/1 are present in this case. In this instance the following indicators are relevant: · a change of purpose exists as evidenced by the MCU and subsequent appeal to alter the use and reconfigure the land from one lot into eight. · this subdivision did not require additional land, X hectares of land was large enough to develop it into Z lots. · there was a coherent plan for the development and division of the property as evidenced by the planning and environment court of xx successful appeal against MCU of the land. · there is a business organisation in appointing the several consultants and contractors to carry out and over see the subdivision, · borrowed funds and the sale of residential properties were used to finance the legal action. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider whether the activities have a commercial flavour and whether the nature of the asset changes to one of trade. In this case the overriding factors of a property development exist in this arrangement. Supported by MT 2006/1 the facts in this case indicate there is a purposeful commencement of activities to embark on a definite and continuous cycle of operations designed to lead to the sale of the land. Rather than directing the action on your own behalf, you have had your development application done by organising others to perform the task. On balance the activities undertaken exhibit the commencement of a property development and these activities are in the nature of trade. On the basis of these facts, the subdivision and subsequent sales of the subdivided lots of land will be in the form of an adventure or concern in the nature of trade under paragraph 9-20(1) (b) of the GST Act. It follows that you will be 'carrying on an enterprise' for the purpose of subsection 9-5(b) of the GST Act. What remains to be considered to be a taxable supply of vacant land is whether you are required to register for GST under subsection 9-5(d) of the GST Act. | Detailed Reasoning - (ii) Whether you are required to be registered? (Section 9-5(d) of the GST Act): Section 23-5 of the GST Act provides that you are required to be registered for GST if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold. Regulation 23-15.01 specifies that the registration turnover threshold (other than for non-profit bodies) is $75,000. You will be required to register for GST if your GST turnover meets or exceeds the registration turnover threshold of $75,000. GST turnover refers both to "current annual turnover" (turnover for a particular month and the preceding 11 months) and "projected turnover" (turnover for a particular month and the next 11 months) (sections 188-15 and 188-20 of the GST Act respectively). In both cases, the calculation is based on the GST exclusive value of supplies made (sections 188-10 and subsection 9-75(1) of the GST Act). Section 188-10 provides guidance on how to determine whether your client's annual turnover meets, or exceeds the registration turnover threshold. Under section 188-25 of the GST Act, when calculating your projected annual turnover, you do not include any supplies made or likely to be made by transfer of ownership of capital assets, or as a result of ceasing to carry on an enterprise or substantially and permanently reducing the size and scale of an enterprise. We have determined above that the activities consist of a property development enterprise engaged in by you. This property development enterprise commences with the creation of land subdivided into Z lots furthermore, it will continue until the trading stock is sold or another terminating event occurs to cancel your GST role. (Reasons to cancel your GST are outlined in the ATO publication 'Leaving the GST system (NAT 14829) available by conducting a search using '14829' in the search box from our home page www.ato.gov.au.) The sale of the lots are trading stock, therefore they will not be disregarded in working out the projected annual turnover. Accordingly, if you sell or expect to sell lots in the current month and next eleven months and the sale of the land is over $75,000, the sale of a lot will exceed the projected turnover and you will be required to register for GST. You have some choices available to you in creating the entity structure. From the facts provided you will derive income from the real estate property owned as joint tenants in common and we have concluded above that you are carrying on a property development enterprise in Australia. Therefore, you are entitled to an ABN because you are considered to be a partnership entity for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Refer to paragraph 42-43 of MT 2006/1. Question 2 - sale of sub-divided blocks It is the sale of the newly created lots of land that are subject to GST not the subdivision. The mere subdivision of land does not constitute a supply for GST purposes under paragraph 9-10(2)(d) of the GST Act. All that results from the subdivision is that land is held under different titles by the same owner. It is only when that subdivided land is sold that there is a supply. Therefore, what needs to be considered is whether the supply of the lots being vacant land is a taxable supply. The current Tax Office view on the supply of vacant land is contained in paragraph 99-97 of Goods and Services Tax Ruling 2003/3 (GSTR 2003/3) it states, vacant land that is subdivided from a larger parcel of land that contained residential premises used to make input taxed supplies cannot itself be viewed as having been used solely in connection with making input taxed supplies. Therefore the vacant land, when sold, could not be input taxed under subsection 9-30(4) of the GST Act and is a taxable supply. It follows that if the vacant land achieves an exclusive price of more than $75,000 the sale of the land will trigger the registration GST turnover threshold and you will be required to register for GST. Accordingly, when you sell the vacant lots of land you will be making a taxable supply under section 9-5 of the GST Act and the sale will be subject to GST.