Private ruling: GST and the development and supply of real property
Published: May 2012

Ruling: Q1: 1. Are your supplies of vacant lots from the subdivision of your property taxable supplies? 2. Will the entry into the development agreement (DA) and the grant of a license to the developer to access the land and carry out the project activities be separate taxable supplies? 3. Are you making a creditable acquisition in relation to the acquisitions that you make under the DA? | A1: 1. Yes. Your supplies of the vacant lots of land will be taxable supplies. As you will be required to be registered for GST and the remaining conditions of a taxable supply will be met, you will be liable for GST on the sale of the vacant lots. However, you may choose to apply the margin scheme if you are eligible. 2. No, the entry into the development agreement (DA) and the grant of a license to the developer to access the land and carry out the project activities will not be separate taxable supplies. (See reasons for decision.) 3. Yes, provided that all the requirements of section 11-5 of the GST Act are met, you will be making a creditable acquisition in relation to the acquisitions that you make under the DA.

Relevant facts and circumstances: You, the owner of a property located in Australia (the Property) are not registered for goods and services tax (GST). You have solely owned this property since the death of your spouse. Before the death of your spouse, you had jointly conducted a farming enterprise on the property. Since that time various parts of the farm have been farmed under a share farm arrangement with another party. You terminated the share farming arrangement recently and currently lease the property to the share farmer who conducts their own enterprise on the property. You earn approximately $X per annum from allowing this activity to continue on your property. On a specified date you entered into a Development Rights Agreement (DRA) with a developer in regards to the property. Prior to entry into the DA you had been approached by another developer proposing an arrangement similar to the DA you have now entered into. However that developer withdrew its approach and instead introduced the current Developer to you to continue with the discussions. Your lawyer advised in an email that the share farming/leasing activities ceased in respect of the land being developed once the arrangement with the developer was finalised because they required access to the land. However, the share farmer still had access and continued to make payments to you in respect of that part of the land that the developer was not originally developing. On the specified date you, entered into three agreements in relation to the development of your land: 1. A deed of guarantee & indemnity (Deed) between you and Entity A. Entity A is an entity related to the developer. The Deed was entered into in relation to the DA and was set up as a guarantee for all liabilities present and future of the Developer to pay money to you (as owner) in connection with the DA (Guaranteed Money) 2. A power of attorney granted by you (the Appointer) in favour of the developer (the Attorney) under which you appoint the developer as your 'attorney' to procure in relation to the Land specified results including: · amendment of the development plan under the relevant state authority such that a majority in area of the Land is zoned for residential use · provisional development plan consent(s) and land division consent(s) · the deposit by the Registrar-General in the Land Titles Registration Office of one or more plans of division and · sales of allotments resulting from any plan of division as above. 3. A Development Agreement (DA) with the Developer in relation to the subdivision and development of your property. The DA provides (amongst other things): · authority for the Developer to undertake 'Project Activities' on certain parts of the land owned by you (Land). Two portions of the property on which your own house and another house are located are excluded from the development proposal. · that you will grant an exclusive license to the Developer to access the property to fulfil their obligations under the DA. · a Security Amount of $X will be paid to you on execution of the DA and a further amount of $X (paid in connection with the extension referred to in paragraph x of the contract). These payments can be forfeited under certain specified circumstances . · the Project Activities to be undertaken by the Developer include: i. procuring the amendment of the statutory development plan affecting the Land so that it is zoned primarily for residential use; ii. obtaining the required statutory consents for the Land to be divided into a minimum of x residential lots; iii. complying with all conditions stipulated in any development consent of land division consent, including entering into any design, construction and/or supply contracts for infrastructure to be installed on the Land and undertaking any civil works; iv. procuring the subdivision of the Land, and v. engaging licensed land agents to market the developed lots for sale at fair market values. · the project is expected to be carried out in stages over a number of years. · you will not be required to undertake any development activities personally other than giving consent and signing documents. · subject to circumstances where a transfer of a part of the land is required, including on settlement of any of the Sale Agreements, you are to remain the legal and beneficial owner of the Land until the making of all payments payable to you under the terms of the DRA. · you will not borrow any funds in relation to the development and are treating the land as a capital asset in your accounts. · any Project Activities undertaken by the Developer are at its own cost. · you are required to charge a mortgage in favour of the Developer as security for: o the Developer's right to access, use and develop the Land in accordance with this agreement; o repayment of the security amount as clause X may require; and o the Developer's entitlement to any surplus Gross Receipts. · if requested by the Developer after the commencement date and during the term of the agreement, you must grant in favour of one Financier a registered first ranking mortgage over the land with the mortgage subject to the following limitations. · the DRA provides that subject to clause X, you are not otherwise liable personally for any moneys secured (in other words there is no personal covenant) and the money secured is limited to the lesser of either: o Financial accommodation made available including amongst other things fully drawn advances and overdrafts and o X% of the market value of the land as last agreed in writing by the Financier and yourself from time to time. You are obliged to grant a mortgage over the Land to secure any borrowings by the Developer to undertake the Project Activities but there is to be no recourse to you for any liabilities secured by the mortgagee. · as part of your obligations under the DA you must enter into and complete contracts (Sale Agreements) for the sale of all of the subdivided lots created by the Developer as negotiated by the Developer. · the Sale Agreements are expected to be in the form of a Standard Land Contract and the purchasers will be persons identified by the Developer in the course of Project Activities that it conducts. You propose to apply the margin scheme with respect to such sales. · the proceeds of the sale of the subdivided lots are required to be paid into a Project Account. · the Developer is beneficially entitled to the credit balance (from time to time) of that account, subject to a charge in your favour for monies payable by the Developer to you under the DA. The Developer is contractually restricted under the DA as to the timing and amounts of withdrawals. · the Developer must pay to you installments which will total the greater of $X or Y% of the sale proceeds which ever is the larger amount. These amounts are scheduled annually from the commencement date being the date when stipulated milestones have been achieved. The milestones were to all be satisfied or waived by a specified date. The issuing of a GST ruling on this issue was one of the milestones and it has been agreed to extend this deadline past that specified date. · A number of clauses set out the consequences of termination of the DA as a result of either default by you or the Developer. It sets out o when you will retain the security amount and when it will be forfeited o when the developer is required to discharge any mortgages o when you can deal with the land outside the contract because of defaults by the developer o when the developer or the financier can take ownership of the property subject to defaults by you and subject to making certain payments. Specified clauses deal with various responsibilities of the Owner, Financier, Developer and your Lawyers which provides (amongst other things) 'step in rights' for the Financier to take over the developer's future performance of this agreement. Clause X provides that where for the Project Activities you are required to enter into a Development Act Agreement: · the Developer has the sole right and responsibility to negotiate for the terms and conditions of that agreement, so far as consistent with this Agreement: · such agreement: o must be prepared by the Developer at its cost; o is subject to your Lawyer's prior review for consistency with this Agreement, and in final form must take account of any reasonable comment made by your Lawyer as far as possible; o only after that review must be signed in final form by you or, if you are then unavailable to sign within 2 Business Days after submission, may be signed under the Power of Attorney; and · such an agreement is to be noted against the title of any of the Land: Clause X states that the Developer holds the Project Assets on trust for both you and the Developer Clause x provides in particular that during the Term, the Developer must allow the Project Account to be debited with only: · usual account-keeping charges and taxes collected by the issuer of the Project Account; and · subject to clause X, any payments to a Financier; · an amount payable to you as clause Y requires; and · an amount payable to the Developer as clause Z allows. · clause X sets out that: o In consideration of the obligations undertaken by you in this Agreement the Developer agrees to the payment of the Security Amount. o to pay to you the greater of X% of Gross Receipts or the Minimum Proceeds, · clause X provides that the security Amount paid to you (the Owner) is to be set off once against any payment the Developer is otherwise required to pay to you under clause Y. · clause X and y provide that If the Authorisation terminates by reason of either your default or an Insolvency Event occurring in relation to you, within 10 Business Days you must refund to the Developer such of the Security Amount paid as not previously set off under clause xx. · clause x provides that The Developer is absolutely entitled to any surplus Gross Receipts not required to be paid to you Owner under clause 45. · Clauses X, Y and Z provide that the owner is entitled to review the progress of the development. Following are some relevant definitions from the DA Commencement Date means the date all the Milestones are satisfied or waived. End Date means the earlier of the date the Authorisation terminates and the day before the xth anniversary of the Commencement Date. Gross Receipts means gross proceeds from the sale of any of the Land or any Lot during the Term before any vendor's costs of marketing or sale or conveyancing are taken into account and also before any amount payable to a Financier or payable to the Developer to discharge a security interest over a Lot sold, and includes any deposit forfeited and any damages recovered upon the termination of a Sale Agreement by reason of the default of a purchaser. Holding Costs mean all statutory costs or expenses during the Term incurred by the Owner arising from her ownership or possession of any of the Land … Land means at any time Lot X and Lot Y or so much thereof as the Owner remains the owner. Lot/s means allotments created following one or more subdivisions of the Land on or after the Commencement Date, and includes any community lots upon any of the Land created on deposit of a community plan under relevant laws and any strata units upon any of the Land created on deposit of a strata plan under your State strata laws . Lot X means the land on the date of this Agreement comprised in allotment X in Deposited Plan No. Y in Certificate of Title Register Book Volume Z Folio A but excluding the House Block comprising approximately B hectares. Lot Y means the land on the date of this Agreement comprised in Certificate of Title Register Book Volume X Folio Y comprising about Z hectares and identified as the area bounded in red on the draft Primary Plan of Division but excluding the House Block. Sale Agreement means a contract between the Owner and purchaser for the sale of a Lot that conforms to these requirements or as the Owner and the Developer may in any case agree in writing:

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 9-5. | A New Tax System (Goods and Services Tax) Act 1999 Division 11. | A New Tax System (Goods and Services Tax) Act 1999 23-5. | A New Tax System (Goods and Services Tax) Act 1999 9-20. | A New Tax System (Goods and Services Tax) Act 1999 188-10. | A New Tax System (Goods and Services Tax) Act 1999 9-10

Reasons for decision: Detailed Reasoning - 1 Are your supplies of vacant lots from the subdivision of your property taxable supplies?: Section 9-5 of the 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. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 of the GST Act must be satisfied. In this case, you are selling the vacant land for consideration and the supply is connected with Australia, therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. In addition the supply of the vacant lots in your factual situation will neither be GST-free or input taxed. Accordingly, we must determine whether your sale meets the other requirements of section 9-5 of the GST Act, that is, we must consider: · whether you are selling the land in the course or furtherance of an enterprise that you carry on; and · whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise. Section 9-20 of the GST Act defines the term 'enterprise' to include: · an activity, or series of activities, done in the form of a business; · an adventure or concern in the nature of trade; or · provision of a lease, licence or other grant of an interest in property on a regular or continuous basis. The ATO view on the meaning of the term 'enterprise' is explained in detail in 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). Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. · a business encompasses trade engaged 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. 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. It refers to 'the badges of trade' and outlines a number of factors 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. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following: Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. The property in question is held as part of your share farming/leasing enterprise. We acknowledge that the property was held as a capital asset for the purposes of that leasing enterprise. However, the relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of your development, subdivision and subsequent sale of the lots. Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. 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 264 of MT 2006/1 discusses two court cases [ Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T ( Casimaty] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets. From these cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. Paragraphs 178 of MT 2006/1 set out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions | Detailed Reasoning - 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. | Detailed Reasoning - Factors used to examine an isolated transaction:: · 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 addition other factors that may be relevant include: · the length of time the property had been held and the purpose to which it was put to in that time; and · the personal involvement in the development activity. 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. In applying the above factors to this case, we acknowledge that you have owned the property for a significant period of time and the land was used as a capital asset in your farming/leasing enterprise. We also acknowledge that you did not approach either the initial or current developers. However, applying the principles in MT 2006/1 it is necessary to examine your activities and conduct in relation to the development, to determine whether the nature of the asset has changed and as a consequence whether your supplies of the vacant lots are made in the course or furtherance of an enterprise. You submit that your involvement in the development is minimal and is limited to signing agreements and sale contracts as instructed by the Developer and that you have not been engaged in previous development activities. You further submit that you do not have a business plan or the requisite skills or expertise to undertake the development. While these factors in isolation would support the view that you are merely realising a capital asset when you sell the vacant lots, we consider that the following factors lend greater support to the conclusion that your supplies are made in the course or furtherance of an enterprise of subdivision and sale: · you have engaged a developer with the relevant skills and expertise to undertake the development on your behalf and granted a power of attorney to the developer authorising them to enter into contracts and manage the day to day decisions regarding the development; · you have allowed your property to be mortgaged in favour of the developer and a first ranking mortgage in favour of a financier, indicating that you bear some risk in relation to the development. We acknowledge that to mitigate this risk you have entered into a deed of guarantee and indemnity with an entity related to the Developer who guarantees payment of liabilities due to the owner up to the minimum proceeds payable under the DA. Although you were approached by the developer, you (personally and through your legal advisors) have negotiated the terms of the development (as outlined in the DRA). There is agreement from the outset in relation to the size, scale and complexity of the development which requires a minimum of x lots to be developed (any less is subject to your approval). The development will involve infrastructure works to support the size and scale of the development including building roads, footpaths, parks and connecting services to the lots. While you do not have a personal business plan for the development there is a comprehensive plan in relation to how the development of your Land will be effected, as evidenced by the terms of your formal agreements with the Developer and other relevant parties (such as the financier). Further the Developer has set up a coherent plan for the development project to be conducted on your behalf. Your net sale proceeds are expected to be at least $X and up to Y% of the proceeds if Y% of the proceeds exceed $X, indicating that you will share in a portion of further gain in the value of the development. You have engaged lawyers to represent you and to ensure your interests are protected. While the Developer is said to have full control over the day to day decisions relating to the development, the DA provides that the Developer must report to your lawyer (amongst other things) the progress made in relation to the Project Activities during each month and the Project Activities to be carried out in the next month, documents to be signed and a copy of monthly bank account statements. This information must be delivered by email to your lawyers each month, indicating that you (via your lawyer) do have some involvement or the opportunity to influence the development. While in the interim, you will continue to allow the share farmer to use the land for share farming, you have granted an exclusive licence to the Developer with respect to the Land and it is only with the Developer's approval that such use can continue, indicating that there has been a change in the purpose for which the land is held. On weighing up these factors on balance, we consider that your activities pertaining to the development of your property has a commerciality that goes beyond the mere realisation of a capital asset. For the reasons outlined, we consider that there has been a change in the purpose for which your land is held and that the nature of the asset has changed to that of 'trading stock'. As a consequence, your supply of the subdivided vacant lots will be made in the course or furtherance of an enterprise (of subdivision and sale) that you carry on. | Detailed Reasoning - GST registration: 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 GST turnover meets the registration turnover threshold. As set out above the Commissioner has determined that you are carrying on an enterprise and therefore we will examine whether your GST turnover meets the registration threshold. Section 188-10 provides that you have a GST turnover that makes a particular turnover threshold if: · 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 · your projected GST turnover is at or above the turnover threshold. The GST turnover threshold is currently $75,000. Your current GST turnover during a particular month is the sum of the value of all supplies you have made or are likely to make during the 12 months ending at the end of that month excluding input taxed supplies, supplies that are not for consideration (and are not taxable supplies under section 72-5) and supplies not made in connection with an enterprise you are carrying on. Your projected GST turnover at a time during a particular month is the sum of the value of all supplies you have made or are likely to be make during that month and the next 11 months other than input taxed supplies, supplies that are not made for consideration (and are not taxable supplies under section 72-5) and supplies that are not made in connection with an enterprise you are carrying on. Although section 188-25 requires you to also disregard supplies of capital assets when calculating your projected GST turnover, this is not relevant in your factual situation because we have made a finding that the nature of the asset (the property) has changed from a capital asset to trading stock. Your current GST turnover is below the threshold and therefore you are currently not required to be registered for GST. Therefore you are required to determine when your projected GST turnover will meet or exceed $75,000. As the value of the supplies of the vacant lots will exceed $75,000 your projected GST turnover will exceed the GST turnover threshold. Consequently, when your projected GST turnover meets or exceeds this threshold, you will be required to be registered for GST. [You will need to monitor the value of your supplies to determine when you are required to become registered for GST.] | Detailed Reasoning - Conclusion: As you will be required to be registered for GST (with respect to your subdivision activities) you will meet all the requirements of section 9-5 for of the GST Act and your supplies of the vacant lots of land will be taxable supplies. You will be required to report the GST on these taxable supplies. Generally, this will be equivalent to 1/11 th of the price for each lot. However, you may choose to apply the margin scheme if you are eligible, in which case the amount of GST will be equivalent to 1/11 th of the margin for the supply of each lot. [Further information regarding the margin scheme is available on the Australian Tax Office website ( www.ato.gov.au ). 2 Will the entry into the Development Agreement (DRA) and the grant of a license to the developer to access the land and carry out the project activities be taxable supplies separate from the sale of the vacant lots? Section 9-5 of the GST Act provides that you make a taxable supply subject to certain conditions. You have asked whether your entry into the DA and the taking on of the specified obligations under the DA amount to separate supplies from the sale of the subdivided lots. In your ruling application you submitted that there were a number of possible separate supplies made by you in relation to the DA. You set out that the following may be separate supplies: · The entry into the DA itself · The grant of a license to the developer to access the land and carry out the project activities. · The term 'supply' is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever. Subsection 9-10(2) of the GST Act contains a list of things that are included as supplies which includes (amongst other things): · a creation, grant, transfer, assignment or surrender of any right; and · an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation. The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) explains that the list contained in subsection 9-10(2) is not an exhaustive list and is not intended to limit the definition of supply contained in subsection 9-10(1). Goods and Services Tax Ruling GSTR 2006/9 provides guidance on the meaning of 'supply' in the GST Act. Paragraph 71 of GSTR 2006/9 explains that the term 'supply' has been held to take its ordinary meaning which is to 'furnish or to serve' or to 'furnish or provide'. In adopting the ordinary meaning, it follows that the supplier must take some action or do something to make a supply. The DRA contains a number of terms and conditions, and specifies the things to be performed by the respective parties. You have agreed to certain things to be done on your property, including allowing the Developer to access the land for the purposes of undertaking the development and to carry out the necessary works to effect the development. You have also surrendered certain rights in relation to the land that is the subject of the DA. While the terms of the agreement give rise to specific things being done and the creation of specific rights and obligations for you, we consider that these are merely terms and conditions that go to the execution of the agreement as a whole. In Saga Holdings Ltd v Commissioner of Taxation 2006 ATC 4001 the Court held: ' a technical analysis of one part of a transaction or of one set of obligations within a contract, even though accurate in legal principle, which is capable of explaining the service supplied, or the consideration given, in a restricted way, is not necessarily the right answer in law to the application of the provisions of this statute… this approach does indicate that taxable transactions should not be artificially dissected so as to demonstrate as being the service provided… Applying these principles to your circumstances, we consider that the rights that you hold and the obligations that you undertake under the DRA are not the relevant things that are being supplied by you. As a consequence, you will not be liable for GST in relation to the rights and obligations that you undertake. Rather, the essence of the transaction is your entry into an arrangement to acquire services (development, marketing and other services) from the Developer to develop your property to allow for your subsequent sale of the subdivided lots. It is the supply of the vacant lots that are the relevant supplies made by you for GST purposes that has a nexus with the consideration that you will receive. | Detailed Reasoning - 3 Are you making a creditable acquisition in relation to the acquisitions that you make under the DA?: Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make. Section 11-5 of the GST Act provides that you make a creditable acquisition if: (a) you acquire anything solely or partly for a creditable purpose (b) the supply of the thing to you is a taxable supply; and (c) you provide, or are liable to provide, consideration for the supply; and (d) you are registered, or required to be registered. In addition section 11-15 of the GST Act provides, amongst other things that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise to the extent that: (a) the acquisition relates to making supplies that would be input taxed; or (b) the acquisition is of a private or domestic nature. In your case your acquisitions under the DA of development, marketing and other services that you acquire from the Developer will be creditable acquisitions provided that the supply of these services to you are taxable supplies and you are registered, or required to be registered for GST at the time of making the acquisition(s).

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.