Private ruling: GST and sale of land
Date of advice: 16 August 2018
Published: October 2018

Ruling: Q1: Are you making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) on the sale of Lot B? | A1: No.

Relevant facts and circumstances: In Year 1, you purchased off-the-plan a vacant block of land. Settlement occurred in Year 2. The land is zoned residential. You purchased the land with the intention of using it to build your family home. The purchase was financed by a home loan. You started planning for your family home in Year 2. The building plans were completed in Year 3 and were ready for lodgement. You decided that the family home design was too big for you and decided to apply to council to build attached townhouses for yourself and another family member. Planning started with council in Year 4. The town planning was approved by Council in Year 6. This was a two-year process. During those two years, family member’s marriage broke down and they were not in financial position to build the other townhouse. You decided that your best option was to sell the land and buy a family home. You applied for subdivision to council in Year 6. The subdivision creates two vacant lots, being Lot A and Lot B. In Year 6 you entered into a contract to sell Lot A for $75,000. The sale was not treated as a taxable supply. The subdivision was approved in Year 7 and the sale of Lot A was settled. With part of the proceeds of the sale of Lot A, you purchased your family home which settled recently. You are in the process of selling Lot B. The expected selling price is in excess of $75,000. You provided a list of expenses showing that apart from the building plans, all the remaining expenses relate to providing utilities and access to the subdivided lots.

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 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: You are not making a taxable supply under section 9-5 of the GST Act when you sell Lot B because, although the sale of the vacant land is for consideration and connected with the indirect tax zone: ● the sale is a mere realisation of a capital asset and hence, is not be made in the course or furtherance of an enterprise that you carry on, and ● you are neither registered nor required to be registered for GST. Consequently, GST is not payable on the sale. | Detailed Reasoning - Detailed Reasoning: GST is payable on the sale of Lot B if you are making a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and 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 for GST. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (* denotes a term defined in section 195-1 of the GST Act.) Based on the information provided, the sale of Lot B satisfies the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is, you supply the land for consideration and the supply is connected with the indirect tax zone as the land is located in Australia. You are not registered for GST. Furthermore, the sale of the land in the circumstances described is neither GST-free nor input taxed. It remains to be determined whether the sale of Lot B is in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST. | Detailed Reasoning - Whether the sale is made in the course or furtherance of an enterprise that you carry on: Section 9-20 of the GST Act provides that enterprise includes, among other things, an activity or series of activities done: ● in the form of a business (paragraph 9-20(1)(b) of GST Act), or ● in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of GST Act). Miscellaneous Taxation Ruling MT 2006/1 provides the view of the ATO on the meaning of enterprise for the purposes of entitlement to an Australian Business Number. 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. MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the mere realisation of investment or private assets does not amount to trade. Additionally, the fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature. Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes. Paragraphs 262 to 302 of MT 2006/1 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 opposed to the mere realisation of a capital asset. Paragraph 264 of MT 2006/1 discusses two court cases, Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. FC of T 97 ATC 5135 (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 the Statham and Casimaty 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. Paragraph 265 of MT 2006/1 provides the following list of factors: ● 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 ● buildings have been erected on the land. Examples 28 to 31 in MT 2006/1 are examples of subdivisions of land that are not enterprises and Examples 32 to 35 are examples of subdivisions of land that are not enterprises. Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this case. This requires 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. No single factor is determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities. We have reviewed your factual situation and have taken into consideration the following factors: ● You purchased with the intention of using it to build your family home. ● The purchase was financed by a home loan. ● You decided that the family home design was too big for you and applied to build attached townhouses for yourself and another family member. ● Your family member’s marriage broke down and they were not in financial position to build the other townhouse. ● The subdivision into two vacant lots proceeded creating Lot A and Lot B. ● You sold Lot A and part of the proceeds of sale was used to buy your family home. ● The list of expenses you provided show that apart from the building plans, all the remaining expenses relate to providing utilities and access to the subdivided lots. ● You are in the process of selling Lot B. It is our view that your activities are not those of an entity carrying on a business of developing land. Considering all the facts and circumstances in your case, the sale of Lot B is the mere realization of a capital asset. The sale is not in the form of a business or an adventure or concern in the nature of trade. Accordingly, the sale of Lot B is not made in the course or furtherance of an enterprise that you carry on and the requirement of paragraph 9-5(b) of the GST Act is not satisfied. Therefore, as you do not satisfy all the requirements of section 9-5 of the GST Act, the sale of the Lot B is not a taxable supply. Please note that in this case, it is not necessary to consider whether you satisfy the condition at paragraph 9-5(d) of the GST Act. However, for completeness, we discuss the requirements of paragraph 9-5(d) of the GST Act. As you are not registered for GST, we need to determine if you are required to be registered. Section 23-5 of the GST Act provides that you are required to be registered if: (a) you are *carrying on an *enterprise; and (b) your *GST turnover meets the *registration turnover threshold. The registration turnover threshold is $75,000 (or $150,000 for non-profit organisations). As outlined above, you are not carrying on an enterprise as the activities you have undertaken in subdividing and selling the lots amount to the mere realisation of a capital asset. Hence, the requirement of paragraph 23-5(a) of the GST Act is not satisfied. Therefore, as not all the requirements of section 23-5 of the GST Act are satisfied, you are not required to be registered for GST.