Private ruling: GST and sale of subdivided lots
Date of advice: 20 August 2018
Published: October 2018

Ruling: Q1: Will you be required to register for GST, pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST ACT) in the event of your sale of the subdivided lots located at xxxxx? | A1: No

Relevant facts and circumstances: You are not registered for GST. You acquired a property in 20XX. The property is the only investment property held by you – now or in the past. The residence on the property was built in the 19XX’s. It has old plumbing, which has been causing water damage and mould issues within the house. The cost to remove and replace the plumbing was prohibitive. You were told that the property would not pass a building inspection if it was sold with the plumbing issues. You decided that the premises would be demolished and the property subdivided into two equal blocks and sold. The premises was demolished in MMYY and the property subdivided. You have not built and do not intend to build on the lots prior to sale. The two lots are currently marketed for sale.

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 Subsection 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

Reasons for decision: Detailed Reasoning - Registration: Section 23-5 states: You are required to be registered under this Act if: (a) you are *carrying on an *enterprise; and (b) your *GST turnover meets the *registration turnover threshold. | Detailed Reasoning - Enterprise: Subsection 9-20(1) provides that an enterprise relevantly includes: An activity, or series of activities, done: ● in the form of a business; or ● in the form of an adventure or concern in the nature of trade; Therefore, we need to consider whether the activities of subdividing your property and selling the subdivided lots amount to an enterprise. 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 provides the Commissioner’s 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 Goods and services tax: does MT 2006/1 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? 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. Paragraph 178 of MT 2006/1 lists the main indicators of 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 ● 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. Although a profit may be achieved from the subdivision and sale, the property was purchased for investment purposes; the subdivision has arisen from the need for and the prohibitive cost of plumbing repairs. Although the purpose for which the property was held changed from investment to sale, you have not previously been involved in anything similar. This is a small scale subdivision of a single residential lot into two residential lots. You had no business plan for the activity beyond obtaining subdivision approval and carrying out the subdivision. You are only doing what is necessary to gain council approval for the subdivision. On balance, we consider your activities involved in the subdivision and sale of the subdivided lots do not constitute the carrying on of a business. Paragraphs 262 and 263 of MT 2006/1 deal with isolated transactions and sales of real property: 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.... We consider your activities in the subdivision and sale of the subdivided lots are a ‘one-off’ or isolated real property transaction, and we also need to consider whether the activities are being done in the form of an adventure or concern in the nature of trade. Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken are an ‘adventure or concern in the nature of trade’ and state: 264. The cases of Statham & Anor v. Federal Commissioner of Taxation … (Statham) and Casimaty v. FC of T … (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 265. 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… If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: … ● 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. 266. 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. 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. 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. … 269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience… We consider your activities in the subdivision and sale of the subdivided lots are a ‘one-off’ or isolated real property transaction. However, for the reasons stated in relation to the issue of carrying on a business, we do not consider that your activities constitute an adventure or concern in the nature of trade. We have taken into account the above factors and consider that your subdivision and sale activities do not amount to an enterprise in the form of a business or in the form of an adventure or concern in the nature of trade. The activity is the mere realisation of a capital asset. As you are not considered to be carrying on an enterprise you are not required to be registered for GST.