Private ruling: GST and the supply of real property
Date of advice: 29 July 2016
Published: September 2016

Ruling: Q1: Will your supply of the subdivided land be a taxable supply? Advice/Answers No

Relevant facts and circumstances: In mmyyyy, you, X and Y, purchased a property with a residence. xxx acres on one side of the road is zoned rural and contains your residence. xx acres, on the opposite side of the road, is zoned rural residential and had a dam on it. After council approval (Development Application dated ddmmyyyy, the property was subdivided into s lots. You continue to reside on the larger allotment and will sell the other lot. You operate a business, in partnership. The partnership is registered for GST. Since the land was purchased another business is operated on the larger allotment. A few head of cattle have been kept on the property to help X with the mowing. Neither of the businesses has claimed or is claiming occupancy costs, such as mortgage interest and council rates, for the use of the property in their income tax returns. Neither of the businesses pays rent or makes other payments for the use of the land. The land is not listed as a partnership asset in the partnership returns. You decided to subdivide for the following reasons. 1. The smaller allotment has residential blocks on both sides. The neighbours have previously complained to council regarding the up-keep of the land adjoining their properties. 2. The land could not be put to any productive use. 3. The land backs onto a creek that periodically floods and destroys the fences, adding to the cost of maintenance. 4. X is xx years old and, with the rigours of running a small business, no longer has the energy or time to maintain the whole property. The subdivision is a one-off transaction. You have not been involved in any previous subdivisions or development activities. Due to the requirements of the DA, you have spent $xxx on the subdivision. $xx of this has been for earthworks to fill in the dam. You are funding the subdivision costs from your own resources - not from borrowings.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision: Summary: In this reasoning, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Under section 9-5, an entity makes a taxable supply if: • it makes a supply for consideration; and • the supply is in the course or furtherance of an enterprise that it carries on; and • the supply is connected with the indirect tax zone (Australia); and • the entity is 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. The supply of property located in Australia will be for consideration and the partnership is registered for GST. Therefore, if the supplies are made in the course or furtherance of an enterprise carried on by the partnership, they will be taxable supplies. Although you are registered for GST, it does not follow that every asset you hold is a partnership asset potentially subject to GST on sale. You decided to subdivide for the following reasons. The smaller allotment has residential blocks on both sides. The neighbours have previously complained to council regarding the up-keep of the land adjoining their properties. The land could not be put to any productive use. The land backs onto a creek that periodically floods and destroys the fences, adding to the cost of maintenance. X is xx years old and, with the rigours of running a small business, no longer has the energy or time to maintain the whole property. Neither of the businesses has claimed or is claiming occupancy costs, such as mortgage interest and council rates, for the use of the property in their income tax returns. Neither of the businesses pays rent or makes other payments for the use of the land. The land is not listed as a partnership asset in the partnership returns. This indicates that the property was purchased and held for private purposes. Therefore the supply is not in the course or furtherance of an enterprise the partnership carries on. However, we must also consider whether you are carrying on an enterprise in your own right. The subdivision is a one-off transaction. You have not been involved in any previous subdivisions or development activities. 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) considers the meaning of carrying on an enterprise. Paragraphs 262 and 263 of MT 2006/1 state: | Detailed Reasoning - 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. ... Your subdivision and sale of the Property will be a 'one-off' or isolated real property transaction. 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… Applying the above factors to your case, we note: 1. The original purpose for acquiring the Property has not changed. That is, the Property was originally acquired for the purposes of using it as the family home and has been for this purpose - albeit with 2 enterprise activities now being operated on the land. 2. You have not acquired land in addition to the original land. 3. You have not previously carried out activities of this nature. 4. You will finance the subdivision from your existing resources. 5. The development of the Property is limited to the subdivision and sale of one lot which is separated from the rest of the property by a public road. We consider that in your situation the factors listed in paragraph 265 of MT 2006/1 are not present. The land has been held as a private asset. The subdivision is a one-off activity requiring limited work. We consider that your subdivision of the Property does not amount to an enterprise. Further, you will not supply the Property in the course or furtherance of an enterprise that you carry on. As your supply of the Property will not satisfy all of the requirements of section 9-5, it will not be a taxable supply.