Private ruling: Subdivision and sale of land
Date of advice: 29 April 2020
Published: June 2020
Ruling period: X to Y

Ruling: Q1: Were you, as an individual, carrying on an enterprise for GST purposes in purchasing, subdividing, and selling part of the property at X (the Property)? | A1: Yes | Q2: Was the sale by you, as an individual, of a subdivided block of the Property, a taxable supply? | A2: Yes

Relevant facts and circumstances: You, as an individual, are not registered for GST. Your brother, X and you registered for GST as a partnership (the Partnership) on Y. On X you, as an individual, purchased the Property. Settlement occurred on Y. X was shown as a co-purchaser of the Property on the sale contract. The Certificate of Title identifies yourself and your brother as the registered proprietors as joint tenants. When applying for a loan to purchase the Property, your financier required additional income to service the requested loan amount. As such, X became a party to the loan agreement and with the inclusion of X's income, the financier approved the loan. You subsequently demolished the house on the Property and subdivided it into two equal portions. X did not contribute any funds. You paid for everything using your own funds. X was involved in the project 'in name only'. You sold one of the vacant blocks (the Block) to fund the building of a house on the remaining block which you intend to rent out. Both yourself and X were shown as the vendor on the sale contract for the Block (Block Contract). The sale price for the Block was $X. The Block Contract indicates that the Vendor (you and X) are not liable for GST on the sale of the Block. Prior to selling the Block you were advised that you would need to pay GST on the sale. You were advised that you would be required to pay an amount of $X being "with holding on margin scheme 7%". As a consequence of this advice you and X registered the Partnership as noted above. You reported and remitted GST of $X in relation to the sale of the Block in a Business activity statement (BAS) of the Partnership for the tax period ending Y. X's name was removed from the title of the remaining block of land and loan documentation when the Block was sold. X derived no proceeds from the sale of the Block. It was not your intention to set up a business to derive profits for the sale of land. Your intention was to build a home that you could rent out in your own name. You have obtained council approval to build a rental property on the remaining block, construction of which has recently begun. You have not been involved in any previous subdivisions or property development activities.

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 188-10 | A New Tax System (Goods and Services Tax) Act 1999 , section 188-25

Reasons for decision: Detailed Reasoning - Which entity made the supply?: It is first necessary to ascertain whether it was the registered Partnership, or yourself as an individual, that made the supply of the subdivided block ('the Block'). Subparagraph 184-1(a) of the GST Act defines "entity" to include an individual. Subparagraph 184-1(e) defines "entity" to include a partnership. You, as an individual, are a different entity from the Partnership for GST purposes. "Partnership" is defined in section 195-1 of the GST Act by reference to section 995-1 of the Income Tax Assessment Act 1997 as follows: (a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or (b) a limited partnership. Paragraph 17 of Goods and Services Tax Ruling 2003/13 ( Goods and services tax: general law partnerships ) (GSTR 2003/13) states: 17. A partnership is formed when two or more entities commence carrying on a business as partners. Whether and from what date a general law partnership exists are questions of fact. They are determined having regard to the partnership agreement and the circumstances surrounding the partnership's formation. The execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time. Given the facts of this case we do not consider you and X are carrying on a business and as such do not fall within the scope first limb of paragraph (a) in the definition of a 'partnership' referred to as a general law partnership. Paragraph 18 of Goods and Services Tax Ruling 2004/6 ( Tax law partnerships and co-owners of property ) (GSTR 2004/6) states: 18. A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is "an association of persons (other than a company or a limited partnership)... in receipt of ordinary income or statutory income jointly". In this case, X did not receive any of the proceeds from the sale of the Block. Furthermore he will not receive any of the income generated when the adjoining property is constructed and rented out. You and X will not be in receipt of income jointly. As such, the second limb of paragraph (a) in the definition of a 'partnership' (referred to as a tax law partnership) above is not satisfied. Given the above, we consider the sale of the Block was not made by the Partnership. It is our view the sale of the Block was made by you, in your capacity as an individual. | Detailed Reasoning - Enterprise: We must now determine whether the sale of the Block was made in the course or furtherance of an enterprise that you, as an individual, carry on. Subsection 9-20(1) and subsection 9-20(2) of the GST Act in part defines enterprise as follows: | Detailed Reasoning - 9-20 Enterprises: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a *business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or (2) However, enterprise does not include an activity, or series of activities, done: (a)... (b) as a private recreational pursuit or hobby; or (c) .... (d) .... Paragraphs 262 to 266 of Miscellaneous Tax Ruling 2006/1 ( The New Tax System: the meaning of carrying on an enterprise for the purposes of entitlement to an Australian Business Number ) (MT 2006/1) discuss isolated transactions and sales of property in the context of when an enterprise is being carried on: | 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) 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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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. Paragraph 270 of MT 2006/1 specifically discusses the purchase of land that is intended to be resold: 270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. In this case you acquired the Property with a plan to demolish the existing dwelling, subdivide the Property into two lots and sell a vacant lot which would fund the construction of a residential dwelling on the remaining lot that you intend to rent out deriving an income stream. You have carried out your plan to date with construction of the residential dwelling having recently commenced. Your initial purchase of the Property was financed via a bank loan which was extinguished following the sale of the Block. Furthermore, we consider your situation to be analogous to Example 29 in paragraphs 273 to 276 of MT 2006/1: 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise. 276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units. Given the above we consider that whilst your venture is small in scale, your activities fall within the scope of an enterprise as defined in section 9-20 being a series of activities done in the form of an adventure or concern in the nature of trade. | Detailed Reasoning - Question 2: 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 the indirect tax zone (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. For the supply of the Block to be a taxable supply, all of the requirements in section 9-5 must be satisfied and it must not be GST free or input taxed. In your case you have sold the Block for consideration and the property is connected with Australia as it is located in the indirect tax zone (Australia). Furthermore, as discussed above, the sale was in the course or furtherance of an enterprise you carry on. Therefore, paragraphs 9-5(a), 9-5(b), and 9-5(c) of the GST Act are satisfied. In addition the sale of the residential property is neither GST-free or input taxed. To determine whether your supply of the Block was a taxable supply, it is therefore necessary to ascertain whether you were required to be registered at the time of supply (settlement). | Detailed Reasoning - 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 GST registration turnover threshold, which is currently $75,000 for entities other than non-profit entities. Subsection 188-10(1) of the GST Act provides that you have a GST turnover that meets the registration turnover threshold if: · your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or · your projected GST turnover is at or above the registration turnover threshold. The registration turnover threshold applicable to you is $75,000. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months. As it does not include input taxed supplies, income you derive from the rental property will not be included. Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you, by way of transfer of ownership of a capital asset. To determine whether your projected GST turnover met the threshold at the time the Block was sold we must determine whether the Block was a capital asset. The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7). The GST Act does not define the term "capital asset". However, GSTR 2001/7 explains that generally, the term capital assets refers to those assets that make up the profit yielding subject of an enterprise. They are often referred to as structural assets. They may be described as the business entity, structure or organisation set up or established for the earning of profits. Capital assets are to be distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Therefore, the character of an asset must be determined at the time of expected supply. Taking into account all of the above, we consider the Block to be a revenue asset rather than a capital asset. As you received consideration of $X for the Block, your turnover meets the registration threshold of $75,000 which would require you to be registered, as an individual, at the time of settlement. Because the requirements of subparagraph 9-5(d) of the GST Act were met at the relevant time, all elements of section 9-5 of the GST Act were met and the supply of the Block was a taxable supply. Your registration as an individual will need to be backdated to the date of supply at the latest and the registration of the Partnership cancelled as of X.