Private ruling: GST and the sale of property
Date of advice: 30 August 2018
Published: October 2018

Ruling: Q1: Are you liable for GST pursuant to section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 in regard to your sale of property situated at a specified location? | A1: No

Relevant facts and circumstances: Individual A and Individual B (You) are not registered for GST, either as individuals or as a partnership. You are employed on a salary and wage basis. You do not carry on any other business activities. In xxxx you purchased vacant land (approximately xxxm 2 ) situated at a specified location (the Property). In xxxx you constructed a three bedroom, one bathroom residential house on the Property. You moved into the house in xx/xxxx and used it as your principal place of residence. As your family grew, you renovated the house to become a four bedroom, two bathroom house. Over the years your children gradually moved out and the Property became too big and difficult to maintain. The house was larger than what was needed and also run down. However, the house is in a desirable location and you wished to remain in the area in your retirement. In xxxx you decided to demolish your existing house, subdivide the land into two lots, construct a new house to reside in on one lot and sell the other vacant subdivided lot (the vacant subdivided lot). In xx/xxxx you applied to the relevant authority for approval to subdivide the Property into two lots. In xx/xxxx you demolished your existing residence. Construction commenced on your new home in xx/xxxx on one of the subdivided lots. Construction was completed in xx/xxxx at which time you moved into the new house as your primary residence. You borrowed $xxx,xxx to fund the construction of your primary residence. You did not conduct any development on the vacant subdivided lot that was beyond the level necessary to secure council approval for the subdivision. The vacant subdivided lot was put on the market in xx/xxxx. The vacant subdivided lot has not sold to date however you have received interest from a potential purchaser. Your intention is to remain resident in your newly constructed home during retirement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax Act) 1999 Section 9-5 | Section 9-20 | Paragraph 9-20(1)(a) | Paragraph 9-20(1)(b) | Section 9-40 | Section 23-5

Reasons for decision: Summary: Note: In this reasoning, unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides 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 the indirect tax zone; 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. Of relevance is whether you will be making a supply of the vacant subdivided lot in the course or furtherance of an enterprise that you carry on and, as you are not registered for GST, whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: The term ‘enterprise’ is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done: ● in the form of a business (paragraph 9-20(1)(a)) or ● in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office 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 provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. | Detailed Reasoning - In the form of a business: Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? , lists 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. Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. | Detailed Reasoning - Application to your situation: Given the facts of this case, we consider that the activities you have undertaken do not display the indicators of a ‘business’ as listed above. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: 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. Paragraph 245 of MT 2006/1 refers to ‘the badges of trade’ with paragraphs 247 to 257 discussing the various ‘badges of trade’ 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. 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 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are ‘one-offs’ or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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. Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: ● 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. Paragraph 266 of MT 2006/1 provides in part that no single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. | Detailed Reasoning - Application to your situation: You decided to dispose of some of the land on which your home was located. You therefore applied for subdivision approval, demolished your existing residence and created two new lots. You constructed a new residence on one lot and propose to sell the remaining vacant lot. A scenario similar to your situation is illustrated in Example 33 at paragraphs 291 to 293 of MT 2006/1: | Detailed Reasoning - Example 33: 291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years. 292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold. 293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset. You are both employed on a salary and wage basis and do not conduct any business activities. You did not acquire any additional land for the purpose of the subdivision. The subdivision of the land was not conducted in a business-like manner as there was no ‘business organisation’, the vacant subdivided lot was not brought into account as a ‘business’ asset and expenses related to the subdivision and subsequent sale were not claimed as a ‘business’ expense. You did not conduct any development on the vacant subdivided lot that was beyond the level necessary to secure council approval for the subdivision. You borrowed funds to finance the construction of your principal place of residence and anticipated that the proceeds from the sale of the vacant subdivided lot would be sufficient to extinguish the loan amount. However, due to market conditions, you have not been successful in selling the vacant subdivided lot and have consequently reduced your asking price. No buildings were erected on the vacant subdivided lot. Given the above, we do not consider your activities to constitute an adventure or concern in the nature of trade and as such an ‘enterprise’ for the purposes of GST. The subdivision and sale of the vacant subdivided lot is considered to be the mere realisation of a capital asset. | Detailed Reasoning - GST registration: Section 23-5 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 (currently $75,000). As discussed above, it is considered that the sale of the vacant subdivided lot does not constitute an ‘enterprise’ for GST purposes. As such, you are not required to register for GST. | Detailed Reasoning - Conclusion: Your activities of subdividing land and selling the vacant subdivided lot are not done in the course or furtherance of an enterprise. You are not required to register for GST. As such, the sale of the vacant subdivided lot does not meet the definition of a ‘taxable supply’ and you are not liable for GST on the sale in accordance with section 9-40.