Private ruling: GST and the supply of vacant land
Published: December 2014

Ruling: Q1: Is the partnership (you) required to be registered for GST under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as a result of the sales of the two subdivided blocks of vacant land (vacant land)? | A1: No, you are not required to be registered for GST as a result of the sales of the vacant land.

Relevant facts and circumstances: You are not registered for goods and services tax (GST) as individuals or as a partnership. You jointly purchased the original property in XXXX and the original property was used for rental purposes. After having rented the original property for some years, you experienced significant problems with the maintenance of the original property. In YYYY you decided to demolish the existing residential house, subdivide the original property into two smaller blocks; and hire a real estate agent to conduct the sale of the two blocks of vacant land. You hired a business to take care of the demolition of the house and to apply for the subdivision on your behalf. The date of the submission of the Development Plan to Council is ZZZZ and you received the Development Approval by the Council on NNNN. According to your Development Plan, the only work to be undertaken will be done to secure the council approval for the subdivision of the land to create one additional allotment. There are no buildings on the two blocks of vacant land. Your expenses of demolishing the old house on the original property and hiring the Land Consultant to take care of the subdivision work totals approximately $X. You will finance the demolishment of the existing house and subdivision of the original property from your own savings. You advise that the disposal of the two blocks of vacant land had not been conducted in the manner of a land development enterprise but rather in the manner necessary for you to avoid anticipated extensive cost of future repairs to the property. You wish to sell your capital asset and wind down your leasing enterprise. You did not set up any business to sell the two blocks of vacant land. You used the local real estate agent to advertise and handle the sales of the two blocks of vacant land. There was no additional advertisement apart from the internet advertising. Your two blocks of vacant land have both been exchanged for contracts off the plan with settlement expected in the near future. You have not been involved in similar investment activities of demolishing existing residential house, and subdividing land for sale before. You will not borrow to finance the work, so you will not claim interest on money borrowed as a business expense. You will not claim any input tax credits in relation to acquisition costs incurred for the demolishment of the house and the Development Approval and subdivision of the original property.

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 Paragraph 9-5(b) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(d) | 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 Paragraph 188-10(2)(b) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 188-25(a)

Reasons for decision: Summary: Your activities of demolishing the building, subdividing and selling the two vacant blocks of land amount to the disposal of capital assets in your leasing enterprise. The sale proceeds will therefore be excluded from the calculation of your projected GST turnover. In the absence of any other commercial activities, you have a GST turnover that does not meet the registration threshold because your current and projected GST turnover are below the turnover threshold. Hence you are not required to be registered for GST. | Detailed Reasoning - Detailed reasoning: GST is payable on taxable supplies. You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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. 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 facts provided, the two blocks of vacant land are owned as joint tenants by two individuals. We need to consider whether the property will be provided by each individual separately or by a partnership for GST purposes. The term 'you' applies to entities generally. An 'entity' is defined in section 184-1 of the GST Act to include (amongst others) an individual and a partnership. Co-owners of property are considered partners in a partnership for tax law purposes where they are in receipt of ordinary or statutory income jointly. Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the suppliers of the two blocks of vacant land. Based on the facts provided, you satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as you make the supplies of two vacant blocks of land for consideration; and the blocks of land are located in Australia. We also need to consider whether the sale of the vacant blocks of land will be made in the course or furtherance of an enterprise you carry on and whether you are required to be registered for GST. | Detailed Reasoning - Sale made in course or furtherance of enterprise: In accordance with paragraph 9-20(1)(a) of the GST Act, 'enterprise' includes an activities or series of activities done in the form of a business. In accordance with section 195-1 of the GST Act, carrying on an enterprise includes anything done in the course of the termination of an enterprise, for example, selling assets as part of the winding up of the enterprise. Since you acquired the original residential property in XXXX, and you have used it to make supplies by way of lease (residential rent) on a regular basis with a reasonable expectation of profit or gain, we consider that you are carrying on a leasing enterprise. You acquired the property in the course of your leasing enterprise, and subsequently you subdivided the property. The sales of the two blocks of vacant land are the sales of assets which you have been used in your leasing enterprise. The supply of the vacant land is therefore in the course or furtherance of your leasing enterprise. Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act. Do your activities of demolishing the building, subdividing and selling the two vacant blocks of land change your assets from capital assets to revenue assets? Paragraph 262 of Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides that an enterprise can incorporate isolated or one-offs real property transaction. Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 provides 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. From the facts provided, there are several events which occurred for which we consider that your activities in demolishing the existing building, subdividing and selling the two vacant blocks of land do not amount to an enterprise of land development and are the mere realisation of capital assets in your leasing enterprise. Significant factors which lead to this conclusion are as follows: • You purchased the original property since XXXX and have used it in conducting your leasing enterprise since acquisition. • You stated that you subdivided the original property into two blocks of land and sold them because you can no longer carry out the maintenance of the house on the original property for the purpose of leasing without incurring significant maintenance costs. • You did not purchase the original property for the purposes of subdivision and resale for profit. • The development of the two blocks of vacant land is not beyond that necessary for council approval of the land, and the development cost of the original property is not substantial. Your expenses of demolishing the old house on the original block of land and hiring the agent to take care of the subdivision work totals approximately $YYYY. You did not borrow funds to finance the demolition costs of the existing building or the subdivision, and/or other costs. • There are no buildings on the two subdivided blocks of land . • You do not own any other real property, and have never been involved in any other development before, as this is a one off transaction. • You do not have a documented business plan, and there is no organisation set-up for the subdivision and sales of the two vacant blocks of land. No manager is employed or business premises used to conduct these activities. The level of marketing appears to be reasonable and expected for the sales. • You will not claim any input tax credits in relation to acquisition costs incurred for the demolishment of the house and the Development Approval and subdivision of the original property. • The commercial size and scale in your activities are not significant. Hence it is considered that your activities of demolishing the building, subdividing and selling the two vacant blocks of land do not change your assets from capital assets to revenue assets. Your activities are the mere realisation of your capital assets in the leasing enterprise and the sales proceeds will be part of the disposal of capital assets. | Detailed Reasoning - GST registration: Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: a) the entity is carrying on an enterprise, and b) the entity's GST turnover meets the registration turnover threshold ($75,000). The requirement of paragraph 23-5(a) of the GST Act is met as you are carrying on a leasing enterprise. Subsection 188-10(2) of the GST Act provides that your GST turnover does not exceed the registration turnover threshold if: a) your current GST turnover is at or below $75,000, and the Commissioner is not satisfied that your projected GST turnover is above $75,000; or b) your projected GST turnover is at or below $75,000. In accordance with paragraph 188-25(a) of the GST Act, a sale of a capital asset is excluded from projected GST turnover. Paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7 discuss the meaning of 'capital asset'. Capital assets are generally those assets that make up the profit yielding subject of an enterprise. In your case, the vacant land formed part of the profit yielding subject of your leasing enterprise. The property was not acquired for the purpose of subdivision and sale. The property was held for a number of years before it was subdivided. As such the vacant land is considered to be a capital asset. Therefore, the sales proceeds of the two vacant blocks of land will be excluded from the calculation of your projected GST turnovers. In the absence of any other commercial activities, your GST turnover does not meet the registration turnover threshold and you are not required to be registered for GST under section 23-5 of the GST Act. Since you are not registered or required to be registered for GST paragraph 9-5(d) of the GST Act is not satisfied. The sales of the two blocks of vacant land are not taxable supplies under section 9-5 of the GST Act. Therefore, GST is not payable on the sale of these two blocks of land.