Private ruling: Goods and services tax (GST) and the sale of a property
Published: July 2014

Ruling: Q1: Will GST be payable on your sale of the property? | A1: No.

Relevant facts and circumstances: You are not registered for GST. You are elderly. You own a property located in Australia (the property). The land is a number of ha and is held on certificate of Title (title details). You acquired all of your interest in the land from your relatives many years ago. You previously lived on the property. From a certain date to a certain date, you used the property for a small scale primary production business. The turnover from this business was so low that you were not required to be registered for GST. During a certain financial year, you moved from the property to a house elsewhere to reside near your relative who was able to keep an eye on you. You initially lived with your equally elderly relative in a house you purchased. During a certain financial year, you were moved to a nursing home where you now reside. You suffer from a major disease. In a certain year, you recognised that in your advancing years, you would be unable to attend to your rural land. Around that time, you consulted with your neighbours and made a decision to notionally join your properties and apply for a zoning change from rural to urban. With urban zoning applying to all of the lots, you and your neighbours hoped to attract a purchaser to the land. Now that all the appropriate zone changes have been approved, the owners as a group are set to invite a purchaser to make an offer to purchase all the lands simultaneously. It was recognised from the beginning of the project that the owners would never have the financial resources to complete the infrastructure and thus carry the project to the stage of subdivision and sale of the individual blocks. The lots have never been merged on a single title and each proprietor retains separate ownership. You did not acquire additional land to add to the land you acquired from your relatives on a certain date, rather you just made your land available within the project. You have never brought the property to account as a business asset or as trading stock and will not do so. You and your neighbours did not have the skills to effect the zoning change so you engaged people skilled in such matters to do so. There was no formal business organisation in relation to the project. However, a project manager guided the project through the approval processes and requirements of the various government authorities on behalf of the owners. You did not borrow any funds in relation to the project. There was no development of the land (as part of the project) beyond that necessary to secure the zoning change. This zoning status would make all the lots attractive for sale to say a purchaser who had the skill and resources to carry out and complete the subdivision and sale of individual lots. You have not built any buildings on the property since deciding to apply for re-zoning of the property or since deciding to sell the property. You will not build any buildings on the property in the future. Apart from the project and the sale of the property in question, you do not plan to carry on an enterprise in the future.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | 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 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision: Summary: GST will not be payable on your sale of the property because you are not registered for GST and will not be required to be registered for GST. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy 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) You meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act because: • you will supply a property for consideration; and • the supply will be connected with Australia (as the property is located in Australia). You are not registered for GST. Therefore, what remains to be determined is whether you sell the property in the course or furtherance of an enterprise that you carry on, whether you will be required to be registered for GST and whether the sale will be GST-free or input taxed. | Detailed Reasoning - Enterprise: Paragraph 9-20(1)(a) of the GST Act provides that enterprise includes an activity or series of activities done in the form of a business. Paragraph 9-20(1)(b) of the GST Act provides that enterprise includes an adventure or concern in the nature of trade. Section 195-1 of the GST Act states that carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 can be relied on for GST purposes. Paragraph 234 of MT 2006/1 states: 234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following: • Assets can be categorised as either trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. • Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. However, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. Paragraphs 262 and 263 of MT 2006/1 discuss one-off or isolated real property transactions. They state: 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.) Paragraphs 264 and 265 of MT 2006/1 discuss real property transactions. They 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 (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. In accordance with paragraph 254 of MT 2006/1, an intention to resell an asset at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the 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. You have held the property in your case for many years and retained it to produce farming business income. Therefore, you have held it as a capital asset/investment asset. However, we need to consider whether the character of this asset will change to that of a trading/revenue asset at the time of sale. Having given consideration to the above factors and the facts and circumstances, we consider that your sale of the property will be the mere realisation of a capital asset. Therefore, the sale will not be a business or an adventure or concern in the nature of trade. Paragraph 148 of MT 2006/1 gives an example where a farming enterprise has ceased to be operated but has not terminated. It states: Example 13 - an enterprise that has not terminated 148. Joel, who has been farming cotton for a number of years, decides to retire, sell up everything and move to town. All assets are sold with the exception of a number of bales of cotton. Joel expects to sell the cotton at some future time and pays to have it stored in a commercial warehouse. The enterprise has not terminated until the cotton is sold or is determined to be worthless or of little value. You will sell the land in the course or furtherance of the farming enterprise you formerly operated as you used the land in that enterprise. The sale of the property will be something done in the course of the termination of your enterprise. Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act. | Detailed Reasoning - GST registration: An entity is required to be registered under section 23-5 of the GST Act if: (a) it is carrying on an enterprise, and (b) its GST turnover is $75,000 or more. Your sale of the property will be part of the carrying on of your farming enterprise. Therefore, you will meet the requirement of paragraph 23-5(a) of the GST Act. Subsection 188-10(1) of the GST Act explains when you meet a particular turnover threshold. It states: You have GST turnover that meets a particular *turnover threshold if: (a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or (b) your projected GST turnover is at or above the turnover threshold. Your current turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely, to make, during the 12 months ending at the end of that month other than: • supplies that are input taxed, and • supplies that are not made in connection with an enterprise that you carry on. Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies you have made, or are likely to make, during that month and the next 11 months, other than: • supplies that are input taxed, and • supplies that are not made in connection with an enterprise that you carry on. Section 188-25 of the GST Act provides that the following supplies are excluded from projected GST turnover: • sales of capital assets, and • supplies made solely as a consequence of ceasing to carry on an enterprise. Goods and Services Tax Ruling GSTR 2001/7 provides the meaning of capital asset. Paragraphs 31 to 33 of GSTR 2001/7 state: 31. The GST Act does not define the term 'capital assets'. 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' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). In your situation, you carried on a farming enterprise on the property. Therefore, the property was held as part of your farming business structure set up for the earning of profits. Hence, the property was held as a capital asset for the purposes of that enterprise. The nature of the asset will not change to that of a trading asset as at the time you sell the property. Hence, the sale of the property will be excluded from the calculation of your projected GST turnover. Your projected GST turnover will be zero when you sell the property. As your GST turnover will be zero when you sell the property, you do not meet the requirement of paragraph 23-5(b) of the GST Act. As you do not meet all of the requirements of section 23-5 of the GST Act, you will not be required to be registered for GST when you sell the property. As you are not registered for GST and you will not be required to be registered for GST, you do not meet the requirement of paragraph 9-5(d) of the GST Act. As you do not meet all of the requirements of section 9-5 of the GST Act, you will not make a taxable sale of the property. Therefore, GST will not be payable on your sale of the property.