Private ruling: GST and subdivision and sale of property
Published: February 2013

Ruling: Q1: Is the sale and subdivision of property an enterprise for which goods and services tax (GST) is payable? | A1: Yes.

Relevant facts and circumstances: You seek an up to date private ruling for the transactions contemplated in our earlier letter to you. You advise that no circumstances have changed from the information provided to this office previously. You are mostly registered as individuals for GST. The partnership you have formed has an Australian Business Number (ABN) but is not registered for GST. You purchased a property many years ago as an asset. At the time of purchase, the land was zoned for residential development. The property and surrounds was later zoned residential C. Later the property and surrounds was then re-zoned residential 1. The property has a house located on it which is now uninhabitable. The property was used for market gardens several years ago but this was not a commercial activity undertaken by you. The property was also used for agistment of cattle until a number of years ago but again this was not considered to be a commercial activity on your part but merely a way to keep the grass down. The property does not generate any income presently and the past uses have not been considered commercial activities. The council has not been approached yet regarding the subdivision and any road works that this will entail. The actual cost of stage 1 of the subdivision is not known at this time but you have funds available and are certain you will not need to borrow funds to undertake the subdivision. You wish to subdivide the property in stages over a period of years. You will finance the first stage from your own resources and the next stages will be financed from the sale of the previous stage. To date you have had preliminary discussions with a surveyor, engaged a valuer and obtained a ruling regarding Capital Gains Tax.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for decision: Summary: The proposed subdivision of the property and the subsequent sale of the smaller lots are considered to be an enterprise and therefore will be subject to GST. Detailed reasoning Under the GST legislation an entity must pay GST on any taxable supplies made. A supply is taxable if it is: (a) made for consideration (b) made in the course or furtherance of an enterprise carried on by the entity making the supply (c) connected with Australia, and (d) made by an entity registered or required to be registered. However, the supply is not a taxable supply to the extent that the supply is GST-free or input taxed. All of the conditions set out above must be satisfied in order for a supply to be taxable. The supply of the subdivided lots will be for consideration, and the supply will be connected with Australia as the land is situated in Australia. Therefore, the remaining requirements: § whether the supply will be made in the course or furtherance of an enterprise carried on, and § you are registered or required to be registered. There are no provisions in the GST legislation that treat the supply of vacant land for residential purposes as either GST-free or input taxed in your circumstances. Paragraph 9-20(1)(a) of the GST Act provides that enterprise includes 'in the form of a business'. The meaning of 'business' is considered in Taxation Ruling TR 97/11 which discusses the main indicators of carrying on a business. Some of those indicators are: § 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. There is no single test that determines whether a business is being carried on. To be conducted in the form of a business the activities would need to have the essential appearance or characteristics of a business. Although there is clearly an intention to make a profit and it is likely the subdivision will be profitable, you have held the property for many years and have not been involved in any business activity prior to this proposed subdivision. Therefore, based on the facts provided, we are satisfied that you are not presently in the business of land development. Paragraph 9-20(1)(b) of the GST Act provides that an enterprise is an activity, or series of activities, done: In the form of an adventure or concern in the nature of trade; or.. The definition of enterprise includes the words, 'in the form of'. The use of the words 'in the form of an adventure or concern in the nature of trade' indicates a wider meaning than if the concept of an adventure or concern in the nature of trade was used by itself. However, there will be circumstances where the transactions do not amount to an adventure or concern in the nature of trade even though they may exhibit many of the characteristics of a business or trade deal. If a subdivision is not substantial and only minimal requirements are needed to meet council requirements to sell the land, then these activities may not be in the form of an adventure or concern in the nature of trade. Such minimal activities include: § surveying the land § lodging plans with council § obtaining council consent for the subdivision § the provision of access, drainage, water meters, electricity and telephone to the subdivided lots, and § arranging a real estate agent to market and sell the subdivided lots. However, this general rule will not apply where: § the land is bought with the intention of resale at a profit § the land is further developed by way of building on it, § the land requires significant activity such as major road works to provide access; and § in circumstances where the entity has been involved on ongoing subdivision or a series of subdivisions. The question of whether an entity is carrying on an enterprise often arises where there are one-off property transactions. The decision to be made is whether the activities are an adventure or concern in the nature of trade as opposed to the mere realisation of a capital asset. Miscellaneous Taxation Ruling MT 2006/1 sets out guidelines on the meaning of the word 'enterprise' for the purpose of entities' entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes. Paragraph 266 of MT 2006/1 states: 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. Each case is examined on its facts and in reviewing the works proposed in your subdivision of the property into lots for sale, it is accepted that on the particular facts of this case, it will be in the form of an adventure or concern in the nature of trade. This is due to the fact that significant activities such as major roads works to provide access will be required to complete the subdivision of land and the fact that this subdivision is significant enough to require it to be undertaken in stages. Having applied all the principles listed above to your circumstances, we have concluded that the subdivision and development of the property does amount to an enterprise for GST purposes. The development of the property is regarded as more than just the mere realisation of a capital asset. As such, you will be carrying on an enterprise and you will be required to register for GST when your annual turnover meets the registration turnover threshold of $75,000, The sale of the proposed lots will be subject to GST and you will be entitled to any input tax credits for GST paid on any acquisitions to subdivide and sell the land, once you are registered.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.