Private ruling: GST and subdivision of land
Published: June 2013

Ruling: Q1: Does the company need to be registered for goods and services tax (GST) in regards to one off residential property development transaction as property to be sold at completion of development, in order to declare GST on proceeds of property sale? | A1: Yes, the company will be required to register for GST.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. · The company is not registered for GST. · The directors purchased the residential premises in 200X · This property has been used as the main place of residence of the company directors · The company directors intend to subdivide their main residence into equal lots. · Subdivision is subject to council approval; however development is to be completed within 12 months of receiving council approval, permits and completion of other necessary legal matters. · The company would acquire one lot and the other lot will be retained by directors in their personal names for construction of a new main residence for themselves. · The intention is to build a new residential property on the land and sell on completion of development · The company has only ever acted as a trustee for a discretionary trust and at this stage the property development is a one off transaction. · Further property developments could be considered by the company subject to the financial outcome of this development. · At this stage property will not likely be used for investment purposes prior to sale of development

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 7-1 | 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 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 75-5

Reasons for decision: Summary: Under section 23-5 of the GST Act, you are required to be registered if you meet the following criteria: (a) you are carrying on an enterprise; and (b) your annual turnover meets the registration turnover threshold (as set out in section 23-15 of the GST Act. Under section 23-10(1) of the GST Act you may register for GST purposes if you are carrying on an enterprise, even though your turnover is below the registration turnover threshold referred to in section 23-15 of the GST Act which is currently $75,000 for entities other than a non profit organisation. Also, section 23-10(2) of the GST Act allows you to register if you are not carrying on an enterprise but intend to do so in the future. | Detailed Reasoning - Enterprise:: Miscellaneous Tax Ruling MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number - considers the meaning of certain key words and phrases used to define an enterprise and provides assistance to entities in determining whether their activities constitute an enterprise and their entitlement to an Australian Business Number under the A New Tax System (Australian Business Number) Act 1999. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act. Subsection 9-20(1) of the GST Act relevantly defines an enterprise as an activity, or series of activities, done: · in the form of a business; or · in the form of an adventure or concern in the nature of trade. Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity or series of activities done as a private recreational pursuit or hobby. Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Paragraph 244 of MT 2006/1 states: 244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature. In your case you intend to subdivide the property, demolish the existing house and build new residential premises on each of the lots. Example 31 in MT 2006/1 is similar to your intentions and provides: Example 31 284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land. 285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block. 286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for : · their house to be demolished ; · the land to be subdivided ; · a builder to be engaged ; · two houses to be built ; · water meters, telephone and electricity to be supplied to the new houses ; and · a real estate agent to market and sell the houses. 287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses. Because you are building a new house for sale, your activities are more than the mere realisation of a capital asset and your activities in this subdivision will be an enterprise. Section 7-1 of the GST Act states that GST is payable on *taxable supplies Division 9 of the GST Act defines taxable supplies, states who is liable for the GST, and describes how to work out the GST on supplies. Section 9-5 of the GST Act states: You make a taxable supply if: (a) you make a 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 for GST. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed under the exemptions. When you sell the new residential premises you are making a supply for consideration. The supply will be in the course of your enterprise. The supply is connected with Australia as the property is in Australia (subsection 9-25(4)). The supply is not GST free or input taxed. Your supply will be a taxable supply if you are registered or required to be registered for GST. You are required to be registered if you are carrying on an enterprise and the GST registration turnover threshold is met (section 23-5 of the GST Act). Subsection 188-10(1) states that; You have an annual turnover that meets a particular *turnover threshold if: (a) your *current annual turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected annual turnover is below the turnover threshold; or (b) your projected annual turnover is at or above the turnover threshold. Projected annual turnover is defined in subsection 188-20(1) as below: Your projected annual 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 that month and the next 11 months, other than: (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connection with an *enterprise that you *carry on. | Detailed Reasoning - Conclusion: As the sale of the residential premises will put your projected annual turnover over the GST registration threshold you will be required to register for GST in regards to the one off residential property development transaction (section 23-5 of the GST Act). You are liable for GST on the sale of the new residential premises as all the requirements of section 9-5 of the GST Act are met | Detailed Reasoning - Additional information: Section 11-20 of the GST Act provides that you are entitled to claim input tax credits for any creditable acquisition that you make in carrying on your enterprise. Section 75-5 of the GST Act advises that you, as the vendor of a property, you may choose to apply the margin scheme in working out the amount of GST if you make a taxable supply of real property by: · selling a freehold interest in land; or · selling a stratum unit; or · granting or selling a long-term lease. However, you cannot use the margin scheme if you purchased the property through a taxable sale where the GST was worked out without applying the margin scheme. Further information is available from our publication, GST and the Margin scheme NAT 15145.02.2012 and GSTR 2006/8