Private ruling: GST Enterprise
Date of advice: 2 December 2016
Published: May 2017

Ruling: Q1: Will the sale of X of the X townhouses be a supply made in the course or furtherance of an enterprise that you carry on such that GST will apply to the sale of the X townhouses? | A1: Yes, the sale of X of the X townhouses will be a supply made in the course or furtherance of an enterprise that you carry on such that GST will apply to the sale of the X townhouses.

Relevant facts and circumstances: You own a property and have been occupying the property as your main residence in the past X0 years. The property consists of a dwelling which is too big for you and thus is no longer appropriate for you based on your current and expected future needs. You decided to redevelop the property and build 4 adjoining dwellings on the property after demolishing the existing dwelling. The redevelopment will involve i. obtaining planning permits; ii. demolishing the existing dwelling; iii. construction of 4 adjoining dwellings; iv. subdivision of the property into 4 separate titles; v. in respect of the dwellings: (a) you will retain one to live in as your main residence as it will be constructed to suit your current and future needs; (b) you will retain one as investment property; (c) you will engage professionals to sell the remaining X off-the-plan to third parties, and the proceeds from their sale will pay off your existing debt and construction costs. The subdivision and construction works will take XX months to complete. You have never developed the property or engaged in a property development business, the purchase of real estate for profitable sale or a profit making undertaking or scheme involving property. The proposed subdivision works will be undertaken by third party contractors, under the management of project managers. Your involvement with the proposed subdivision will be limited. You are registered for GST in respect of another business and you own an investment commercial 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, section 195-1

Reasons for decision: Summary: GST is payable on taxable supplies. Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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. (* denotes a term defined in section 195-1 of the GST Act) Accordingly, GST is payable on the sale of the X townhouses if all the requirements of section 9-5 of the GST Act are satisfied. One of the requirements is that the sale of the X townhouses is made in the course or furtherance of an enterprise that you carry on. The relevant question to consider is whether carrying on the redevelopment and subdivision of the property by you on this occasion amounts to carrying on an enterprise. 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. Miscellaneous Taxation Ruling MT 2006/1 The New System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT2006/1) considers the meaning of the term 'enterprise' for the purpose of the A New Tax System (Australian Business Number) Act 1999 (ABN Act). The ABN Act uses the definition of the term that is contained in the GST Act. The principles in MT2006/1 thus apply equally to the term 'enterprise' and can be relied upon for GST purposes. The cases of Statham and Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358 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. MT 2006/1 lists the factors that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. 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 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 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. In your case you will redevelop and subdivide the property into X townhouses. One of them will be used as your main residence, one retained as an investment property and you propose to sell the remaining X townhouses off-the-plan. You will have limited involvement in this redevelopment process. You will engage third party contractors to undertake the redevelopment activities under the management of project managers. After taking into consideration and weighing all the relevant facts, it is clear that the redevelopment and subdivision of the property constitutes an enterprise and it is more than a mere realisation of assets. An enterprise is carried on in this situation because the activities of redevelopment and subdivision are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. Significant factors which lead to this conclusion are as follows: ● there is a change of purpose for which the whole property is held ● there is a coherent plan for the subdivision of the land, i.e. the demolition of the existing dwelling, the building of new townhouses and the subdivision of the property ● the subdivision is carried out in a businesslike manner, for example projects managers were appointed, third party contractors will be engaged to carry out the subdivision works, significant development costs will be incurred, third party professional will be engaged to sell X of the townhouses off-the-plan, substantial loan to be taken out to finance the development ● there is reasonable expectation of profit as your plan will enable you to fully pay for the existing debt and new debt incurred to carry out the redevelopment ● in addition, the sale of the X townhouses will enable you to own your new residence and an investment property outright (free of debt)