Private ruling: Goods and services tax (GST) and property subdivision
Published: August 2013

Ruling: Q1: Will you be entitled to an input tax credit on your purchase of the property? | A1: No. | Q2: Will you be entitled to input tax credits on your acquisition of construction services? | A2: You will be entitled to input tax credits on your acquisition of construction services provided that the supplies of the construction services to you are taxable supplies. | Q3: Will you make taxable supplies of the subdivided lots? | A3: Yes. | Q4: How will you calculate GST on your sales of the subdivided lots? | A4: You can calculate the GST by dividing the sale price by 11. Alternatively, you can calculate GST at 1/11 th of the margin for the supply, provided that you and the purchaser agree in writing by the time of supply or within such further period as the Commissioner allows that the margin scheme is to apply.

Relevant facts and circumstances: The vendor and their late spouse purchased a property many years ago at an address in Australia (Lot X). They subsequently built a dwelling and established their permanent home there. For some years, they conducted a farming enterprise on the land. In certain years, the vendor and their spouse sought and obtained DA approval to subdivide Lot X into a certain number of lots, including house lot Lot Y, which they retained as their permanent home. They did not carry out construction work in connection with this subdivision. The vendor and their spouse ceased operating their farming enterprise before the spouse died. In a certain year, the spouse died leaving the vendor as the surviving joint tenant. The vendor did not acquire additional land to add to the original parcel of land they acquired jointly with their spouse. The vendor has not carried on a farming enterprise on the property on their own since their spouse died. In a certain year, the vendor sought and obtained council approval to register a plan of subdivision of Lot X into two lots. The vendor arranged for the registration of Lot Y (the house lot) and Lot Z, which were created from Lot X. The vendor did not carry out construction work in connection with this subdivision. The vendor may offer to sell Lot Z to you. Lot Z has DA approval to subdivide into a certain number of lots - this would be done in two stages, with stage 1 comprising certain lots and stage 2 comprising certain lots. You will be registered for GST with effect from the date you purchase the property. You plan to do the construction work associated with the subdivision of Lot Z into a certain number of lots, including the building of roads and connection of services. You will pay contractors for construction services. You will sell the subdivided lots as vacant lots after you have carried out the construction work.

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 paragraph 9-20(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 9-70 | A New Tax System (Goods and Services Tax) Act 1999 section 9-75 | A New Tax System (Goods and Services Tax) Act 1999 section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 11-15(2) | A New Tax System (Goods and Services Tax) Act 1999 section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(1A) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(2) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(2) | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-14 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-15

Reasons for decision: Summary: You will not be entitled to an input tax credit on your purchase of the property because the sale of the property to you will not be a supply made by the vendor in the course or furtherance of an enterprise that they carry on. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your creditable acquisition. You make a creditable acquisition where you satisfy the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered or *required to be registered. (*Denotes a term defined in section 195-1 of the GST Act) Acquisition for a creditable purpose Subsection 11-15(1) of the GST Act states: You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your *enterprise. Subsection 11-15(2) of the GST Act states: However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature. You will acquire the property in question in carrying on your property developing and trading enterprise. Your acquisition of the property does not relate to making supplies that would be input taxed. This acquisition will not be of a private or domestic nature. Hence, you will acquire the property for a creditable purpose. Therefore, you will meet the requirement of paragraph 11-5(a) of the GST Act. Taxable supply You make a taxable supply where you satisfy the requirements of section 9-5 of the 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. | Detailed Reasoning - Enterprise: Subsection 9-20(1) of the GST Act defines 'enterprise' to include: · an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act); and · an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act). We do not consider that the sale of Lot Z to you will be a supply the vendor makes in the course or furtherance of a farming enterprise they carry on even though the vendor and their spouse, as a partnership, formerly carried on such an enterprise on the land. The partnership was a separate entity to the vendor. 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 the principles in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied upon for GST purposes. Paragraphs 262 and 263 of MT 2006/1 discuss one-off and 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.) Paragraph 254 of MT 2006/1 provides that an intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 lists factors that are relevant in determining whether an entity is carrying on a property subdivision enterprise. It states: 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. The information you provided indicates that the vendor did not acquire the property in question for the purposes of reselling and the vendor held the property as a capital asset rather than a trading asset. Also, you stated the following - · The vendor did not acquire additional land to add to the original parcel of land they acquired jointly with their spouse. · The vendor did not carry out construction work relating to the subdivisions. Considering the factors in paragraphs 254 and 265 of MT 2006/1, we do not consider that the vendor has carried on a property subdivision or property trading enterprise. The sale of the property to you will be the mere realisation of a capital asset. We do not consider that the sale of the property to you will be a supply made in the course or furtherance of any enterprise carried on by the vendor. Therefore, the requirement of paragraph 9-5(b) of the GST Act will not be met. As not all of the requirements of section 9-5 of the GST Act will be met, the vendor will not make a taxable supply to you. Therefore, you will not meet the requirement of paragraph 11-5(b) of the GST Act. Consideration You will provide consideration for the supply. Therefore, you will meet the requirement of paragraph 11-5(c) of the GST Act. GST registration You will be registered for GST. Therefore, you will meet the requirement of paragraph 11-5(d) of the GST Act. Conclusion As the sale of the property to you will not be a taxable supply, you will not meet all the requirements of section 11-5 of the GST Act. Therefore, you will not make a creditable acquisition of the property. Hence, you will not be entitled to an input tax credit on your purchase of the property. Additional information The margin scheme is not relevant to the sale of the property to you as the sale of the property to you will not be a taxable supply and the margin scheme is a method of working out GST on a taxable supply. | Summary: You will be entitled to input tax credits for your acquisition of the construction services provided that the supplies of the construction services to you are taxable supplies, because under such circumstances you would meet the requirements of section 11-5 of the GST Act, that is: · you will acquire the services for a creditable purpose · the supplies to you would be taxable supplies · you will provide consideration for the supplies of the services, and · you will be registered for GST. | Detailed Reasoning - Detailed reasoning: You will acquire services in undertaking the construction work in carrying on your property developing and subdividing enterprise. These acquisitions will not relate to making supplies that would be input taxed. These acquisitions will not be of a private or domestic nature. Hence, you will acquire these things for a creditable purpose. Therefore, you will meet the requirement of paragraph 11-5(a) of the GST Act. Where the supplies of services to you are taxable supplies, you will meet the requirement of paragraph 11-5(b) of the GST Act. You will provide consideration for the supplies of the services. Therefore, you will meet the requirement of paragraph 11-5(c) of the GST Act. You will be registered for GST. Therefore, you will meet the requirement of paragraph 11-5(d) of the GST Act. Therefore, where the supplies of services to you are taxable supplies, you will make creditable acquisitions of the services because you would meet all of the requirements of section 11-5 of the GST Act. Hence, where the supplies of services to you are taxable supplies, you would be entitled to input tax credits on your acquisitions of these services. | Detailed Reasoning - Question 3: You will meet the requirements of section 9-5 of the GST Act because: · you will supply properties for consideration · you will supply the properties in the course or furtherance of an enterprise that you carry on · the supplies of the properties will be connected with Australia (as the properties will be located in Australia) · you will be registered for GST, and · there are no provisions of the GST Act under which your sales of the property will be GST-free or input taxed. Therefore, you will make taxable supplies of the subdivided lots. Hence, GST will be payable by you on your sales of the subdivided lots. | Summary: If you and a purchaser agree in writing by the relevant deadline that the margin scheme will apply, you can use the margin scheme because: · you will make taxable supplies of real property by selling freehold interests in land · you and the purchaser would have agreed in writing by the deadline that the margin scheme is to apply, and · you will not acquire the property through a supply that was ineligible for the margin scheme. | Detailed Reasoning - Detailed reasoning: There are two methods for calculating GST on the sale of the property - 1. GST is calculated at 1/11 th of the price. 2. GST is worked out at 1/11 th of the margin (the margin scheme method). Margin scheme Subsection 75-5(1) of the GST Act states: The *margin scheme applies in working out the amount of GST on *taxable supply of *real property that you make by: (a) selling a freehold interest in land; or (b) selling a *stratum unit; or (c) granting or selling a *long-term lease; if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) of the GST Act states: The agreement must be made: (a) on or before the making of the supply; or (b) within such further period as the Commissioner allows. Subsection 75-5(2) of the GST Act states: However, the *margin scheme does not apply if you acquire the entire freehold interest, *stratum unit or *long-term lease through a supply that was *ineligible for the margin scheme. You will be making taxable supplies of properties. You will make these supplies by selling freehold interests in land. You will not acquire the property through a supply that was ineligible for the margin scheme. Therefore, you can use the margin scheme to calculate GST on your sale of the subdivided lots provided that you and the purchasers agree in writing by the time you supply the properties or within such further time as the Commissioner allows that the margin scheme is to apply. In accordance with subsection 75-10(1) of the GST Act, if a taxable supply of real property is made under the margin scheme, the amount of GST on the supply is 1/11 th of the margin for the supply. Subsection 75-10(2) of the GST Act provides that generally the margin for the supply is the amount by which the sale price for the supply exceeds the purchase price for the vendor's acquisition of the property. Section 75-15 of the GST Act provides that if the property the vendor supplies relates only to part of land that it acquired, the consideration for the vendor's acquisition of that part is the corresponding portion of the consideration for the land the vendor acquired. If you use the margin scheme, you will need to apportion your purchase price of the development site between each lot that you supply on a fair and reasonable basis in order to work out the cost base of each lot that you sell. The margin will be the difference between the price you sell the lot for and its cost base. Note that in accordance with section 75-14 of the GST Act your development costs and any costs associated with the land other than your purchase price of the land cannot be included in the cost base. Your cost base for each lot will be a fair and reasonable proportion of the purchase price for the development site only. Your GST liability under the margin scheme would be 1/11 th of the margin.