Private ruling: GST and enterprise
Published: June 2012

Ruling: Q1: Are you carrying on an enterprise for the purposes of subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, you are carrying on an enterprise for the purposes of subsection 9-20(1) of the GST Act.

Relevant facts and circumstances: You purchased a block of land and the adjacent block pre July 2000. Subsequently, you built a house on one block and lived in the house as your principal place of residence until a few years ago whereby you moved to another principal place of residence. Your child continued to live in the home since then. The house needed substantial repairs that were not cost effective given the state of the house and the land was also too large for your daughter to manage. The house was demolished recently. The original block and the adjacent block were subdivided into several blocks. Some of the subdivided blocks were sold as vacant land. The balance of the blocks had houses (built by a builder) constructed on the land. One of the blocks was to be your child's home (that you would retain ownership of); the other house was sold via a real estate agent. You informed that you were aware that you would not make any extra money from the construction of the homes but you believed it would be cheaper to build multiple homes rather than one. This is because you believed it would be easier to sell the property with a house on it, and once sold it would cover the cost of the other home while construction of the child's home could be completed at a cheaper price. You also informed that you are not carrying on a property development business. You have not engaged in property development before and you do not intend to be involved in property development in the future. The subdivision of the blocks was paid for from your savings. The monies for construction of the houses was withdrawn from your superannuation fund, as you found that it was easier than going to the bank for the funds. You state you re-contributed the proceeds received from the sale of the house and land back into your superannuation fund. Your intention in completing the above activities was to facilitate your retirement, construct a house for your child that was of a more manageable size and realise as much income to allow you to assist your child and grandchildren and still have funds remaining for your retirement.

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 subsection 9-20. | A New Tax System (Goods and Services Tax) Act 1999 section 23-5. | A New Tax System (Goods and Services Tax) Act 1999 section 23-15. | A New Tax System (Goods and Services Tax) Act 1999 Division 38. | A New Tax System (Goods and Services Tax) Act 1999 section 40-65. | A New Tax System (Goods and Services Tax) Act 1999 Division 75.

Reasons for decision: Summary: GST is payable if you make a taxable supply. For the sale of real property to be a taxable supply, it must satisfy the requirements under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which provides that you make a taxable supply if: · you make the supply for consideration · the supply is made in the course or furtherance of an enterprise that you carry on · the supply is connected with Australia; and · you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-fee or input taxed. There are no provisions under Division 38 of the GST Act to provide for the sale of vacant land under these circumstances to be GST-free. In respect of whether or not the supply is input taxed, section 40-65 of the GST Act provides that: 1. A sale of real property is input taxed , but only to the extent that the property is residential premises to be used predominantly for residential accommodation. 2. However, the sale is not input taxed to the extent that the residential premises are: (a) commercial residential premises, or (b) new residential premises other than those used for residential accommodation before 2 December 1998. 'Residential premises' is defined in section 195-1 to mean 'land or a building occupied or intended to be occupied as a residence, and includes a floating home'. This definition is explained under Goods and Services Tax Ruling GSTR 2000/20 and requires that land must have a building affixed to it and that the building must have the physical characteristics that enable it to be occupied or be capable of occupation as a residence. If a supply is input taxed then no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired or imported to make the supply. The sale of the two subdivided vacant lots and the new residential house will not be input taxed. Therefore, we have to consider whether the supply of the two subdivided vacant lots and the new house will be subject to GST. The supply of real property will be subject to GST if all the requirements of a taxable supply are met. In your case the sale of the subdivided land and the new residential house will be for consideration; it is connected with Australia and the sale of each of the subdivided lots will not be GST-free or an input taxed supply. It is necessary to consider whether the subdivision and sale of the subdivided lots and the new residential house take place in the course or furtherance of an enterprise that you carry on and whether you are required to be registered. Section 23-5 of the GST Act provides that you are required to be registered for GST if: · you are carrying on an enterprise and · your annual turnover meets the registration turnover threshold. An enterprise is defined in terms of subsection 9-20(1) of the GST Act, and includes 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, or … A transaction is a supply 'in the course or furtherance' of an enterprise that is carried on where the supplies can be considered to be connected to the entity's enterprise. The term in the course or furtherance is not defined in the GST Act, but the term is wide enough to cover any supply made in connection with an enterprise and to cover natural incidents and things incidental to the core enterprise activities. Also, an act done for the purpose or object of furthering an enterprise, or achieving its goals, is in the furtherance of an enterprise, although it may not always be in the course of that enterprise. The Australian Taxation Office (ATO) view of what constitutes an enterprise is contained in Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1). Goods and Services Tax Determination GSTD 2006/6 states that the principles contained in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied on for GST purposes. Paragraph 234 of Miscellaneous Taxation Ruling MT2006/1 distinguishes between a business and an adventure or concern in the nature of trade (or profit-making undertaking or scheme). It provides that the term 'business', would encompass trade engaged in, or on, a regular or continuous basis. However, it goes on to say that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business deal but has the characteristics of a business deal. 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. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. In your case, in undertaking the development and sale of the vacant blocks of land and the house and land, it appears that you will make sufficient profit to cover the cost of building your child's home and re-contributing the money you withdrew from your superannuation fund to undertake the development. Therefore, it would be reasonable to conclude that a significant purpose in undertaking the development is to make a profit or gain to enable you to achieve the above purposes. Paragraph 284 to 287 of MT 2006/1 provides an example of a subdivision of land that amounts to an enterprise by way of constituting an isolated profit-making scheme or transaction. This example reads as follows: 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. In your case, your proposed development is similar to the example given above. Your development consisted of demolishing your existing home, subdividing the original block of land (and the adjacent block) and building new houses on the remaining blocks. In addition; · you have engaged professionals to handle the development (builder) and sale of the house and land (real estate agent) · the activity is similar to the type that a property developer would conduct, since you are developing the land in an organised and professional manner · you provide that the money received from the sale of the vacant blocks of land and the sale of the house and land package would be sufficient to cover the cost of building the other home and make the building of your child's home cheaper. · you provide that once the sale had occurred on the house and land you would be able to re-contribute monies that were withdrawn from your superannuation fund. Based on the information provided, it is considered that the transaction is commercial in character as the number of activities undertaken goes beyond the minimal activities needed to simply subdivide and sell the land. In addition, the development has enabled you to fund the construction of a new house for your child without the need to access finance and also provided sufficient profit to enable you to re-contribute monies to your superannuation fund. This indicates that the transaction is beyond that of a mere realisation of a capital asset and is in the form of an adventure or concern in the nature of trade (or profit-making undertaking or scheme). As such, your intentions and activities have the appearance of a business deal. They are an enterprise. It follows that your activities in relation to the land development and sale of subdivided lots and the new house come within the definition of an enterprise for the purposes of GST under subsection 9-20(1) of the GST Act. Where your annual turnover meets the registration turnover threshold you will be required to be registered for GST. That being the case, the supply of the subdivided lots and the house will be made in the course or furtherance of an enterprise that you carry on and, as your turnover will be greater than $75,000 (section 23-15 of the GST Act) you will be required to be registered for GST. As all the requirements of section 9-5 of the GST Act will be satisfied, the supplies will be taxable supplies, on which GST is payable. This means that under the general provisions of the GST Act, you will be required to remit GST of 1/11 th of the price of each supply. You may be able to apply the margin scheme to reduce your GST liability in terms of Division 75 of the GST Act. Information about the margin scheme is available on the Tax Office website at www.ato.gov.au.

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.