Private ruling: GST and Subdivision
Date of advice: 12 March 2021
Published: May 2021

Ruling: Q1: Will the supplies of the subdivided lots be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No.

Relevant facts and circumstances: 1. You are the registered owner of the Property and acquired the property on xx/xx/xxxx. 2. You are not registered for GST. 3. The Property is x.xx hectares. 4. The Property was acquired as your main residence. The Property has never been leased and has only been used for your residential purposes, but for this subdivision development proposal. 5. The Property was zoned as Rural RU2 when it was acquired. It has been rezoned to Low Density Residential R2 as part of Council's rezoning project in xxxx. 6. The Property has not been on the market for sale. 7. You are retired and have not been involved in any prior subdivisions or property developments. You also have no intention of undertaking any other subdivision activities or development projects in the future. You intend to use the proceeds for retirement purposes. 8. Your preference was to sell the Property as a single undeveloped parcel of land. You wanted to sell the Property and downsize to a smaller property for retirement purposes and contribute remaining proceeds from the sale of the Property to your superannuation funds. 9. You received various verbal offers from property developers and real estate agents (through expression of interest letters in the letterbox) for the purchase of the entire Property. You were not interested in selling the Land at that time you were residing in the property as your main residence. The verbal offers were not serious, and the price offered was much lower than the market value of the Property at that time. You did not proceed with any of these. 10. Three indicative verbal offers have been provided. 11. In 20XX, the project manager (the Developer) undertook a property development on the same street as your Property. A project manager/developer approached you and discussed subdividing the Property, like your neighbour's project. You did not approach the Developer or any other developers or real estate agents directly. 12. The Developer initiated the proposed subdivision of the Property, as part of searching for a subdivision project. 13. You undertook your own due diligence processes on the development management agreement (DMA), the proceeds you would receive for the Property and the development project processes. 14. The market value of the Property at the time of entering into the DMA was approximately $X million. 15. No valuation by an independent valuer was undertaken for your Property prior to the subdivision of the land. An internal calculation was undertaken and provided an indicative valuation of the land to be $X million. 16. You were provided a copy of a feasibility study. 17. The estimated cost to subdivide the Property is $X.X million (including construction cost, council contribution and fee payable to consultants). 18. You entered into a Development Management Agreement (DMA with the Developer on XX/XX/XXXX). 19. You will receive $X.X million. There is a $X preliminary advance payment upon certain conditions being met. The cash amount will be reduced by the value of the subdivided lots you retain. 20. You have advised that, as stated in a clause of the Development Agreement, if required by the Developer, you must permit the registration of a mortgage on the Property in favour of a financier to fund the development undertaken by the Developer. Under clause the funding for the Project will be procured by the Developer. 21. The subdivision activity is expected to commence in XX/XXXX and be completed in XX/XXXX. 22. The property will be subdivided into XX lots. 23. Your existing residence will be demolished. Your new principal place of residence will not be located on the retained lots. You intend to use the two retained lots for investment purposes. 24. The Developer engaged an entity to provide development planning services including a feasibility study. 25. Details of the feasibility study provided. You would not receive any of the Net Profit. 26. An entity and the Developer engaged further geotechnical, environmental and civil engineering consultants to deliver supporting documentation for the Development Approval (DA). 27. The Developer submitted the Development Approval (DA) for the subdivision of the Property on XX/XX/XXXX. The DA was approved on XX/XX/XXXX. 28. The developer may choose to engage a third-party selling agent to sell the subdivided lots, in accordance with the DMA. You will not be involved in the sale of the subdivided lots. 29. You advised on XX/XX/XXXX that contrary to a clause of the DMA there are no plans in constructing a site office, associated landscaping and carparking after the completion of the subdivision of the Property. 30. Upon completion of the subdivision there may be two scenarios: • If subdivision is completed before the sunset date you will remain as the owner of the Property and transfer the subdivided lots to each buyer directly; • If the subdivision is completed after the sunset date. You will transfer the subdivided Property to the developer; and the developer will then transfer the lots to each buyer. Development Management Agreement The parties to the agreement are the Landowner and the Developer. • The Landowner is the registered owner of the land. • The Developer has experience in property development and project management. • The Landowner wishes to engage the Developer to carry out the development of the Land. The Developer has agreed to carry out the Development Services in accordance with this Agreement. Relevant clauses listed.

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 Sub-paragraph 9-5(b)

Reasons for decision: Summary: In this reasoning: • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all terms marked by an asterisk are defined terms in the GST Act • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. GST is payable on any taxable supply you make. Section 9-5 of the A New Tax System (Goods and Services Tax ) Act 1999 (GST Act) 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 You intend to subdivide the Land into residential lots. For the supply of your subdivided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In this case, you will be selling vacant residential lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Further, the supply of the lots in your situation will neither be GST-free or input taxed. Accordingly, we must determine whether: (a) your sale of the lots is in the course or furtherance of an enterprise that you are carrying on, and (b) if so, whether you are required to be registered for GST. | Detailed Reasoning - The Development: You own the Property that was acquired on XX/XX/XXXX. During the period of your ownership the property has been your sole and principal residence. When you acquired the property, it was zoned Rural RU2 and has since been rezoned to Low Density R2 as part of the Council's rezoning in XXXX. You have entered into agreements and arrangements with a Developer such that your property will be developed into XX residential lots that are fully serviced for the purposes of sale (except for X retained lots). | Detailed Reasoning - Enterprise: Section 9-20 provides that the term 'enterprise' includes, among other things, 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. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise Miscellaneous Taxation 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 provides guidance on what activities will amount to an enterprise. Paragraph 159 of MT 2006/1 states that whether an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case. Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. In particular: ¢A business encompasses trade engaged in on a regular or continuous basis. ¢An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. | Detailed Reasoning - The change of intention: While holding an asset for a considerable period of time may indicate that it is a long- term capital asset, the intention of the taxpayer at the time of acquisition and throughout the ownership period is a crucial aspect. The following cases have considered the issue of intention and whether the proceeds from the venture are of a capital or revenue nature: Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer's activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land. Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham's case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income. Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 (Stevenson case) where taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970's he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land. As displayed in the above cases, a taxpayer can embark on a venture in the nature of a business or in the nature of trade, where the property is applied for a different purpose, after the property was first acquired. Paragraph 178 of MT 2006/1 lists a number of indicators to consider when determining whether an activity or series of activities amount to a business. It is our view that this property development activity is not being carried on in the form of a business. Paragraph 265 of MT 2006/1 lists a number of factors which can be used to determine whether activities in relation to a sale of property are done under a profit-making undertaking or scheme. 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); ˗ 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 the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require 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. Taking a balanced view of the characteristics of the Property and of the proposed arrangement, with no one factor determinative in isolation, leads to a conclusion that the proposed subdivision will not amount to an enterprise in the form of an adventure or concern in the nature of trade. This is despite some factors being indicative of having a commercial purpose. For example, you have committed all of your land from the purpose of a private residence to land subdivision. This is a clear change in use for which your land was originally acquired. You are assuming risk by providing your Property as security for external finance and you have entered into a commercial property development agreement after choosing not to pursue avenues (verbal offers) to sell your Property outright. However, in your case there are other factors that indicate you have entered into this arrangement to realise the value in your land accumulated over a period of time, rather than conducting an enterprise. Your history of occupation and not seeking zoning changes are supported by your intention at time of acquisition, namely the property was acquired as your main residence and for which you have done so for a period of XX years. The magnitude or size and scale of the development is not insignificant. This is evidenced by the number of lots and works required to develop the land. The expenditure ratio in comparison to the underlying land value is approximately 50:50 and can be viewed as an indicator of an enterprise. However, notwithstanding this, the arrangement is such that you will only receive the guaranteed amount in accordance with the value of the underlying value of the land at the time of entering into the agreement. You will not be receiving or sharing in any proceeds over and above the agreed amount. Your activities are considered to not fall within the definition of an enterprise as per sub section 9-20(1)(b) of the GST Act, namely the activities are not in the form of an adventure or concern in the nature of trade (isolated transaction- one off). Your supplies of the lots are not in the course or furtherance of an enterprise that you are carrying on and therefore you do not satisfy paragraph 9-5(b). As stated above for a supply to be a taxable supply all elements in section 9-5 must be met. Based on the facts presented we have concluded that your supplies of land will not be taxable supplies.