Private ruling: GST on the sale of a property

Ruling: You along with a family member acquired a residential property prior to 1 July 2000. | You are not registered for GST either as an individual or in association with your family member. | The property was used to generate residential rental income. | In the 2010 financial year, a decision was made to subdivide the property into two blocks for the purposes of sale with one lot becoming vacant land and the other of house and land. | In order to secure subdivision approval, it was necessary to provide connection to mains water and install a boundary fence. An engineer was engaged to assist with the subdivision and some levelling of the land also occurred. | A real estate agent was engaged to assist with the sale of the property. | The house was sold first and about a month later the vacant land with the proceeds used to service a loan and fund your retirement via superannuation contributions. | You are not a property developer with the subdivision being a one off project. | Detailed reasoning | Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay GST on any taxable supplies that you make. | Section 9-5 of the GST Act provides that you make a taxable supply if: | (a) you make the supply for consideration | (b) you make the supply in the course or furtherance of an enterprise that you carry on | (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 the supply is GST-free or input taxed. | All of the conditions set out in section 9-5 of the GST Act must be satisfied in order for a supply to be taxable. | In your case, the sale of the vacant land was for consideration and is connected with Australia given it is located within this country. Therefore, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. | It is now necessary to consider whether the sale of the vacant land was made in the course or furtherance of an enterprise that you carry on. | It is noted that there are no provisions in the GST Act that treat the supply of vacant land as being either GST-free or input taxed. | Enterprise | The ATO view on the meaning of an entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number is provided by Miscellaneous Taxation Ruling MT 2006/1. | Goods and Services Tax Determination GSTD 2006/6 explains at paragraph one that A New Tax System (Australian Business Number) Act 1999 (ABN Act) uses the definition of "entity" and "enterprise" that are contained in the GST Act. It goes on to say that the principles in MT 2006/1 apply equally to the terms "entity" and enterprise in the GST Act. Thus MT 2006/1 can be used to discuss your case. | Paragraphs 120 to 139 of MT 2006/1 explain when an enterprise is being carried on for the purposes of the ABN (and GST) Act. Paragraph 120 of MT 2006/1 states in part: | In order to be entitled to an ABN most entities must carry on an enterprise. The term 'carrying on' is defined in section 41. | Paragraphs 121 and 122 of MT 2006/1 further explain that given an identical definition of 'carrying on' an enterprise can be found in section 195-1 of the GST Act which in turn is given meaning by section 9-20 of the GST Act. | As far as your case applies, section 9-20 of the GST Act provides that an enterprise is an activity or series of activities that are done: | (a) in the form of a business or | (b) in the form of an adventure or concern in the nature of trade. | To determine if an activity or series of activities amounts to an enterprise is a question of fact or degree having regard to all the circumstances of the case. | In relation to an isolated transaction such as the sale of real property, the issue to decide is whether that activity is an enterprise in the form of a business or in the nature of trade as opposed to the mere realisation of an asset. | In your case the relevant activities were: | (a) Approval was obtained from the relevant local Council to subdivide a residential investment property into two allotments, one being vacant land and the other being house and land. | (b) In order to secure subdivision approval, it was necessary to provide connection to mains water and install a boundary fence. An engineer was engaged to assist with the subdivision and some levelling of the land also occurred. | (c) A real estate agent was engaged to assist with the sale of the property.In association with your spouse, the property has been held since 1996 to generate residential rental income. In 2010 a decision was made to subdivide the property to create a new lot of vacant land, with the existing house situated on the other allotment. | Paragraph 264 of MT 2006/1 264 states: | The cases of Statham & Anor v. Federal Commissioner of Taxation 105 ( Statham ) and Casimaty v. FC of T 106 ( Casimaty ) 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. | Paragraph 265 of MT 2006/1 provides guidance on the subdivision of land and determining whether activities amount to a business or adventure in the nature of trade. | 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. | Considering each of those factors in turn as they apply to your circumstances: | There is a change of purpose for which the land is held ; | The property was held by you for the purposes of generating residential rental income. In deciding to subdivide and sell the property, the purpose of holding it changed from a rental property to one that was for sale. | Additional land is acquired to be added to the original parcel of land | No additional land was added to the original parcel of land in your case. | The parcel of land is brought into account as a business asset | You advised that the vacant land was not brought into account as a business asset. That allotment came into existence with the subdivision of a rental property that had in turn been treated as a family investment asset. | There is a coherent plan for the subdivision of the land | By pursuing development approval from Council for the subdivision and that the property sales were advertised and made through commission sales agent, you adopted a set plan with a view to secure the maximum return from your asset. While minimal, these activities were planned, organised and coherent. You were not motivated to enquire about subdividing your land by the desire to alleviate any debt burden or due to ill health as was the case in Casimaty's case. You have not provided any evidence that you were content to sell the land as one parcel but were unable to do so as was the case in Statham's case. From the whole of the evidence, this is a case where you were motivated by an expectation of profit. | There is a business organisation - for example a manager, office and letterhead | There is no evidence of an office or of letterhead or the engagement of an engineer to design and oversee any construction work. | Borrowed funds financed the acquisition or subdivision | While there was no need for you to borrow funds to cover the costs of the subdivision, you chose a path of risk and profit rather than the mere realisation of the asset as it was. You were not merely providing a bond to Council so that it can undertake a simple subdivision of land as was the case in Statham's case. | Interest on money borrowed to defray subdivisional costs was claimed as a business expense | You advised that you are not claiming an income tax deduction for any of the costs associated with the property subdivision. No money was borrowed to fund the project. | There is a level of development of the land beyond that necessary to secure council approval for the subdivision | Your activities to the vacant land amounted to the erection of a boundary fence, levelling of the block and connection of water supply. Based on this it is reasonable to conclude that the level of development was limited to the minimum that is necessary to obtain Council approval for the subdivision. | Buildings have been erected on the land | On the information provided, no buildings were erected on the land. | Paragraphs 291-293 of MT 2006/1 provide an example of a subdivision that is not considered to be an enterprise for GST purposes. Those paragraphs state: | 291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years. | 292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold. | 293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset. | While you do not live on the property, the minimum amount of improvements undertaken for the subdivision of your property is consistent with the example provided by the Ruling. Accordingly we consider that an enterprise of land subdivision was not being carried on. | Summary of considerations | Your activities were a one-off transaction on land that was used as a long term residential investment property. While some of the indicators of an enterprise are present, the majority are not. As such we find that the process of subdivision did not amount to the carrying on of an enterprise for GST purposes and was the mere realisation of a long held capital asset. This means that paragraph 9-5(b) of the GST Act is not satisfied and as a consequence the supply of the vacant land is not subject to GST.




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