Private ruling: Goods and services tax (GST) and sale of property
Published: February 2015

Ruling: Q1: Will GST be payable on the sale of Lot B? | A1: No.

Relevant facts and circumstances: Individual X is not registered for GST. Individual X's spouse, individual Y, is not registered for GST. The partnership of X and Y carries on a livestock farming business and is registered for GST. The profits/losses of the partnership are shared equally. X and Y have been approached to sell their property on a certain road (Lot B). X has a (percentage) interest in the property. Y has a (percentage) interest in the property. X and Y each intend to pay their individual shares of the sale proceeds into their individual bank accounts. Lot B was originally part of a property acquired by X many years ago. Over the years, parts of the original property have been resumed or otherwise disposed of, for roads etc. Also, along the line, X subdivided the original property into two lots, Lot A of approximately (number) hectares contains X and Y's personal residence and Lot B of (number) hectares. From a certain year to a certain year, X carried on a livestock farming business on the land that Lot B was subdivided from and X received the proceeds from the sale of produce from the livestock owned by X's late parent. The produce sales covered the years (a certain year) to (a certain year). X's parent died in a certain year. All feed for the livestock was bought in. No grain/fodder was grown on the property. Y has never carried on an income earning activity on the property. On a certain date, X and Y set up a livestock grazing partnership with the purchase of the grazing property "C" at a certain location. "C" comprises two lots. X and Y hold this property as tenants in common in equal shares. Further land was acquired for the partnership operation on a certain date with the purchase of "D" and "E". The road address for both properties is a certain address. X and Y hold these properties as joint tenants. On a certain date, X transferred a fractional legal interest in Lots A and B to Y, so that a clause in their wills could be activated in the event of a death. At the time of that transfer, there was no agreement that the property would become an asset of the partnership, part of the partnership capital or that the partnership would have beneficial ownership of the property once the fractional interest was transferred. The partnership does not prepare balance sheets. Lot B and the land it was subdivided from has never been reflected in assets of a balance sheet and has never appeared in the records of the partnership as a partnership asset. The partners have never agreed that Lot B or the land it was subdivided from is a partnership asset or that the property forms part of the partnership capital or that the partnership has beneficial ownership of the property. There has never been any formal agreement between X and the partnership in relation to Lot B or the land it was subdivided from. The partnership has not done any improvement on Lot B or the land it was subdivided from. Lot B and the land it was subdivided from were held as security for the loan to purchase "E" and "D". The mortgage was paid out and released prior to the transfer of the fractional interest to Y. The partnership has claimed a tax deduction for part of council rates but has not claimed input tax credits for holding expenses for Lot B or the land it was subdivided from. Neither X nor Y carries on a business or enterprise in their own right at a location away from Lot A and Lot B. X acquired the property Lot B was subdivided from by way of gift from their parent. No borrowings were involved. When X subdivided the property from which Lots A and B came, they did no more than what council required, to secure approval to subdivide. X split a rural property into two blocks. X has not put any buildings on Lot B. No money was borrowed to finance the subdivision. There have been no claims for interest deductions in connection with the initial acquisition in a certain year or the subdivision. X did not acquire additional land to amalgamate with the property they acquired in a certain year. X never prepared a balance sheet. X did not hire a manager to oversee the subdivision. X did not maintain an office in connection with the subdivision. X did not use corporate letterhead on letters they prepared in relation to the subdivision. No partnership livestock were grazed on Lot B more than 5 years ago. For the most part, the partnership's livestock grazing enterprise has been conducted on the properties in certain districts. However, from time to time, the partnership's livestock have been depastured on certain properties (Lots A & B). The use of the certain land has been on a rent free/agistment fee free basis. There has never been any adjustment/rent payment from the partnership to X whilst they were the sole owner of the land or to X and Y after X transferred a fractional legal interest in this land to Y. The only partnership livestock that have been depastured on Lots A and B were several breeding age livestock which were moved for management purposes. There are no partnership livestock on the property at the moment. It is not intended that any partnership livestock will be on Lot B immediately prior to settlement. The livestock currently on Lot B belong to X and Y's children. These livestock are the descendants of the livestock owned by X's parent. The children acquired the livestock upon the death of X's parent in a certain year. The children do not pay agistment fees or rent for the livestock grazing on the property. The purchaser of Lot B does not intend for Lot B to be used for farming purposes.

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 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 subsection 184-5(1) | A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision: Summary: The sale of X's interest in the property will not be subject to GST because they are not registered or required to be registered for GST. The sale of Y's interest in the property will not be subject to GST because they will not sell this interest in the course or furtherance of an enterprise they carry on as an individual. | Detailed Reasoning - Detailed reasoning: GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. We first need to determine which entity/entities will be supplying Lot B for GST purposes when it is sold. Subsection 184-5(1) of the GST Act provides that a supply made by a partner of a partnership in his or her capacity as a partner is taken to be a supply made by the partnership. The legal owners of Lot B are the partners of a partnership. Based on Commissioner of Inland Revenue v Dormer and Anor 18 NZTC 13,446 factors that can be used to determine whether land is an asset of an individual or an asset of a partnership of which the individual is a partner include: • What the partnership agreement actually says in respect of the asset. • The intention of the individual partner as to whether the land will form part of the partnership's assets. • How was the purchase of the land funded ie by the individual partner or by the partnership. • Were input tax credits claimed on the land and who claimed them. • How are the assets shown in the accounts. • How are payments treated in the accounts. • The circumstances of the acquisition of the asset. • The use to which the asset is put. • The manner in which the asset has been subsequently dealt with. All of the above factors must be taken into account and weighed up as a whole in determining whether the land is in fact, an asset of the individual or the asset of the partnership. No one single factor will be indicative, on its own, as to who owns the land; the partnership, or the individual. Paragraph 29 of Goods and Services Tax Ruling GSTR 2003/13 sets out factors that assist in determining whether a partner makes a supply in the capacity as a partner in the partnership. It states: 29. Whether a partner makes a supply or acquisition in the capacity as a partner is a question of fact. Factors that may indicate that a supply is made by a partner in that capacity include: • the consideration for the supply is paid to a common fund, or to all the partners; • the supply is of a kind typically made in the type of enterprise carried on by the partnership; and • the invoice or tax invoice shows the firm or business name, or the names of all the partners as supplier. We do not consider that the sale of Lot B will be a supply of a partnership asset that the partners make on behalf of the partnership because: • X could not have acquired the land from which Lot B was created on behalf of the partnership as the partnership did not come into existence until later. • Although X transferred a fractional interest in Lot B to Y, this was done so that a clause in their wills could be activated in the event of a death, rather than being part of an arrangement to contribute capital to the partnership. • There was never any agreement between the partners to treat Lot B as being capital of the partnership; a partnership asset or that the partnership would have the beneficial ownership of the property. • There was never any formal agreement between X and the partnership in relation to Lot B or the land it was subdivided from. • The percentage interest of each partner in Lot B is not the same as their percentage interest in the partnership profits. • The partners do not have equal shares in Lot B but they have equal shares in the other properties that are used by the partnership. • X and Y each intend to pay their individual shares of the sale proceeds into their individual bank accounts. When all the relevant factors are taken into account and weighed up as a whole, it indicates that Lot B is an asset of the individuals that are the partners in the partnership rather than an asset of the partnership. Therefore, the sale of Lot B will not be a supply made by the partnership. Instead each partner will make a separate supply of their fractional interest in the property and on their own behalf. Therefore, each partner will be making a supply of property for GST purposes when Lot B is sold. We shall now consider whether the sale of Lot B will be a supply made in the course or furtherance of an enterprise. Enterprise includes: • a business (in accordance with paragraph 9-20(1)(a) of the GST Act) • an adventure or concern in the nature of trade (in accordance with paragraph 9-20(1)(b) of the GST Act) • leasing out property (in accordance with paragraph 9-20(1)(c) of the GST Act) However, paragraph 9-20(2)(c) of the GST Act provides that an activity carried on by individuals without a reasonable expectation of making a profit or gain is excluded from being an enterprise. In accordance with section 195-1 of the GST Act, carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise. 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 MT 2006/1 can be relied on for GST purposes. Paragraph 140 of MT 2006/1 discusses sales of assets and termination of an enterprise. It states: 140. Carrying on an enterprise includes doing anything in the course of the termination of the enterprise. An enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of assets may include the sale, scrapping, or other disposal of the assets. X has not received consideration for allowing other entities to use Lot B for grazing and therefore, the activity of allowing other entities to graze their livestock on Lot B is not an enterprise because there would be no expectation of making a profit. X carried on a farming business on the land from which Lot B was created and the sale of their interest in that lot will be something they do in the course of the termination of that enterprise. Therefore, the sale of their interest in Lot B will be a supply made in the course or furtherance of an enterprise that they carry on. Hence, the requirement of paragraph 9-5(b) of the GST Act is met. X is not registered for GST. We shall now determine whether they will be required to be registered for GST when they sell their fractional interest in Lot B. In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if: (a) it is carrying on an enterprise, and (b) its GST turnover meets the registration turnover threshold of $75,000 Subsection 188-10(1) of the GST Act states: You have a GST turnover that meets a particular *turnover threshold if: (a) your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or (b) your projected GST turnover is at or above the turnover threshold. Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than: a) supplies that are *input taxed; or b) supplies that are not for *consideration; or c) supplies that are not made in connection with an *enterprise that you carry on. Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months, other than: a) supplies that are *input taxed; or b) supplies that are not for *consideration; or c) supplies that are not made in connection with an *enterprise that you carry on. Paragraph 188-25(a) of the GST Act provides that your sale of a capital asset is disregarded in calculation projected GST turnover. Paragraphs 31 to 35 of Goods and Services Tax Ruling GSTR 2001/7 distinguish between capital assets and revenue assets. They state: 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47. MT 2006/1 provides guidance on the meaning of revenue assets and capital assets. Paragraphs 262 to 264 of MT 2006/1 discuss one-off or isolated real property transactions and provide guidance on determining whether such a transaction is the sale of a revenue asset or instead a capital asset. 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.) 264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( 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. 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. 266. 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 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. None of the factors in paragraph 265 of MT 2006/1 are present in relation to X's subdivision of the property they acquired in a certain year. Considering the fact that X held the land from which Lot B was subdivided as a capital asset, and the factors in paragraph 265 of MT 2006/1, and the small scale and low level of complexity of the subdivision, we consider that X's supply of a fractional interest in Lot B will be a sale of a capital asset rather than a trading asset. Therefore, X's sale of their fractional interest in Lot B will be excluded from their projected GST turnover calculation. Therefore, as they are not earning income from any enterprise, they will not be required to be registered for GST when they sell their interest in Lot B because their GST turnover will be zero. As X is not registered or required to be registered for GST, they do not meet the requirement of paragraph 9-5(d) of the GST Act. Y has not received consideration for allowing other entities to use Lot B for grazing and therefore, the activity of allowing other entities to graze their livestock on Lot B is not an enterprise because there would be no expectation of making a profit. Y did not carry on any enterprise on Lot B as an individual. Therefore, their sale of their fractional interest in Lot B will not be a supply made in the course or furtherance of an enterprise that they carry on. Hence, they do not meet the requirement of paragraph 9-5(b) of the GST Act. Therefore, GST will not be payable on the sale of Lot B as not all of the requirements of section 9-5 of the GST Act are met.