Private ruling: GST and the sale of vacant land
Date of advice: 20 April 2018
Published: July 2018

Ruling: Q1: Will the sale of the proposed Lot X, be a taxable supply 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: In 19XX a couple purchased two adjacent properties located in Australia. They built a house on Lot X and operated a farm on the balance of the land. The couple had a child, who is the applicant for this ruling. In 19XX Lot X was subdivided into Lot Y and Lot Z. You, the applicant acquired Lot X from your parents and built your family home on that lot. The other lot remained with your parents and in 19XX they built a house on the Lot and moved into the house and rented out the house on other lot where, their previous home was located. In February 20XX your father died and his interest in their lots passed to his wife, (your mother). She continued to live in their house however she ceased the farming business. In 20XX your mother moved into a nursing home and her house remained vacant until mid-20XX when it was rented out. At this point your mother owned the two lots. You then began discussions with a developer, in regards to the sale of your property. On ddmmyyyy your mother entered into a Deed of agreement with the Developer whereby he had first right of refusal on any future sale of your mothers property. On ddmmyyyy you sold your property to the developer. On ddmmyyyy you inherited your mothers properties You then rented out the houses on these lots. Your neighbour, whose property was being developed approached you to purchase your property. You advised them that you did not want to sell all of the land in both blocks and proposed that you might consider a sale of a portion of your land if the lots could be reconfigured into two new lots, and that you would retain the resulting proposed Lot 1. The neighbour requested an entity to prepare a subdivision proposal and gave you a copy of the subdivision plan. The lot you had sold the developer earlier was located within the new proposed Lot 1. You advised the Developer that you had been approached by your neighbour as they had first right of refusal. You then began discussions through your lawyers around a proposal for a sale to the developer of the proposed Lot 2. The sale price you agreed on was $XX.00 plus the supply of the lot you had previously sold to the developer. Under the sale contract for the proposed Lot X you will give permission to the developer to enter your property to enable him to prepare the subdivision plans to submit to the council.

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 Section 9-20 and | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40.

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 legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act Section 9-40 provides that you must pay GST on any taxable supply. Section 9-5 of the (GST Act provides that you make a taxable supply if: a) you make the supply for consideration b) the supply is made in the course or furtherance of an enterprise that you carry on c) the supply is connected with the indirect tax zone (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. For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In your case you will be selling the proposed Lot X for consideration and is connected with Australia. Therefore, paragraphs 9-5(a) and (c) of the GST Act are satisfied. In addition the supply of the vacant lot in your proposed factual situation will neither be GST-free or input taxed. Accordingly, we must determine whether a) Your sale of the proposed lot X will be in the course of a property development enterprise you are carrying on and b) If so whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: The term ‘carrying on an enterprise’ is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise. Section 9-20 of the GST Act relevantly defines enterprise to include an activity, or series of activities, done: ● In the form of a business ● In the form of an adventure or concern in the nature of trade or ● On a regular or continuous basis, in the form of a lease, license or other grant of interest in property Under your proposal the new lot includes part of the land that used to include a house although the house is not on area of the proposed lot X. Therefore the sale of the new lot will be in the course of your rental enterprise and it is necessary to consider whether the proposed subdivision of the existing lots and subsequent sale of the proposed Lot X constitutes a new enterprise. The ATO view on the meaning of the term ‘enterprise’ is explained in detail in 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’ (MT 2006/1). MT 2006/1 at paragraph 154 provides: 154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise. It is necessary to consider whether your subdivision activities are in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. The issue is whether the property has been changed to a revenue asset as a result of your decision to sell a portion of your property. Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of ‘an adventure or concern in the nature of trade’ where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal. Paragraph 237 of MT 2006/1 provides that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a “business deal.” 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. 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.” Paragraphs 178, 252 and 265 set out a number of factors that can be looked at to determine whether a particular set of activities amounts to an enterprise. Of the factors set out in these paragraphs the following factors are considered important in determining whether your activities amounted to an adventure or concern in the nature of trade and therefore an enterprise for GST purposes. ● Has there been a change in use or purpose of the land. ● Is there a profit making intention ● The level of pre-planning and development activity of the land including that to meet Council requirements ● Did the activities improve the property beyond preparation for sale | Detailed Reasoning - Has there been a change in use or purpose of the land: You acquired the existing Lots as an inheritance. It had been in the family for some 50 years. It is acknowledged that at the time of acquiring the property, these assets were capital in nature in that they were in part used in your leasing enterprise. You were approached by various parties including a developer to sell the whole property. You did not want to sell the whole property and so you proposed a subdivision to create the proposed Lot X for sale to the developer, and buying back the existing lot Y from the developer. You took this action for family reasons. We consider that on this basis there has been no change in purpose for your land merely the realising of a portion of your property. | Detailed Reasoning - Is there a profit making intention: In entering into this arrangement you will make a significant profit. However you did not seek out the sale of your land. We consider that the motive was driven by private reasons rather than a profit making motive. | Detailed Reasoning - The level of pre-planning and development activity of the land including that to meet Council requirements: You will not undertake any development activities on the proposed Lot 2 and this land will be sold to the developer prior to development commencing. We do not consider that where you allow the developer earlier access to the land for the purpose of preparing the re-configuration of the lots for the proposed subdivision for sale to the developer constitutes development activity on your part. | Detailed Reasoning - Did the activities improve the property beyond preparation for sale: In your case you did not undertake preparatory activities to develop the land prior to sale of proposed Lot to the developer. | Detailed Reasoning - Conclusion: We have reviewed your proposed subdivision and considered the following factors important. ● There has been no change in use or purpose of the land ● The sale process was not driven by a profit making motive and you did not prepare the property for sale or actively seek a purchaser ● There has been minimal pre-planning and you will not be conducting any development activity ● The activities are limited to subdividing your existing lots into the proposed Lots X and Y and the subsequent sale of Lot X. The activity is minimal. Based on a consideration of all relevant factors we consider that your activities do not constitute the carrying on of an enterprise of land development in the nature of trade. As we consider that the sale is not in the course of a property subdivision enterprise, you are not required to be registered for GST in relation to that activity. As you do not meet the criteria for 9-5 your supply will not be a taxable supply and you will not be liable for GST on the sale of the property in this factual scenario.