Private ruling: Goods and Services Tax and property subdivision
Date of advice: 15 December 2017
Published: May 2018

Ruling: Q1: Are you required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to the property subdivision? | A1: No, you are not required to be registered for GST pursuant to section 23-5 of the GST Act in relation to the property subdivision.

Relevant facts and circumstances: You are a retiree and not registered for GST purposes. You advised you have not previously been involved in property subdivision or development. You purchased a dwelling (the property) in late 200A with an investment loan, as joint tenant with your child. The dwelling was your child’s main residence for a period of less than four years, ending in early 201B. The dwelling has been rented out since that time but is now rundown and vacant and is listed on the market in its current state. You have not received any offers to purchase the property in its present state. You received advice from your real estate agent that the sale of the property could be more profitable if you demolish the existing dwelling and subdivide the land and estimate that the market value of the cleared, un-subdivided block with the dwelling removed to be between $X amount - $X amount. You estimate the market value of the cleared land, subdivided into two allotments to be $X amount - $X amount per block. You have engaged surveyors in relation to the subdivision works but have not engaged the services of a project manager or property developer. You approached your local Council (Council) for information about how to subdivide the land and were granted development consent to subdivide the block into two equal lots measuring Xm 2 each in late 201C. The conditions listed in the Development Approval were that: ● The subdivision be completed in accordance with the plans provided by the surveyor as part of the application. ● Existing structures be removed from the proposed allotments. ● Financial requirements in relation to the provision of water and sewerage by your State Water Authority. ● Water piping which crosses the allotment boundaries be severed or redirected (at your expense). ● Payment of $X amount per allotment to be made to the Planning and Development Fund. ● A final plan to be lodged with the Development Assessment Commission for Division Certificate purposes. You will not undertake any additional works or construct any new buildings or structures on the lots before they are sold. Your estimated costs of the subdivision would be $X amount for demolishment costs of the existing dwelling and $X amount for subdivision costs. You estimate that you will yield approximately $X amount more from the sale of the subdivided lots than you would have if you sold the land as a whole. You intend to finance the subdivision costs from your own finances, as they arise. The subdivided blocks will be marketed and sold by a real estate agent.

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 Paragraph 9-5(a) | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-5(c) | A New Tax System (Goods and Services Tax) Act 1999 Section 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 188-25

Reasons for decision: Summary: In the reasoning for the question, unless otherwise stated, ● all legislative references are to the GST Act ● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act | Detailed Reasoning - Will your supplies of the two subdivided lots be taxable supplies pursuant to section 9-5 of the GST Act?: You are an entity for the purposes of the GST Act and will be liable for GST on any taxable supplies you make. Section 9-5 provides that 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 the indirect tax zone; 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 supply two subdivided lots for consideration and the lots are connected with Australia as they are located in the indirect tax zone (Australia). | 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 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 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 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 used in your licensing activities, (excluding your home) has been changed to a revenue asset as a result of your decision to undertake development activities on your land. 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. Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. There are number of cases and rulings that point to indicative factors that are relevant for consideration. ● Statham & Anor v. Federal Commissioner of Taxation ; (89 ATC 4070); (20 ATR 228) (Statham) ● Casimaty v. FC of T ;; (1997) 151 ALR 242 (Casimaty) ● Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (82 ATC 4031) (Whitfords Beach); ● McCorkell v. Federal Commissioner of Taxation - (28 July 1998) (28 July 1998) (McCorkell); ● FCT v The Myer Emporium Ltd (1987) 61 ALJR 270 (Myer) 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. Gibbs CJ in Whitfords Beach says in his opening statement: A profit made on the sale of an asset may be treated as assessable income within the Income Tax Assessment Act 1936 (Cth.) as amended (``the Act'') for one of a number of reasons. In the first place, if the profit should be regarded as income in accordance with the ordinary usages and concepts of mankind, it will be assessable income within sec. 25(1) of the Act. When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in Californian Copper Syndicate v. Harris (1904) 5 Tax Cas. 159, at p. 166, that have so frequently been quoted, ``what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business''. Paragraph 31 of Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’, as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations. The following factors are considered important in determining whether your development activities conducted on your property, previously used in your licensing activities, are an adventure or concern in the nature of trade and therefore an enterprise for GST purposes: ● The level of pre-planning and development activity on the land including that activity necessary to meet Council requirements ● Has there been a change in use or purpose of the land? ● Are the activities systematic, organised and carried on in a business-like and commercial manner? ● Size and scale, involvement, and risk; and ● Relevant knowledge or skill. The level of development in your case is to be contrasted with that undertaken in Statham and Casimaty where it was said: Statham case The following matters are significant: (a) the owners were at first content to sell the land as one parcel, but were unable to do so; (b) no moneys were borrowed by them, although a guarantee was provided to the Kingaroy Shire Council by way of bank guarantee; (c) only very limited clearing and earthworks were involved; (d) the owners relied upon the Kingaroy Shire Council to itself carry out road works, kerbing, electricity and sewerage works which were required to be done Casimaty case …The applicant deposes that the only works carried out to prepare the land for sale were the construction of an internal road, Opus Drive; the provision of water services, farm fencing all boundaries and the extension of the water main from Seven Mile Beach Road to the area of the subdivision. | Detailed Reasoning - Requirement to register for GST: Under section 23-5 you are required to be registered for GST if you are carrying on an enterprise (and your GST turnover meets the registration threshold). Section 23-5 requires you to be registered for GST if: a) you are carrying on an enterprise, and b) your GST turnover meets or exceeds the registration turnover threshold. (The current registration turnover threshold is $75,000) You are currently not registered for GST. Based on the information provided in your ruling application, we have assumed that your planned subdivision and sale of the subdivided lots will exceed the GST turnover threshold of $75,000. | Detailed Reasoning - Application to your situation: In your case, you advise that you have not previously been involved in property development. You have owned the property for approximately 11 years. For the first few years of the ownership period, the dwelling was the main residence of your child, the other joint owner. The property has been used to produce rental income for the remainder of the ownership period. You intend to demolish the building and subdivide the land into two equal lots. The conditions required for the Development Approval are minimal and you will not build new dwellings, fences or structures on the subdivided lots before they are sold. You have not taken out finance in relation to the subdivision, and intend to meet costs as they arise from your savings. You will not be involved in any of the subdivision works yourself. The lots will be marketed and sold by your real estate agent. While you estimate that you will yield approximately $X amount more from the sale of the subdivided lots than you would have if you sold the land as a whole. You did not originally purchase the property with the intent of subdivision and have held the property for a significant period of time, the greater part of which it has been used to produce assessable income. Accordingly, the sale of the subdivided lots will represent the mere realisation of a capital asset. The capital nature of the development is relevant only to this particular scheme of subdivision. If you were to engage in further land purchase, subdivision and sale in future, it is likely that it would be considered to be on revenue account.