Private ruling: Goods and services tax (GST) and the subdivision of real property
Published: January 2014

Ruling: Q1: Are you making a taxable supply when you sell the lots? | A1: Yes.

Relevant facts and circumstances: The Trustee for the Trust (You) is not registered for GST. You derive passive income. You purchased the property in Australia (property) with the intention of using the single existing house as a rental investment. The purchase is financed by a bank loan. At the time of purchase you were aware that the property could be subdivided into multiple lots. You spent an amount of money renovating the house to improve its rental yield. You received rent on the house for a number of years. You demolished the house and plan to subdivide the property into multiple lots and sell each lot as part of a house and land package. The properties will be advertised as house and land packages. There will be a single house and land contract with separate contracts for the sale of the land and the construction of the house by the builder. The contract will stipulate that you are only selling vacant land to the purchaser and that the purchaser is entering into a separate contract with a builder. You are only selling the land. The buyer is not obligated to sign with the builder. You will receive income on the sale of the land only. The Trustee is in the business of new house sales, has extensive knowledge on how to subdivide parcels of land and will be involved in finalising the subdivision. You will fund the subdivision through capital contributions from the Trustee or associates. The level of development consists of the approval to subdivide the block into multiple blocks. You have made the subdivision application with the Council. You are not associated with the builder.

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 Subsection 9-20(1), | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 and | A New Tax System (Goods and Services Tax) Regulations 1999­ Regulation 23-15.01.

Reasons for decision: Summary: In this ruling, please note: - All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise. - All terms marked by *asterisk are a defined term in the GST Act unless stated otherwise. You must pay the GST payable on any taxable supply that you make. Section 9-5 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. In your case, you will make a supply of land in Australia for consideration satisfying subsections 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in your circumstances. However, it is necessary to determine if the supply of the land is made in the course of an enterprise you carry on and if you are required to be registered for GST. | Detailed Reasoning - Enterprise: Subsection 9-20(1) states: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a *business; or (b) in the form of an adventure or concern in the nature of trade; or … 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) considers the meaning of carrying on an enterprise. Paragraphs 262 and 263 of MT 2006/1 state: | Detailed Reasoning - Isolated transactions and sales of real property: 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. ... Your proposed subdivision and sale of the property will be a 'one-off' or isolated real property transaction. Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade' and state: 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… 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. … 269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience… You have changed the purpose for which the land is held from a single residential rental property from which you receive rental income to multiple subdivided lots of vacant land to be sold as part of a new residential house and land package. You have a coherent plan for the subdivision of the land consisting of obtaining subdivision approval, organising the demolition of the house and arranging for the vacant lots to be advertised and sold under contracts for house and land packages. The Trustee has extensive knowledge on how to subdivide parcels of land and will be involved in finalising the subdivision. We consider that these factors indicate that the subdivision amounts to more than the mere realisation of a capital asset and that you are carrying on an enterprise. Therefore, you will satisfy paragraph 9-5(b) if you proceed with the sale of the land. | Detailed Reasoning - Registration: Section 23-5 states: You are required to be registered under this Act if: (a) you are *carrying on an *enterprise; and (b) your *GST turnover meets the *registration turnover threshold. The registration turnover threshold is currently $75,000. We have already established that you are carrying on an enterprise. Therefore, you will be required to be registered for GST if you sell the land for $75,000 or more, satisfying paragraph 9-5(d). As all the requirements of section 9-5 will be satisfied if you proceed with the sale of the land as outlined above, you will be making a taxable supply.