Private ruling: Goods and services tax (GST) and property subdivision
Date of advice: 8 September 2015
Published: September 2015

Ruling: Q1: Is GST payable on your sale of the subdivided lots to be created from lot X? | A1: Yes. | Q2: Can you use the margin scheme to calculate GST on your sale of the lots to be created from lot X? | A2: Provided that you and the purchasers agree in writing that the margin scheme is to be used, you can use the margin scheme to calculate the GST. | Q3: How do you calculate the margin for the sale of a subdivided lot for GST margin scheme purposes? | A3: The margin is the difference between your selling price and: (a) if you choose to apply an approved valuation to work out the margin for the supply - an approved valuation of the interest as at 1 July 2000; or (b) if paragraph (a) does not apply - the GST inclusive market value of the interest as at 1 July 2000.

Relevant facts and circumstances: The trustee for the individual X deceased estate trust (you) has been registered for GST from a certain date to the current time. On a certain date, individual X applied for a private ruling to determine the capital gains tax effects of a rural subdivision of lot X, which is located in Australia. The ATO response to the private ruling request stated that the sale proceeds of the development would be returned on a capital account. The ruling states: "In your case, you do not carry on a business of buying, selling or developing land. You purchased the property as farming land. You will have minimal involvement in the subdivision of the land and will only change the land to the extent that you are required to for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997." Subsequent to receiving the Private Ruling, individual X passed away on a certain date. Individual X was registered for GST from a certain date to the date of their death. The land previously held by individual X (which is approximately X hectares of land situated at a certain road) now forms part of the testamentary trust (name of trust) which was created by way of individual X's will. Individual Y is the executor and a beneficiary of the deceased estate. You have proceeded with the project in accordance with the facts outlined in that original ruling and the subdivided land is now ready for sale. You would now like to know the GST ramifications of the disposal of the individual land parcels within the development. The land is in 3 titles, lot X (X hectares), lot Y (Y ha), lot Z (Z ha). Individual X acquired the land in one transaction many decades ago. Lots X and Y were acquired as freehold land, and lot Z was acquired as leasehold land. Many years ago, lot Z was converted from leasehold to freehold. Title has remained in individual X's name since its acquisition and the land has not been sold or transferred in whole or in part since acquisition until their death. The land was originally purchased to carry on farming activity. Individual X actively farmed the land from a certain year until a certain year. From a certain year to a certain year the farm activities were the cultivation of crops and running livestock. In a certain year, the crop cultivation ceased and the livestock operation became the predominant activity on the land. During the decades of ownership, individual X has gradually cleared and pasture improved the land. Individual X has erected internal fencing, yards, and maintained good husbandry of the land. Lot Z is currently utilised as security for bank loans associated with off-farm investment assets. The balance of the land is unencumbered and there is no debt associated with the purchase of the land. In a certain year, individual X was diagnosed with a disease. Due to individual X's ill health, from a certain date, the land has been leased to a business that actively conducts a livestock raising operation. The decision to lease the land was brought about by individual X's ill health. Annual lease receipts are approximately (an amount that is below $75,000) per annum. Due to the ongoing diagnosis and treatment, a decision was made for individual X to retire and to sell the family farm. Due to the encroaching residential development surrounding the land, a strategy of subdividing the land was investigated and it was decided that a subdivision would be the best way for individual X to dispose of the land to maximise the return to the landholder. Individual X has not been involved in subdividing land in the past and has not been involved in any business connected with development of land. On a certain date, individual X entered into a Put and Call Option Deed with a developer (A) for the sale of the lots X and Y in one transaction. Due to council/planning outcomes, A did not exercise the option and the sale of land contract lapsed. Since a certain year, the local council has amended the local plan for the area, and the same developer has continued with applications and submissions for the subdivision of the site at its own cost and not subject to any agreement or understanding with individual X. Through the efforts of A, the council approved a subdivision of lot X into a number of lots. On a certain date, an agreement was entered into with A to progress the development of lot X only (the Development Management Agreement)(DMA). The intention of that agreement is to allow A to do all things to the land to capitalise on the subdivision approval and for individual X to deliver the land to sale. There is no current intention or plans to continue the development beyond lot X however it would be a logical progression that lot Y and lot Z would be developed at some stage in the future. Individual X's death, in addition to the encroaching residential development, would continue to be the main factors that would drive the future disposal of lot X and lot Y. The dividing line between the allotments X and Y and lot Z was the previous council area boundaries, with each of the allotments in different council areas (being X and Y). No additional land was acquired to be added to lots X, Y and Z. The land was held on capital account in the name of individual X. The only change in ownership was on individual X's s death. You now hold the land. The asset will not be brought to account as a business asset. A coherent plant exists for the development of lot X . Subject to the provisions of the Development Management Agreement, this plan is under the sole control and discretion of the developer. You are entitled to be informed of the plans. However, you are not involved in the decision making and are not entitled to a position on the Project Control Group. A level of business organisation or structure does exist in relation to the property subdivision. However, this is under the sole control and discretion of the developer. You are not part of that organisation structure. Funds will be borrowed by the developer to fund the construction costs associated with the subdivision. These borrowings will be in the name of the developer and they will be at the risk of the developer. You will not borrow any funds. You will consent to the developer using the subject property as security for the developer's borrowings. The interest on borrowed funds will be claimed as a business expense in the context of the developer only. You will not be claiming the interest expense as a deduction as it is intended that the sale proceeds be received on capital account. A has not done any additional development works on the land above that required under the conditions of the DA. However, under the development agreement you have with A, you must sign any consents or applications necessary to advance the project which may include additional works. No buildings are to be erected on the land other than a temporary site office to manage the marketing of the home sites. The subdivision will require headworks to be performed, including construction of access roads, curb and guttering, sewerage, water and electricity utility services. All roads external to the three lots will be constructed by Council. The internal roads will be constructed by A. (name of road) is an internal road as it separates lots X and Y. This is a gazetted road for future development purposes only and is not required for the lot X project. Its construction is dependent upon the development of lot Z which is on the southern side of (something). Individual X and A entered into a Development Management Agreement (DMA). The DMA states that individual X has agreed to appoint A to appoint and liaise with consultants and undertake works to develop the Land in such manner as A considers appropriate to permit realisation of the land. The DMA provides that A will take care of the subdivision project, including doing the following tasks: • Designing the proposed development. • Obtaining DA approvals. • Registering one or more plans of subdivision. • Engaging contractors to carry out the subdivision development work. • Marketing and arranging settlement of sale of the lots. Individual X agreed to pay A remuneration for these services, which the parties agreed would be worked out by reference to the net profit of the project. The DMA specifies that individual X and A are not in partnership. Lots X and Y are currently being leased to the livestock farmer and they will continue to be leased to the livestock farmer after the (number) allotments on lot X have been developed and sold.

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 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 25-57 | A New Tax System (Goods and Services Tax) Act 1999 Division 75 | A New Tax System (Goods and Services Tax) Act 1999 Division 188 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1 | Income Tax Assessment Act 1936 section 318

Reasons for decision: Summary: GST will be payable on your sale of the subdivided lots because: • you will sell the lots in the course of furtherance of a leasing enterprise that you carry on, and • the sales will be connected with Australia; and • you are registered for GST, and • your sales of the lots will not be GST-free or input taxed. | Detailed Reasoning - Detailed reasoning: GST is payable on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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 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. (*Denotes a term defined in the GST Act) The indirect tax zone is Australia. You meet the requirements of paragraphs 9-5(a), 9-5(c) and 9-5(d) of the GST Act. This is because: • you will sell the subdivided lots for consideration • the lots will be located in Australia, and • you are registered for GST. There are no provisions of the GST Act under which your sales of the subdivided lots will be GST-free or input taxed. Therefore, what remains to be determined is whether your sale of the subdivided lots will be supplies you make in the course or furtherance of an enterprise that you carry on. Enterprise includes: • an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act) • an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act) • leasing out property on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act). In accordance with section 195-1 of the GST Act, 'carrying on an enterprise' includes doing anything in the course of terminating an 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 states that MT 2006/1 can be relied on for GST purposes. Taxation Ruling IT 2622 explains that upon the death of a person, the property of the deceased passes to their estate, the legal control over which is exercised by an executor or an administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs. Therefore, it is considered that the winding up of an enterprise that the deceased carried on, performed by an executor or administrator upon the death of the deceased, will still be part of the carrying on of the deceased's enterprise. Paragraph 234 of MT 2006/1 distinguishes between the term 'business' and 'adventure or concern in the nature of trade'. It states: 234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. In accordance with paragraph 243 of MT 2006/1, the term 'trade' is used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services. Paragraph 35 of Goods and Services tax Ruling GSTR 2001/7 states: 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. Paragraph 258 of MT 2006/1 states: 258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. Paragraphs 262 to 266 of MT 2006/1 provide guidance on isolated real property transactions. 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. In Stevenson v Federal Commissioner of Taxation 91 ATC 4476, the case involved a property subdivision. The court considered that the subdivision was a business and it regarded as significant in arriving at this decision the land owner's high degree of personal involvement in the various stages of the subdivision process. Paragraph 254 of MT 2006/1 provides that an intention to resell an asset at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. Individual X held the land as a capital asset as they retained it for a very long period of time to use as an income producing asset on which they carried on their farming business. They also retained it to produce leasing income. Individual X did not acquire the land to resell. We shall now consider whether or not any of the factors in paragraph 265 of MT 2006/1 are present in your case. There will not be a change in purpose for which you hold the land (the current three lots were leased out to a farmer and the land remaining after the subdivision will continue to be leased out to a farmer). No additional land has been acquired to amalgamate with the original lots acquired for farming. Individual X held the land on capital account as they used the land as a capital asset of their farming business. You will not bring the land to account as a business asset of a property subdivision business. Therefore, we do not consider that the third factor in paragraph 265 of MT 2006/1 is present in your case because the land has not been recorded as a business asset of a property subdivision business. You do not have a coherent plan for the subdivision and sale of all of the land (lots X, Y and Z collectively). At this stage, you are only undertaking the subdivision of lot X. You will retain land remaining after the subdivision of lot X and sale of the lots created from lot X. There is no current intention or plans to continue the development beyond lot X, however, it would be a logical progression that lot Y and lot Z would be developed at some stage in the future. Individual X's death, in addition to the encroaching residential development, would continue to be the main factors that would drive the future disposal of lots Y and Z. If you later decide to subdivide lots Y and Z and sell the lots created from these lots, we consider that you will be disposing of the entire land in a piecemeal fashion. You have not established a business organisation (the developer will utilise its own business organisation to carry out the subdivision process, including the temporary on site sales office). You will not borrow any funds. The developer has not done any additional development works on the land above that required under the conditions of the DA. No buildings are to be erected on the land other than a temporary site office to manage the marketing of the home sites. Additionally, individual X had very little personal involvement with the subdivision process and you have very little personal involvement in the subdivision process. We do not consider that you are carrying on a property subdivision business or a property subdivision adventure or concern in the nature of trade because of the combination of the following factors: • Individual X did not acquire the land to resell. • Individual X acquired the land to use as a capital asset of their farming enterprise • There will not be a change in purpose for which the land is held. • No additional land has been acquired to amalgamate with the original lots acquired for farming. • Individual X held the land on capital account as they used the land as a capital asset of their farming business. • You will not bring the land to account as a business asset. • You do not have a coherent plan for the subdivision and sale of all of the land at the location in question. • You have not established a business organisation in relation to the subdivision project. • You will not borrow any funds. • The developer has not done any additional development works on the land above that required under the conditions of the DA. • No buildings are to be erected on the land other than a temporary site office to manage the marketing of the home sites. • Individual X had very little personal involvement with the subdivision process and you have very little personal involvement in the subdivision process. Based on the current circumstances, none of the factors in paragraph 265 of MT 2006/1 are present in your case. The sale of the subdivided lots to be created from lot X will be the mere realisation of a capital asset. If the developer does works that are additional to those that were required by Council to secure council approval, we still do not consider that the sale of the subdivided lots will be more than the mere realisation of a capital asset because this is the only factor listed in paragraph 265 of MT 2006/1 that would be present under such circumstances and: • the additional works would be done just to advance the subdivision; and • the DMA states that A will undertake works to develop the land in such manner as A considers appropriate to permit realisation of the land; and • no buildings are to be erected on the land other than a temporary site office to manage the marketing of the home sites; and • Individual X did not acquire the land to resell; and • Individual X acquired the land to use as a capital asset of their farming enterprise and • Individual X had very little personal involvement with the subdivision process and you have very little personal involvement in the subdivision process. In accordance with paragraph 75 of Goods and Services Tax Ruling GSTR 2003/13, we consider that the supply, sale or disposal of business assets will be in the course or furtherance of the enterprise in which those assets are used. Individual X used the land in their property leasing enterprise. This was their most recent use of the land. You are the trustee of a deceased estate. The sale of the lots to be created from lot X will be something done in the course of winding up individual X's property leasing enterprise. Hence, the sale of these properties will be supplies made in the course or furtherance of an enterprise you carry on. Therefore, you meet the requirement of paragraph 9-5(b) of the GST Act. As you meet all of the requirements of section 9-5 of the GST Act, GST will be payable on your sale of the subdivided lots to be created from lot X. | Detailed Reasoning - Ongoing GST registration requirements: In accordance with section 23-5 of the GST Act, an entity is required to be registered for GST if: • the entity is carrying on an enterprise, and • the GST turnover of the entity is $75,000 or more. To determine whether an entity's GST turnover exceeds $75,000, the past twelve month's turnover and projected twelve month's turnover must be considered. If an entity determines that their turnover for the current month and the next 11 months will probably be under $75,000, they are not required to be registered for GST. Projected turnover excludes sales of capital assets. Your sale of the lots created from the subdivision of lot X will be a sale of a capital asset and is therefore excluded from projected GST turnover. If you do not expect to earn any enterprise income in future other than the rent for leasing out the land at the location in question, you are not required to be registered for GST because your projected GST turnover would be under $75,000. For more guidance on calculating GST turnover, see Goods and Services Tax Ruling GSTR 2001/7. Type in GSTR 2001/7 into an internet search engine. Generally, a GST registered entity that is carrying on an enterprise but not required to be registered for GST must remain registered for GST for at least 12 months and you have been registered for GST for less than 12 months. However, you may apply for cancellation of your GST registration, and the GST registration section of the Australian Taxation Office (ATO) will consider your request at that time. In determining whether to allow the request, the ATO will consider the matters set out in subsection 25-57(2) of the GST Act. | Detailed Reasoning - Question 2: In accordance with subsections 75-5(1) and 75-5(2) of the GST Act, as you will be making GST taxable sales of freehold interests in real property and you did not acquire the freehold interests through a supply that was ineligible for the margin scheme, you and the purchaser can choose for the margin scheme to apply. You would need to agree in writing with the purchasers that the margin scheme is to apply in order to use the margin scheme. | Detailed Reasoning - Question 3: In accordance with subsections 75-11(6) and 75-11(6A) of the GST Act, the margin is the difference between your selling price and: (a) if you choose to apply an approved valuation to work out the margin for the supply - an approved valuation of the interest as at 1 July 2000; or (b) if paragraph (a) does not apply - the GST inclusive market value of the interest as at 1 July 2000. Goods and Services Tax Ruling GSTR 2006/8 and MSV 2009/1 set out rules for determining the valuation. Type in GSTR 2006/8 and MSV 2009/1 into an internet search engine.