Private ruling: GST and supply of subdivided land
Published: March 2014

Ruling: Q1: Is the supply of the subdivided land a taxable supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | A1: Yes | Q2: Where the supply is subject to goods and services tax (GST) can you apply the margin scheme on the sale of the subdivided land? | A2: Yes

Relevant facts and circumstances: You are an individual and are not registered for GST. You are an employee and have not been carrying on any enterprise. You are close to retirement age You bought a block of land of located in Australia (the land). The settlement on the land occurred recently. There was no GST on the purchase of the land. The land is not farm land, it is residential and surrounded by other residential premises. You intend to subdivide the front section of approximately xxx sq. m of the land and sell while retaining the back section of approximately yyy sq. m of the land to build your home. The cost of the subdivision is estimated at $xxxx, a substantial amount. There are a number of reports and surveys required by Council, including Further Council requirements advised as likely conditions of final approval: n Payment of full costs for additional line marking on roadway to improve traffic management for intersection and provide safe egress from the block n Extension of sewer line to the proposed second lot n Installation of stormwater management works under proposed driveway to second lot and on-site hydraulics management (gravel pit etc.) n Provision of additional electricity supply pole to manage the overhead line to the neighbouring house (supply currently loops across the vacant block) n Provision of underground electricity supply to the proposed second (back) lot The subdivision costs will be financed from the sale of an investment property that you have has previously owned elsewhere. You have already begun the works required for the approval of the subdivision. The fund of the sale of the front parcel of land will be used to top up your superannuation for your retirement. However, if you decide that your super is sufficient you will not sell the land and will wait to sell in the future.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 75-5 | Section 75-11

Reasons for decision: Summary: The supply of the subdivided land is a taxable supply and the sale is subject to goods and services tax (GST). | Detailed Reasoning - Detailed reasoning: Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act sets out 4 criteria required for a supply to be a taxable supply. Under this section, you make a taxable supply if: 1. you make the supply for consideration 2. the supply is made in the course or furtherance of an enterprise that you are carrying on 3. the supply is connected with Australia, and 4. you are registered or required to be registered. However, your supply is not a taxable supply to the extent that it or GST-free or input taxed. The sale of the front parcel of land (the property) will be a taxable supply and subject to GST if all the requirements of section 9-5 of the GST Act are met. A supply is not a taxable supply unless all of the criteria above are met. In your circumstances, the supply (sale) of the property will be made for monetary consideration. The supply of the property will be connected with Australia as the land is situated in Australia. Before determining whether the sale of the property will be a taxable supply and therefore subject to GST, it is necessary to determine what is provided from you, the supplier, to the recipient following the sale. | Detailed Reasoning - Supply: For there to be a taxable supply, the pre-requisite is that, there must be a supply for the purposes of GST. Supply is defined in subsection 9-10(1) of the GST Act to mean 'any form of supply whatsoever.' Subsection 9-10(2) of the GST Act provides a non-exhaustive list of things considered to be supplies for GST purposes. This list, in paragraph, 9-10(2)(d), includes 'a grant, assignment or surrender of real property.' Real property is defined in section 195-1 of the GST Act to include 'any interest in or right over land. What you supply is a block of vacant land after the subdivision. Therefore, by disposing of the property, you make a supply under paragraph 9-10(2)(d) of the GST Act. | Detailed Reasoning - Is the supply of the property input taxed supply/GST-free: Generally, a sale of residential premises is considered under Division 40 of the GST Act and may be input taxed if certain requirements are met. If a supply is input taxed, then no GST is payable on the supply and there is no entitlement to an input tax credit for anything acquired or imported to make the supply. The definition of 'residential premises' in section 195-1 of the GST Act only refers to land or a building that is occupied as a residence. Vacant land, itself, can never have sufficient physical attributes to characterise it as being able to be, or intended to be, occupied as a residence. On the contrary, a supply of vacant land is not a supply of residential premises, therefore the supply of vacant land cannot be considered under Division 40 of the GST Act. The supply of your property is not input taxed under Division 40 of the GST Act or any other Act. There is no provision in Division 38 of the GST Act to make the supply of the property GST-free. The question remaining is whether the sale of the subdivided blocks of land satisfy the requirements of the GST Act in relation to paragraph 9-5(b) (carrying on an enterprise) and 9-5(d) (required to be registered for GST). | Detailed Reasoning - Are you carrying on an enterprise?: The term enterprise is defined in section 9-20 of the GST Act to mean: (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 (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or … An asterisk denotes a defined term in the Act Miscellaneous Ruling MT 2006 /1 provides the view of the Tax Office on whether or not an activity (or a series of activities) constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Goods and Services Tax Determination GSTD 2006/8 provides that the view of the Tax Office expressed in the MT 2006/1 can be equally applied to the meaning of enterprise under the GST Act. Of relevance to your circumstances is whether paragraph 9-20(1)(a) or (b) applies. That is whether your activities amount to carrying on a business or an adventure or concern in the nature of trade (in the form of). Generally, a business includes a trade that is engaged on a regular or continuous basis. The sale of the subdivided land involved business-like activities such as preparing the subdivision plans, applying for council permits and disposal. However, the activities are not repetitive and regular. Therefore, it is considered that you are not carrying on a business. Although the sale of the property is not considered to be a business, paragraph 234 of MT 2006/1 provides that an isolated or one-off activity may fall into the category of 'an adventure or concern in the nature of trade'. This category includes a commercial activity of a trading nature that does not amount to a business but which has the characteristics of a business deal. | Detailed Reasoning - An adventure or concern in the nature of trade: Paragraphs 235 and 237 of MT 2006/1 explain that: 235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income. 237. 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, see McClelland v. Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority, said: It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'. However, paragraph 244 of MT 2006/1 emphasises that: …However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature. The approach of the Tax Office on the question of 'whether an entity is carrying on an enterprise where there is one-off or isolated real property transaction' is expressed in paragraph 263 of MT 2006/1 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. | Detailed Reasoning - A mere realisation of a private asset?: It should be emphasised that only the character of the supply and how the supply is arranged are of importance to determine the liability of supplier under the GST legislation. In brief, the matter is whether the supply of your property is a mere realisation of a private asset or whether your activities go further than that. If your activities are to facilitate the sale of the property that you have acquired, it is a mere realisation of an asset; your activities do not amount to carrying on an enterprise in relation to the property. If your activities go further than facilitating the sale of the property you have acquired (i.e. taking into account all other factors), it may (in association with other factors) amount to an adventure or concern in the nature of trade. It can be concluded in your circumstances that when you sell the land without any further major works, the sale of the property would be a mere realisation of an asset and is not subject to GST. A mere realisation of an asset simply means the sale of the property you have acquired without any further activities or works done to change the character of the property. By subdividing the property into two blocks of vacant land, you have created new assets different from the asset you have acquired. It cannot be concluded that you merely realised an asset where the land you have acquired has been transformed into new assets (front and back lots). We need to consider other surrounding factors. | Detailed Reasoning - In the form of: Paragraph 170B of MT 2006/1 states that: 'The words "in the form of' have the effect of extending the meaning of enterprise beyond entities carrying on a business. An enterprise will include entities that carry out activities that, while they are not sufficient to meet the criteria for being regarded as a business, have the appearance or characteristics of business activities. For example, activities that, had they been undertaken for profit, would have satisfied the tests of a business. The effect of this is that many non-profit mutual organisations, clubs and associations will meet the definition of enterprise.' In your circumstances, the following factors are taken into account: • You acquired the whole land in 20xx, and held the whole land for a short period of time (you have commenced the subdivision process recently). • You will incur approximately $xxxx (a substantial amount) in costs to obtain Council's approval. The costs will be financed from the sale of an investment property you currently hold.. • The proceeds of sale will be used to top up your superannuation. You may sell the property later if your superannuation is sufficient. Your activities in relation to the subdivision are substantial, the total costs are considerable. Your activities are not different from the activities of a property developer. Although profitability is not the determinative factor, the potential for receiving a better price following the subdivision will add more weight to the conclusion that the activities were done in a business-like manner. You have an investment property and sold it to pay for the subdivision costs. You take the risk of financing the subdivision to increase the return on disposal by developing the property so as to get a better price for it. Otherwise, the expenses cannot be justified. You have provided that the proceeds of sale will be used to top up your superannuation. You will not commence the subdivision if this would not bring about a better financial outcome for the sale of the subdivided land (including taking into account the sale of the investment property). This indicates the subdivision is a profit-taking activity in the development of the land. The fact that you will sell the property now or later does not change your intention that the development is profit-taking activity. Your activities are inherently more than a mere realisation of a private asset. While the property was not acquired to make a profit, your development to facilitate disposal is certainly designed to increase the return over and above the mere sale of the whole land in one block. It is done in form of an adventure or concern in the nature of trade. Accordingly, you are carrying on an enterprise of land development under paragraph 9-20(1)(b0 of the GST Act. | Detailed Reasoning - Are you required to be registered for GST?: Pursuant to section 23-5 of the GST Act, you are required to be registered for GST if you are carrying on an enterprise and your annual turnover meets the registration turnover threshold, currently set at $75, 000. However, under section 188-25 of the GST Act, in working out your projected annual turnover, you disregard: (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and (b) any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an * enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise. ' There is no definition of a capital asset in the legislation and no explanation of the term in the Explanatory Memorandum. Accordingly, the term should acquire its ordinary usage meaning as an asset associated with the underlying business structure of an enterprise as opposed to the enterprise's business process. You are not involving a day to day business of trading in real property. Goods and Services Tax ruling GSTR 2001/7 explains how section 188-25 of the GST Act affects the calculation of projected GST turnover Paragraphs 33 and 34 of GSTR 2001/7 provide that: • an asset that is acquired and used for resale in the course of carrying an enterprise is not a 'capital asset' for the purposes of paragraph 188-25(a)'. • A 'revenue asset' is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. They state in full: '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'. You are carrying on an enterprise of one-off property developing as discussed above. You acquired the land and the purpose of your enterprise is ultimately to maximise return from the sale of the property. The land is held not to produce income; it is held to be sold (in part). It is considered that the nature of the property is not a capital asset because of the extent of the development works performed on the original asset to transform it into the nature of revenue. Furthermore, as you conducted the enterprise in land development, the sale (realisation) of the property is inherent in or incidental to the carrying on of an enterprise. In brief, as reasoned above, your activities amount to an adventure or concern in the nature of trade. The sale of the property is the sale of a trading asset even though it is a one-off transaction. It follows that the proceeds of the sale of the property must be included in your projected turnover. Considering the value of real property generally, your projected turnover is over the registration turnover threshold. Paragraph 188-25(b) does not apply in your circumstances simply because the sale of the asset is not a consequences of ceasing your enterprise. On the contrary, the sale of the asset in question is the reason for your enterprise. Once sold, your enterprise and the entity cease. You are currently not registered for GST; however you are required to be registered for GST if you are carrying on an enterprise and your turnover exceeds the registration threshold, currently at $75,000. Hence, you are required to be registered for GST as your projected turnover exceeds the registration threshold. In conclusion, as all the criteria of section 9-5 are satisfied, we confirm that the sale of the property in question is a taxable supply and therefore is subject to GST. The consequences are: 1. As you are the supplier, you will be liable for GST under section 9-40 of the GST Act. The GST amount is 1/11th of the selling price or the margin under the margin scheme (to be discussed in question 2). 2. You will be entitled to an input tax credit (ITC) on things acquired for your enterprise pursuant to Division 11 of the GST Act. That is, you can claim Input Tax Credits (ITC) for GST included in expenses incurred for the purposes of facilitating and selling the property. | Summary: You can apply the margin to calculate your GST liability on the supply of the subdivided land. The GST payable is 1/11 th of the margin of the supply. | Detailed Reasoning - Detailed reasoning: It has been discussed above that the supply of the subdivide land is a taxable supply under section 9-5 of the GST Act. Generally, under Subdivision 9-C of the GST Act, the GST payable on a taxable supply is 1/11 of the price of the supply However, Division 75 of the GST Act allows a supplier of a taxable supply of real property and the recipient of the taxable supply to use the margin scheme in working out the amount of GST payable on the supply. | Detailed Reasoning - Conditions for applying the margin scheme to your supply: To apply the margin scheme all of the following conditions must be satisfied • The supply is a taxable supply of freehold interest in land (paragraph 75-5(1)(a)). • Agreed in writing (as required under subsections 75-5(1) and 75-5(1A) of the GST Act). • Eligibility for the margin scheme subsection as required under subsection 75-5(2) of the GST Act and subsection 75-5(3) of the GST Act does not apply to exclude you from subsequent supply that is ineligible for the margin scheme You have advised that the subsequent sale of the land will meet all of the requirements under the above provisions of the GST Act - the supply of the land to you is a supply of freehold interest in land, - is not a taxable supply and GST was not paid on the supply of the land to you. - you and the prospective purchaser of the new residential premises agree in writing that margin scheme is to apply to the supply of the subdivided land. • None of the exclusion under subsection 75-5(3) applies to your acquisition of the (whole) land. Therefore, you can apply the margin scheme to the supply of the subdivided land. Under subsection 75-10(1) of the GST Act, the GST amount on the supply is 1/11 of the margin for the supply. Unser subsection 75-10(2) of the GST Act, the margin is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the land. As you will supply subdivided land rather than the whole land, section 75-15 of the GST Act provides that the consideration for the subdivided land is corresponding proportion of the consideration for the whole land. There are a number of apportionment methods to work out the proportion of the consideration for the acquisition (for the subdivided land) in GSTR 2001/8. A copy is attached.

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