Private ruling: GST and carrying on an enterprise
Published: July 2011

Ruling: Q1: Are you required to remit goods and services tax (GST) in relation to the supply by way of sale of the subdivided lots? | A1: Yes.

Relevant facts and circumstances: · The entity (You) is not registered for GST, but you currently hold an Australian business number (ABN). · You acquired a property some years ago. · You were registered for GST for the period in relation to income from the agistment and raising of livestock conducted by yourselves and another entity on the Property. · The Property contains your main residence plus pastoral land. · The Property is recorded on your balance sheet. · You have determined that a portion of the Property is to be sold. · You are acting on advice that the best way to realise a return from the Property would be to sell it or to subdivide and to dispose of the subdivided lots by way of sale. · You previously attempted to sell the Property as a whole and when that failed you entered into negotiations with developers to develop it. These negotiations were not successful due to the total cost of the development continuing to increase which impacted the return that you would receive. · You have engaged Entity B to develop and sell a portion of your Property as residential lots. · Your respective partners are the sole shareholders and sole directors of Entity B. · Entity B is registered for GST. · Entity B has been engaged by you to develop the Property on commercial terms in accordance with the Development Agreement (Agreement). · Entity B is responsible for all aspects of the development (Development) and sale of the lots including engaging consultants and construction experts, engaging construction companies and real estate agents and are responsible for all fees associated with those engagements. · You advise that you are not personally involved in the Development of the Property as Entity B engages consultants and contractors to undertake the work, including undertaking significant borrowings to finance the development. · You incurred minimal costs in respect of obtaining development approvals in respect of the Property. These costs were incurred prior to Entity B's establishment. · You have not previously engaged in property development and have no prior experience in this area and nor do you intend to engage in such activities in the future. · You advise that your purpose in undertaking the Development is maximise the greatest benefit from the Property. Development Overview · The property comprises a total of X acres. · You are intending to sell a portion of the Property. · You advise that the work undertaken by Entity B is limited to that required for Council approval. · Entity B is responsible for the management and administration of the Development including: o the sale and development of the lots o engaging, instructing and supervising any and all consultants to assist with and carry out the Development o apply for, obtain and carry out/satisfy the conditions of any and all approvals required for the Development o supervise the design, development works, completion and sale of the lots in accordance with the Agreement, and o attend to any and all things necessary to finalise the Development and sale of lots approved for sale. · You further advise that under the terms of the Agreement Entity B is responsible for all aspects of the development including: o entering into arrangements to procure the development of the Property o applying for planning permits and other development consents o procuring funding for the Development o entering into or procuring the entering into contracts of sale with third party purchasers o subdividing and selling the Property o distributing the Development cash flow o managing the Development o the preparation of the budget and business plan and feasibility for the Development and are responsible for all actions associated with same o obtaining all development/planning permits and consents from all relevant authorities for the Development o controlling, administering, directing and conducting all activities necessary or desirable to carry out the Development or ancillary to carrying out the Development including obtaining the Approvals and appointing and procuring all Consultants (including agents), and o marketing and selling the lots. · The original cost of the Development was budgeted to be in the amount of $Y but the costs have increased. · All costs incurred in the Development have been paid for by Entity B. · The loan for the Development has been taken out by Entity B. A charge has been registered over the entity as security for the loan. You have provided personal guarantees in respect of the loan. · No guarantees have been provided by you in relation to third party contractors. · You have not claimed any interest expenses in relation to the purchase of the property since you acquired it. · You have not claimed any interest expenses or other expenses in respect of the Development. · You as the landowners are required to enter into the land contracts with the third party purchasers as directed by Entity B pursuant to the Agreement. · To date a number of contracts for the sale of the lots of land have been entered into the prices for each are above the GST registration turnover threshold. A developer fee will be payable in respect of the proceeds from the Development.


Reasons for decision: Summary: The supply of the subdivided lots is made in the course of your land development enterprise as your activities amount to more than a mere realisation of a capital asset. | Detailed Reasoning - Detailed reasoning: Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make. A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. This section 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. (* denotes a term defined in section 195-1 of the GST Act) In your case, the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied as the supply of the subdivided lots will be for consideration and the supply is connected with Australia as the subdivided lots are situated in Australia. Your supply of the subdivided lots is neither GST-free not input taxed under the GST Act or any other Act. Therefore, what needs to be determined is: · whether the sales of the subdivided lots will be in the course or furtherance of an enterprise that you carry on, and · whether you are required to be registered for GST. | Detailed Reasoning - Whether the sales of the subdivided lots are in the course or furtherance of an enterprise that you carry on: The term enterprise is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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; … Miscellaneous Taxation Ruling MT 2006/1 considers the meaning of the word 'enterprise' for the purposes of entities' entitlement to an ABN. Goods and Services Tax Determination GSTD 2006/6 confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes. Paragraph 153 of MT 2006/1 provides that an entity can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term activity or series of activities for an entity can range from a single undertaking including a single act to groups of related activities or to the entire operations of the entity. MT 2006/1 provides that ordinarily, the term business would encompass trade engaged in, on a regular or continuous basis. However, an enterprise can incorporate a single undertaking such as the acquisition, development and sale of real property. Paragraph 244 of MT 2006/1 states: 244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. 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. Entity B is in the process of subdividing a portion of the Property into a number of lots which are to be disposed of individually. Apart from this arrangement with Entity B through which the Development is undertaken, you have provided that you have not subdivided or developed any other properties before and nor do you intend to. Based on the information provided, we consider that you are not carrying on a property development business as you are not engaged in developing properties on a regular or continuous basis. However, it remains to be considered whether your property development activities amount to an isolated transaction that is an enterprise in the form of an adventure or concern in the nature of trade. Isolated transaction and sales of real property Paragraphs 262 to 302 of MT 2006/1 deal with isolated transactions and sales of real property. The ruling explains that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset. Paragraph 265 of MT 2006/1 provides guidance for determining whether the activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. This paragraph states: 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. MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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 Casimaty the taxpayer acquired a farming property on which he erected a homestead and conducted a primary production business. Because of growing debt and ill health, the taxpayer had to subdivide and sell off a large part of the property. In all, there were a total of eight separate subdivisions. The proceeds from the subdivisions and sales were held not to be assessable as there was no change of purpose for which the land was held. The taxpayer acquired and continued to hold the property for use as a residence and the conduct of the business of primary production. A related consideration was the fact that the land was developed and subdivided on a piecemeal basis in response to the exigencies of increasing debt and deteriorating health. No coherent plan was conceived at the outset for the subdivision of the whole property, even in stages, to maximise the return from the aggregate for the individual lots. Accordingly, the subdivisions were considered to have occurred as part of the mere realisation of a capital asset. In Statham the appellants were the trustees of the deceased who had acquired a farm to raise his family there and engage in farming. There was never any intention of selling for a profit. The deceased's health deteriorated and he had various employment transfers and it was decided to subdivide and sell the land. It was held that the way in which the subdivision and sale of the land progressed was simple and had few of the hallmarks of a business enterprise for a number of reasons including: · the owners were at first content to sell the land as one parcel, but were unable to do so · no moneys were borrowed by them, although a guarantee was provided to the relevant council by way of bank guarantee · only very limited clearing and earthworks were involved · the owners relied upon the council to carry out road works, kerbing, electricity and sewerage works which were required to be done · apart from the council's activities, the owners did not engage any contractors, although they did obtain some professional advice · the owners did not erect buildings on the land · they had no business organisation, no manager, no office, no secretary, and no letterhead. We consider that the facts of your case can be distinguished from those in Statham and Casimaty as outlined below. MT 2006/1 provides that 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. However, the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of subdivision, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade. You advised that you acquired the Property some years ago and have lived there as your principal place of residence. You also conducted an enterprise on the Property in the form of an entity. You recently cancelled your GST registration in relation to the business but you have retained your ABN. The Property is listed on your balance sheet. In order to undertake the development of the Property you have set up Entity B as the entity through which you are carrying on the Development. The structure is such that you are performing what Entity B is doing as your respective partners are Entity B's sole directors and shareholders. Consequently, any reference to Entity B having developed the Property is effectively a reference to you. | Detailed Reasoning - Relevant factors from Statham and Casimaty: There has been a change in the purpose for which the Property is held as you intend to sell off a portion of the Property as subdivided lots. The Property was brought into your business accounts. You through Entity B as the business organisation have done the following: · Have developed a coherent plan for the subdivision of the Property which is to maximise the return from each individual lot. · Have and are developing the Property in an organised and professional manner relying on consultants and contractors to provide the necessary expertise and facilitate the successful completion of the development. · Have whilst only doing that which is required by Council to develop the Property built access roads and installed the necessary services. · Have borrowed/risked large sum of money to finance the project. You are providing warranties in relation to the borrowings costs and consequently bearing the risk. For the above reasons, we consider that as your activities have a commercial flavour they go beyond a mere realisation of a capital asset. We consider that your activities have changed the character of the subdivided portion of the Property from a capital asset into a trading asset. Therefore, it is considered that you are carrying on a land development enterprise. Accordingly, the supply of the subdivided lots is made in the course or furtherance of your land development enterprise. Consequently, the requirement of paragraph 9-5(b) of the GST Act is met. | Detailed Reasoning - Whether you are required to be registered for GST: An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of the GST Act. This section 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. Carrying on an enterprise As explained above, you are carrying on a land development enterprise. Therefore, you satisfy paragraph 23-5(a) of the GST Act. Whether your GST turnover meets the registration turnover threshold Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets the registration turnover threshold if: (a) your current GST turnover is $75,000 or more, and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or (b) your projected GST turnover is $75,000 or more. Subsection 188-15(1) of the GST Act provides that your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month. Subsection 188-20(1) of the GST Act provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months. However, the following supplies are excluded from the calculation of both current and projected GST turnovers: · supplies that are input taxed · supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act) · supplies that are not made in connection with an enterprise that you carry on · supplies that are not connected with Australia · supplies that are connected with Australia because of paragraph 9-25(5)(c) of the GST Act · supplies (other than those mentioned in the immediately preceding two dot points) of a right or option to use commercial accommodation in Australia where the supplies are not made in Australia and are made through an enterprise that the supplier does not carry on in Australia, and · supplies made from one member of a GST group to another member of that GST group. Additionally, section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made or likely to be made by you: · by way of transfer of ownership of a capital asset, or · solely as a result of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise. Trade v capital asset You submitted that even if you are carrying on an enterprise, your turnover will not meet the GST registration turnover threshold, as the sales of the subdivided lots will be the sales of capital assets. The meaning of capital assets is discussed in paragraphs 31 to 36 of Goods and Services Tax Ruling GSTR 2001/7. GSTR 2001/7 provides that the GST Act does not define the term capital assets. Generally, the term capital assets refers to those assets that make up the profit-yielding subject of an enterprise. They are often referred to as structural assets and may be described as the business entity, structure or organisation set up or established for the earning of profits. A revenue asset on the other hand, is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. That is, 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 nature even if such a disposal is an occasional or one-off transaction. In your case, the supply of the subdivided lots is inherent in carrying on your land development enterprise. As stated earlier, your activities change the character of the land on which the development has occurred capital asset into a trading asset, although you have been carrying on a farming enterprise. Therefore, the supply of the subdivided lots is not a transfer of capital assets as you are not supplying the Property that has been used in your farming enterprise in its entirety. You are supplying subdivided lots which have taken on the character of trading assets. Furthermore, the supplies are not made solely as a consequence of ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of your enterprise. Accordingly, the sales of the subdivided lots are not disregarded under section 188-25 of the GST Act when calculating your projected GST turnover. Supply of the subdivided lots Therefore, the GST exclusive amount of the sale price of the lots are included when working out your current and projected GST turnovers. Each of the subdivided lots is to be sold for more than the GST registration turnover threshold. Accordingly, where at a time during a particular month you expect to sell a subdivided lot either during that month or the following X months, your projected GST turnover would meet the registration turnover threshold of $75,000. At that point in time, you will become required to be registered for GST and the requirement of paragraph 23-5(b) of the GST Act will be satisfied. As both requirements of section 23-5 of the GST Act will be satisfied at that point in time, you will become required to be registered for GST. Consequently, the requirement of paragraph 9-5(d) of the GST Act will be met. In summary, the sales of the subdivided lots meet the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act. Therefore, the sales are taxable supplies. You are liable to pay 1/11 th of the sale price of each proposed vacant lot as GST. | Detailed Reasoning - Margin Scheme: Where a sale of a real property is a taxable supply, the sale may be made under the margin scheme pursuant to Division 75 of the GST Act if certain requirements are met. For further information on margin scheme, please refer to the following publications: · GST and the margin scheme (NAT 15145), and · Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000.

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