Private ruling: GST and property development
Published: August 2013

Ruling: Q1: Will the subdivision and sale of blocks of land be an enterprise carried on by you? | A1: Yes. | Q2: Will the sale of some or all of the lots be taxable supplies? | A2: Yes. | Q3: Are you entitled to apply the margin scheme to the sale of the lots? | A3: Yes, provided certain conditions are met, and to the extent that the lots are taxable supplies.

Relevant facts and circumstances: You operate a real estate business. In 200X, you purchased a property on which there was a dwelling as well as a orchard ('Block 1'). You purchased Block 1 from vendors who were not registered for GST at the time of the sale. Settlement occurred in 200Y. The dwelling on Block 1 serves as your main residence. When you bought the property, you were aware that the land was already zoned to allow subdivision into smaller lots. You moved to Block 1 for lifestyle reasons, including its proximity to their business, schools, and the prospects of running the orchard and keeping livestock. After acquiring Block 1, you bought equipment for the purposes of continuing to grow and sell fruite. However, the orchard was not a profitable endeavour. You have since ceased this activity. Subsequently, the owner of an adjoining property made an application to subdivide their property. In 200Z, the neighbour approached you to suggest that you include Block 1 in their planned subdivision. The first local subdivision and infrastructure plan ('LSIP') was lodged with the local council in 200Z. You had very little involvement in preparing the LSIP, which was eventually rejected with a request that more land be included in the development, part of which was the back half of Block 1. In the meantime, another adjoining property came up for sale. If this property was sold to someone who did not wish to enter the planned subdivision, you would not be able to subdivide the back half of Block 1 as you had originally planned. You purchased the adjoining property ('Block 2') in 200V and settlement occurred later in 200V. There was no residence on Block 2. You purchased Block 2 from an entity, Company X, which was registered for GST at the time of sale. You informed that Company X was acting as mortgagee in possession in relation to the sale of Block 2. The mortgagor at the time was Company Y. At the time of sale, Company Y was not registered for GST. Your solicitor provided land transfer documents, statutory declarations and ABN register records as evidence of this. You also informed that you made enquiries regarding whether GST applied in relation to the sale of Block 2 and was advised by the seller that GST was not applicable. The local council approved the LSIP in 20XX. Under the LSIP, a conglomerate of blocks, including Block 1 and Block 2, will be subdivided into a number of smaller lots. Block 1 will be subdivided into x lots and Block 2 will be subdivided into y lots. You intend to retain z lots from Block 1 and one lot from Block 2 following the subdivision. One of the lots from Block 1 contains the existing residence. The other lots that you intend to keep surround the residence and therefore preserve your privacy. These will be retained for private and domestic purposes. You have no intention to re-commence your orchard activities, nor have you any current intention to sell those lots. The lots will remain separately titled and serviced with their own utilities. You intend to sell all of the remaining lots to unrelated parties. You market the blocks through your business. So far, you've incurred costs by engaging surveyors and consultants in relation to the development. You have also spent money on costs associated with providing roads, power and water to the subdivided lots. You estimate that you will incur significant further costs. These current and projected costs are yours alone. You do not share the costs with the adjoining properties that are also part of the LSIP. You have appointed your own project manager and contractors, who will work on Block 1 and Block 2 only. You borrowed money from a financial institution for the original purchase of Block 1 and another sum for the purchase of Block 2. A separate loan was taken to finance the purchase of the equipment used in the orchard. You estimate that you will borrow approximately x% of the development costs. The proceeds from the sale of the lot from Block 1 were used to repay some of your debt and to enable you to borrow more money to finance the further costs of the subdivision. You have not previously undertaken any similar property development activities. You will claim a portion of interest on the borrowings for the development expenses as a deduction, but not as a business deduction.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 sections 9-5; 9-20; 9-40; 75-5; and 105-5.

Reasons for decision: Summary: The development and subdivision of Blocks 1 and Blocks 2 will be in the course of carrying on a property development enterprise. | Detailed Reasoning - Detailed reasoning: The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 ('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;… * Denotes a term defined in section 195-1 of the GST Act. 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') discusses when an entity can be said to be carrying on an enterprise. Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? ('GSTD 2006/6') provides that the reasons in MT 2006/1 are considered to apply equally to the term 'enterprise' in the GST Act and can be relied on for GST purposes. Paragraph 154 of MT 2006/1 provides that it is necessary to identify one activity or a series of activities that amount to an enterprise. Paragraph 159 provides that whether or not an activity or series of activities amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case. Example 15 in MT 2006/1 provides that an activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if an enterprise has been carried on. Paragraph 244 of MT 2006/1 states: 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. 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 and 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. | Detailed Reasoning - Isolated transactions and sales of real property: MT 2006/1 provides guidance on whether an entity is carrying on an enterprise where there is a 'one off' sale of real property. Paragraph 266 of MT 2006/1 provides that 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. Paragraph 265 of MT 2006/1 states factors to consider when determining whether an isolated sale of real property is a business or a concern in the nature of trade. These are: · 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. In your case, there is a change of purpose for which the land is held, as you originally held the land for your private and domestic purposes and farmed a orchard from it. You acquired additional land to be added to the original parcel of land. There is a coherent plan to subdivide the land. There is not a business organisation, but you have engaged a project manager and contractors who will provide a level of business organisation during the course of the property development. Borrowed funds have heavily financed the acquisition and subdivision. The interest on the funds borrowed from the financial institution will be claimed as a deduction, but not as a business deduction. The level of development does not go significantly beyond the level required to secure council approval and no buildings have been erected on the land as part of the property development. In addition, you intend to make a profit from the sale of the lots and the cost to you is a significant undertaking. Your portion of the property development taken as a whole is over one third of the total lots, which you are solely expected to fund and develop, separate from the other participants in the LSIP. In this regard, the activities are of a reasonably large scale. You also actively market the properties yourself using your business. Taken as a whole, we consider that your subdivision, development and sale of the property are in the course or furtherance of a property development enterprise that you carry on. | Summary: The sale of the lots will be taxable supplies. It is not possible to conclusively rule on whether the sale of the remaining lots surrounding the residence will be taxable supplies. | Detailed Reasoning - Detailed reasoning: Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make. Section 9-5 of the GST Act 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 make the supplies of the subdivided lots for consideration as you receive payment for them. As determined above, you make the supplies of the subdivided lots in the course or furtherance of a property development enterprise that you carry on. The supplies are connected with Australia as they are located in Australia and you are registered for GST. There are no provisions in the GST Act that would make your supplies of the subdivided lots GST-free or input taxed. Thus, your sale of the subdivided lots will be taxable supplies. You contend that the sale of the lots surrounding the existing residence that you intend to keep will not be taxable supplies as they will not be sold in the course or furtherance of your enterprise. Paragraphs 258 to 260 of MT 2006/1 state: … 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 to not be purchased for trading purposes. 259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. 260. Assets can change their character but cannot have a dual character at the same time. You intend to keep the lots surrounding the existing residence and you do not know when or if they will be sold in future. Therefore, it is not possible to rule on whether the remaining lots will be taxable supplies if and when they are sold, as assets can change their character over time, depending on many factors. Whether a supply is a taxable supply depends on the character of the asset at the time that the supply is made and whether the supply satisfies the conditions of section 9-5 of the GST Act. | Summary: You are entitled to apply the margin scheme to the sale of the lots, provided certain conditions are met, to the extent that you make taxable supplies of the subdivided lots. | Detailed Reasoning - Detailed reasoning: Section 75-5 of the GST Act states that: (1) The *margin scheme applies in working out the amount of GST on a *taxable supply of *real property that you make by: (a) selling a freehold interest in land; or (b) selling a *stratum unit; or (c) granting or selling a *long-term lease; if you and the *recipient of the supply have agreed in writing that the margin scheme is to apply. The written agreement between you and the recipient of the supply must be made on or before the making of the supply or within such further period as the Commissioner allows. Section 75-10 of the GST Act provides that if a taxable supply of a real property is made under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply. The margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the property. You are able to use the margin scheme on your property sales if you bought the property after 1 July 2000 from someone that: · was not registered or required to be registered for GST; or · sold you old residential premises; or · sold you the property using the margin scheme; or · sold the property to you as part of a GST-free going concern; or · sold the property to you as GST-free farmland | Detailed Reasoning - Block 1: You purchased Block 1 in 200X from vendors that were not registered for GST at the time. In addition, Block 1 contained existing residential premises. Therefore, provided that you obtain written agreement from the recipient of the supply on or before the date that you make the supply, you are able to apply the margin scheme to the subdivided lots from Block 1 to the extent that your supply of the subdivided lots from Block 1 are taxable supplies. | Detailed Reasoning - Block 2: You purchased Block 2 in 200Z from an entity acting as mortgagee in possession of the property. The mortgagor at the time was Company Y. At the time of sale, Company Y was not registered for GST. However, the mortgagee in possession, Company X, was registered for GST. Division 105 of the GST Act provides that a creditor is liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor. Section 105-5 of the GST Act states: (1) You make a taxable supply if: (a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and (b) had the debtor made the supply, the supply would have been a *taxable supply. (2) It does not matter whether: (a) you made the supply in the course or furtherance of an *enterprise that you *carry on; or (b) you are *registered, or *required to be registered. (3) However, the supply is not a *taxable supply if: (a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or (b) if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it. It must therefore be determined whether, had the debtor (Company Y) made the supply, the supply would have been a taxable supply. A requirement of section 9-5 of the GST Act is that the entity making the supply is registered, or required to be registered, for GST. You have provided evidence demonstrating that, at the time of the supply, Company Y was not registered for GST. However, it cannot be determined whether, at the time of the supply, Company Y was required to be registered for GST. In addition, it cannot be determined whether the other requirements of section 9-5 of the GST Act would have been met at the time of the supply of Block 2 if Company Y was required to be registered for GST. Subsection 105-5(3) of the GST Act also provides that the supply is not a taxable supply if the debtor gave written notice stating that the supply would not be a taxable supply if the debtor were to have made it, or if the creditor believed, on the basis of reasonable information, that the supply would not be a taxable supply. You have not provided any evidence to determine whether Company Y provided a written notice in accordance with paragraph 105-5(3)(a) of the GST Act. You have also not provided evidence to determine whether paragraph 105-5(3)(b) is satisfied, although you have indicated that the seller informed you that GST was not applicable on its sale of Block 2. ATO Interpretative Decision ATO ID 2001/112 Goods and Services Tax: GST and mortgagee in possession states: Having regard for the provisions of Division 105 of the GST Act, the creditor is taken to be standing in the shoes of the debtor when the creditor makes the supply. So, if it can be demonstrated, in relation to Block 2, that: · had Company Y made the supply of the property to you it would not have been a taxable supply because they were not required to be registered; or · Company Y gave written notice to Company X stating that the supply would not be a taxable supply if Company Y were to make it, and stating the reasons why; or · Company X believed, on the basis of reasonable information, that their supply to you would not have been a taxable supply had Company Y made it; then, provided that you obtain written agreement from the recipient of the supply on or before the date that you make the supply, you are able to apply the margin scheme to the subdivided lots from Block 2 to the extent that your supply of the subdivided lots from Block 2 are taxable supplies.