Private ruling: GST and development and sale of vacant land
Published: May 2014

Ruling: Q1: Will your sale of the subdivided lots be taxable supplies pursuant to section 9-5 of the GST Act? | A1: No

Relevant facts and circumstances: You are not registered for GST. Your current and projected GST turnover (excluding land sales) is less than $75,000. A relative acquired a leasehold interest of land in Australia under a lease in perpetuity from the State Government. On ddmmyyyy, the lease was transferred to you, from the relative. The land consisted of two titles, one of X hectares (the larger title) and the other of Y hectares (the smaller title). Since acquiring leasehold interest of the land, you have used the land for the rearing of livestock, either for sale to outside parties or for use in a business that you and your family operated. Both businesses are operated under your ABN. Effective from 1 July 2000, you registered for GST for the enterprises being carried on. The other business ceased in 200X and the livestock business was scaled back to very low levels from 200X onwards, due to a combination of the continued drought and your increasing age. Since 200X, you have continued to use the land for rearing/grazing of livestock. However, the number of livestock run on the land has been quite limited mainly because of the prolonged drought experienced in the region. During this time, you have supported yourself by working as an employee. In 200X, you received an offer from the Government to purchase the land outright, which you accepted. The cost of the conversion from leasehold to freehold was $XX.XX, which was financed by a loan from the government. The conversion of title occurred on ddmmyyyy, however, as you had not repaid the loan to the Government, it was recorded as an incomplete purchase. You cancelled your GST registration from ddmmyyyy, as your GST turnover was less than $75,000. You sold the smaller title in July 200X. These funds were used in part to extinguish the remaining loan of from the government. A new "Certificate of Title" was issued, being for the larger parcel. Due to the gradual scaling down of the livestock rearing activities and your age, you have now decided to dispose of the balance of the property to provide funds for your retirement. The remaining land has a public road running through it. The section of land between the public road and a river (the smaller parcel of land) comprises X hectares. The larger parcel of the land is located on the other side of the road and comprises Y hectares. You have a buyer for the larger parcel of land and settlement is expected imminently. As the smaller parcel of land is isolated from the larger parcel of land due to the public road and the fact that it fronts the river, you have been advised that it would be difficult to sell this lot as farming land. Therefore, the most advantageous way to sell this lot is to subdivide it into 'lifestyle' lots. In order to do this, you requested the local Council to rezone this land as Large Lot Rural Residential. The rezoning was approved. However, before you could apply for a development approval to subdivide the land, the local Council and the Government had to rectify certain problems. You will submit a development application when the problems are rectified. The application will request the creation of a separate title for the larger parcel of land and the subdivision of the smaller parcel of land into X vacant lots. These lot sizes are in line with the relevant government rules governing the standard size for Large Lot Rural Residential housing lots in this area. The smaller parcel of land is likely to be subdivided and released for sale in two stages. It is expected that the first stage will release the X smaller vacant lots, whilst the second stage will release the remaining large vacant lot. You expect the development to cost approximately $XX.XX, which will be funded from the sale of the larger parcel of land. Each lot will be sold for more than $75,000. You have no interest in developing the land any more than is required to be able to sell the land as vacant lots. Accordingly, the works associated with the subdivision will be strictly limited to that mandated by the local Council as the minimum required for sale. As all proposed lots are accessible by the public road, no roads, gutters or driveways are required to be provided. The works required are for each allotment to be connected to electricity, water mains and sewerage. The electrical works required are minimal, as there is already electricity running along the public road, hence all that is required is for transformers to be put in place for each proposed lot. You will engage other parties to carry out the relevant work. In relation to the proposed subdivision, you: • will have no business organisation or letterhead, • will not have a manager, office, or secretary for the subdivision activities • will not market or sell the lots, but will engage a local real estate agency to market and sell the vacant lots • sought advice from the real estate agent in regards to the land and were advised that the value of the land in as is condition would be approximately $xxx. The agent further advised and suggested that the smaller parcel of land would be more valuable if rezoned and approved for a use other than farming • have no prior experience subdividing and selling land.

Relevant legislative provisions: Section 9-5 A New Tax System (Goods and Services Tax) Act 1999 | Section 23-5 A New Tax System (Goods and Services Tax) Act 1999 | Section 188-20 A New Tax System (Goods and Services Tax) Act 1999 | Section 188-25 A New Tax System (Goods and Services Tax) Act 1999

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 otherwise specified. • All terms marked by an *asterisk are defined terms in the GST Act. You must pay the GST payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if you meet all of the conditions (a) to (d) and your supplies are not GST free or input taxed: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (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. The land that you propose to sell has been used as a capital asset in your enterprise. You plan to subdivide a portion of this land into x separate lots which you will sell for consideration. The property is located in Australia and, the GST-free and input tax provisions do not apply in your circumstances. Your current turnover is less than the GST registration threshold and you are not registered for GST. Therefore unless you are required to be registered for GST your supply of the lots will not be a taxable supply. | Detailed Reasoning - GST Registration: Section 23-5 provides that you are required to be registered if • you are carrying on an enterprise and • your GST turnover meets the registration turnover threshold. As you meet the first criteria in that you are carrying on a farming enterprise, albeit at a reduced level, we will examine whether your GST turnover meets the registration threshold. Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if: • your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold or • your projected GST turnover is at or above the turnover threshold. The threshold for either current or projected turnover is currently $75,000. Your current GST turnover is below the threshold of $75,000. Your projected GST turnover at a time during a particular month is the sum of the values of all supplies that you have made or are likely to make during the current month and the next 11 months. You have advised that the sale proceeds of the development will exceed $75,000 therefore you will be required to register for GST if the sale proceeds are to be included in the calculation of the projected GST turnover. Under paragraph 188-25 (a), you do not include the supply by way of transfer of ownership of a capital asset of yours. The larger title and the smaller title were both capital assets of your enterprise prior to the development. However, we must also consider whether the subdivision and sale of the smaller lot constitutes a new enterprise of property development. If there is no new enterprise, the sale of the subdivided lots will not be included in the calculation of your GST turnover for the purposes of deciding whether you are required to be registered pursuant to section 188-25. 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. MT 2006/1 provides the following commentary on enterprise assets at paragraphs 258 to 260. 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. 102 259. 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. Subsection 9-20(1) provides that an enterprise includes: An activity, or series of activities, done: • in the form of a business; or • in the form of an adventure or concern in the nature of trade; or 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 decision to develop a portion of your property is considered to be a 'one-off' or isolated real property transaction as opposed to a business activity. Therefore, we need to consider whether the development is in the nature of trade or an adventure or concern or whether it is the mere realisation of a capital asset. 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. In your case: • There was a change of purpose for which you held the land, from livestock rearing to sale. • Although you converted your interest from leasehold to freehold, you did not acquire any additional land - the farmland was already a capital asset used in the farm enterprise • There is a plan for the subdivision, but because of the size of the development it is a relatively simple plan • There is no business organisation undertaking the development • You sold a portion of your property, (the larger parcel of land) to fund the development of the smaller parcel of land (this property) • No buildings have been erected on the land, and • You have engaged a real estate agent to sell the lots as you have no expertise in this area. Taking into account the above factors, including the actions that you took to gain development approval and the associated works of developing the vacant land into X lots, we consider that these activities do not amount to a new enterprise and your supply of the X lots is the mere realisation of a capital asset. As the supply of the lots will be the supply of a capital asset you will not be required to include the sale proceeds in the calculation of your projected GST turnover. Accordingly, you are not required to be registered for GST. | Detailed Reasoning - Conclusion: You will not satisfy all of the requirements for a taxable supply, pursuant to section 9-5 of the GST Act. Therefore, your supplies of the subdivided lots will not be taxable supplies.