Private ruling: GST and property
Date of advice: 18 May 2021
Published: August 2021
Date scheme commenced: The existing land, at X, contains a house which was originally built about 19XX-XX. The property was purchased by you (X) pursuant to an X contract. You, (the Trust) intended to allow the X family to use it as a holiday home. You added an extension to the X property in X.

Ruling: Q1: Will the sale of the house, to be built on the proposed subdivided rear of X, be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. | Q2: Can you choose to apply the margin scheme under Division 75, in working out the amount of goods and services tax (GST), on sale of the house to be built on the proposed subdivided rear of X? | A2: Yes. | Q3: What is the margin under Division 75 of the GST Act, for your supply of the house to be built on the proposed subdivided rear of X? | A3: The margin under Division 75 for the supply is the amount by which the consideration for the supply exceeds the corresponding proportion of the approved valuation, on 1 July 2000, of X.

Relevant facts and circumstances: The existing land, at X, contains a house which was originally built about 19XX-XX. The property was purchased by you (X) pursuant to an X contract. You, (the Trust) intended to allow the X family to use it as a holiday home. You added an extension to the X property in X. The contract price of the x property in X was $X. Your capital improvements up to 30 June X were $X. The total cost of purchasing and capital improvements to that date was $X. The value of the X property has increased significantly since purchase and extension. For financial reasons for the benefit of the beneficiaries (the X family), it is proposed that the property be subdivided and a portion sold. To control what is built on the land, a house will be constructed at the rear. The new house will eventually be sold. The principal purpose of your actions is to ultimately supplement the beneficiaries' (the X family's) cash resources, while retaining the holiday house and the surrounding amenity by controlling what is constructed. BACKGROUND You, the X Family Trust, was settled on x as a family investment trust. For many years you simply derived minimal amounts of interest income from small bank deposits. The current trustees are X, who are both aged X and retired. The beneficiaries are members of the X family. In X there was settlement of an action against the X by one of the principal beneficiaries, X. An amount totalling X was received by him as accident compensation for injuries suffered. They lent the monies to you. In X you used the monies to purchase a rental investment property at X. It is located on the corner of X. You acquired the X property in order to derive rental income and not for sale at a profit. It was rented from the date of purchase in X until its sale in X. The X property was subdivided and a second rental house constructed. The second rental house became known as X. The X property was constructed during 1995/1996. The purpose being to derive additional (rental) income for you to distribute to the beneficiaries, the X family, into the future. This is particularly so in light of the serious spinal injuries suffered by the trustee/beneficiary of the trust (X) in a car accident in X. Their work future was uncertain at that time. The relevant dates of purchase, rental and sale of those properties, as well as the X property, are shown in the table below. Rental and Holiday properties purchased 19XX - 20XX Date Nature of Property Dates Sold The X property a. Rented from XX February 19XX to XX October 20XX Purchased XX November 19XX Rental Sold November 20XX to reduce debt and finance extensions to the X property The X property a. Application for Planning permit to build and subdivide the X property XX March 19XX Rental Sold XX April 20XX To finance purchase of the X property b. Commence building the X property XX December 19XX c. Rental commenced XX May 19XX The X property Purchased XX April 20XX Holiday Home Still owned and used as holiday home July 1997 - Commencement of small development business X retired (from their work other than as trustee) due to the injuries resulting from motor vehicle accident, other ongoing health issues and job stresses. Amongst other possible activities and/or investments, you, the Trust, investigated the feasibility of acquiring property for development purposes. During the years 19XX to 20XX, you acquired a number of properties with the express purpose of development of residential home units and subdivision of the land. Those activities amounted to carrying on a business of property development. During those years you, the Trust, were actively involved in seeking land as development sites, in the planning process and monitoring the daily activities of the business and contractors. Details of property purchases and developments are disclosed on the table below. While conducting the development business, but entirely separate from the development activities, you purchased the X property in April 20XX. The X property was made available to X family beneficiaries who used it as a family holiday home. The X property replaced an on-site caravan (in X) that had been owned by the family and used for X years. The settlement of the purchase of the X property occurred in X. From then both the X property and the family's principal place of residence were used as security for financing your property development activities. Prior to that date only the family's principal place of residence at X was used as security for your borrowings. The X property is owned by X. All construction activities were contracted to X. The construction activities occurred from 19XX to 20XX and from 20XX to 20XX. Development properties purchased Address Date Purchased Nature of Dates Sold Development X XX October 19XX 3 units June 19XX - March 19XX X XX October 19XX 3 Units Nov 19XX - January 20XX X XX December 19XX 4 Units October 20XX- February 20XX X XX December 20XX 3 Units March 20XX - May 20XX X XX December 20XX Renovation XX September 20XX X XX June 20XX Renovation and XX October and 1 new unit XX December 20XX X XX October 20XX 3 Units March 20XX to October 20XX Development business ceased at completion of X development. Trust became involved in a X business from XX July 20XX - XX October 20XX. After X business sold, a development opportunity arose in 20XX. X XX April 20XX Renovation and 1 new unit December, 20XX and XX May 20XX All development business activities ceased permanently after losses suffered on this last development. During the period of October 20XX to April 20XX, there were no development activities undertaken. The property development business activity ceased. You (the Trust) entered into a partnership business which purchased a X. The X business operated between XX July 20XX and XX October 20XX. Following the sale of that business, a final property development opportunity arose. It was undertaken at the X property. This property was subdivided into the X. Your final property development sale related to the X property. This occurred on XX May 20XX. Development Business ceased All property development business activities ceased in 20XX. No other development activities have been undertaken since 20XX. X (as trustee) was actively involved with each of the development properties throughout 1997 to 2005. However, they was only involvement to a limited extent in 20XX and 20XX due to further health issues. OTHER INVESTMENT BY TRUST - X In September 20XX, you (the Trust) were invited to invest in X. X acquired a 75% interest in a trading entity X. X conducted a hardware store for about 2 years. But due to continuing losses the operations ceased in 20XX/XX. This resulted in a capital loss on your investment. X played no part in the day to day management of the 2 companies. This investment was totally unrelated to your property development business activities. GST REGISTRATION AND CANCELLATION In March 20XX you applied to be registered for GST purposes. You were registered for GST effective XX July 20XX. Your (the Trust) other activities since the cessation of the property development business in 20XX have been - • Assisting the contractor with management and construction of joint townhouse/residential home/investment property for X. X is one of your beneficiaries. You charged fees for your supply of management and construction services. This occurred during the period September 20XX - September 20XX when her project was taking place. • Holiday rental of the X property through X. It was available for holiday rental from December 20XX to February 20XX. It was typically rented over the summer months and school holidays. The rent was X per day in the peak period. Gross rental incomes during those years were - o Year ended 30 June 2017 - X o Year ended 30 June 2018 - X o Year ended 30 June 2019 - X o Year ended 30 June 2020 - X GST registration cancelled Your development business activities ceased in 20XX and no further development activities were contemplated at that time. Your GST registration was cancelled from X following the completion of X's home and investment property. You are not currently registered for GST. The X Property On XX April 20XX, a contract was entered into for purchase of the X property. You, the Trust, purchased it with the intention that the beneficiaries, the X family, would use it as a beachside holiday home. Settlement of the X purchase was on X. You did not acquire the X property through a taxable supply. The supply of the property to you was not GST-free under subdivision 38-J or 38-O of the GST Act. You did not acquire the property from an entity that was in the same GST group. You were never a participant in a GST joint venture. You did not acquire the property from an associate. You did not acquire the property from a GST branch, non-profit sub-entity or a government entity. The X property replaced the on-site caravan at the X, now re-named X. The caravan park was where the X family had enjoyed regular holidays from late 19XX until approximately May - June 20XX. The caravan was sold in 20XX. The X property house was renovated and extended in 20XX. You have not claimed any GST credits in connection with the renovation and extension. This is because it was entirely separate from the property development activities. The X property had been provided to and used exclusively by the X family as a holiday home until December 20XX when you commenced supplying it as a holiday rental. All rental activity ceased in February 20XX. The X property was rented due to the increasing holding and maintenance costs of the property, (rates, land tax, power and gas, maintenance etc) and the diminishing personal superannuation of the principal beneficiaries. Valuation of property On XX October 20XX, a X real estate agent and land valuer, X was approached to inspect the property. They considered the current value at X and indicated that 'the highest and best use would be a subdivision into 2 lots'. One lot will be with the existing house and a separate vacant lot at the rear. The total value of the 2 lots was estimated at X. The front lot being worth X for approx. X sqm with the existing home. And X for X sqm at the rear including a X metre driveway on the eastern side. You provided us with a copy of their valuation. Proposed subdivision of the property. You decided to realise the unrealised gains to improve your, (and ultimately the beneficiaries and the X family's) cash position by subdividing the property. A consequence of the early retirement of X was the requirement of early access to superannuation. This caused the X family's finances to be diminished much earlier than ordinarily anticipated. Purchase of the X property was enabled by sale of the rental investment properties. The beneficiaries' (the X family's) desire was to retain the home for use as their holiday location, both now, and for their children and grandchildren into the future. This far outweighs the option to sell it. In light of the general redevelopment of the central X area, many formal and informal approaches have been received by you to sell the X property for subdivision. Demolition and construction of up to X units was one option for the property. This is so in light of the numerous surrounding double storey constructions of that size in recent years. See for example: • 4 double storey developments at X; and • 2 double storey developments at X; and • 3 single storey developments at X; and • 3 double storey developments at X; and • 4 double storey developments at X; and • 3 double storey developments at X. The trustees (X) have been actively involved in objections and X appeals against double storey multi-unit developments in the area. The objections and appeals related to: • X The objections and appeals continued until such time as the tide had turned at Council and X in favour of such developments. The trustees were successful at X but not at the others. The purpose of these objections and X appeals was to protect the amenity of the area. One approach from a building company was for a joint venture development and subdivision, however that was rejected outright. Subdivision into 2 lots and immediate sale of the rear lot is one option. However, your, and the beneficiaries, overwhelming desire is to: a. at a minimum, retain the front lot and existing house; and b. control what is constructed on the rear lot to ensure that no double storey or overbearing development proceeds on the lot. Since purchase in 2000, there has never been any intention or purpose to develop the X property. The intention and purpose always has been to retain it. But in the financial circumstances of the beneficiaries now evident, consideration was given to subdividing the land and retaining the existing house on a reduced lot. Exploratory Planning considerations Following the valuation and general enquiries with town planners and with Council, preliminary discussions with a house construction company (X) occurred. The discussions commenced in late January 20XX with a view to having a house designed to fit on a rear subdivided lot. It was initially proposed to subdivide first and then build later under a building permit. You decided to use X services on XX February 20XX. A Council Officer confirmed in X that a subdivision permit could be obtained ahead of construction under a building permit. Finance considerations Your own bank would not lend to retired people without adequate income to support repayments. However, two alternative sources indicated that a Bridging loan (for construction) would be available solely on the basis that the property was firstly subdivided. Following which the front lot with the existing house would be used as security for any loan. However, an alternative source of finance has been obtained. Subdivision will not occur until construction is near complete and all permit conditions have been satisfied. Planning process. With that information, key decisions were then made at the end of January 2019 to instruct consultants to prepare an application to obtain a Planning Permit for subdivision. This process involved the following: X was appointed on XX February 20XX to undertake survey work, prepare permit application and the plan of subdivision. This was based on a building design to be prepared by X's subcontract designer. This permit application was made in X's name. X was appointed on XX February 20XX to prepare Soil Tests and Property Reports and Information Pricing. A X employee/sub - contractor was appointed to prepare a house design. The employee/sub-contractor was to work in conjunction with X and their sub-contract Planning consultant to design a house. This was in order to determine the size of land to be subdivided. X's subcontract Planning Consultant was to prepare the Planning Permit application for a subdivision (only) permit. The Council had advised verbally on XX April 20XX that subdivision could proceed prior to building a house. The subdivision permit application was lodged on X. However, Council advised X on XX October that a combined development and subdivision application should be submitted for consideration instead. Accordingly, the designers, planners and surveyors proceeded with the following: a. Preparing Revised Plans (by designer), Planning Permit application, (by Planner) and revised plan of subdivision by X. b. A Landscape plan was prepared by a landscape architect recommended by the planning consultant. c. Revised Planning permit application lodged by X on XX December 20XX. You have given us a copy of the Planning Permit dated X. It has many conditions relating to matters which are to be undertaken by contractors and or/sub-contractors prior to the issue of a Statement of Compliance under the X. An extensive amount of planning and compliance is required simply to get to the subdivision stage before construction can commence. You took part in one meeting and had email communication with a Council Planner to clarify certain requirements regarding the permit. You also had discussions with representatives of the designer/building company and engineer. Apart from that your only involvement has been, and will be, the authorisation of the contractors to undertake the work. You have not and will not be performing any of the work. The following work either has been, or will be, undertaken by other parties: a. Contractors have been engaged to carry out the work to date to achieve the planning permit; and to undertake future work; and b. Contractors will engage other relevant sub-contractors to undertake all relevant work to progress the construction of the house. c. The work to be done by contractors is to comply with the conditions prescribed by the Planning Permit. Marketing will be undertaken by local real estate agents, X. d. NBN capabilities, electricity and gas, water, drainage connection, and sewerage facilities will be undertaken to comply with the permit to obtain subdivision The Plan of Subdivision will be lodged by X. This will occur after completion of all works necessary to satisfy council's permit conditions for the issue of their Statement of Compliance for subdivision. The new house will be built for residential accommodation with physical characteristics including bedroom(s), bathroom(s), toilet(s) and kitchen. The house will provide basic living facilities and shelter. You expect the house on the rear to be built by October 20XX. You expect to sell it in the second half of 20XX. You will not be selling the property to an associate. You and the recipient will agree in writing that the margin scheme is to apply to the sale of the house on the rear. Such an agreement will be made on or before the supply. This is provided: • the supply of the house is a taxable supply; and • you can choose to apply the margin scheme. There will be an approved valuation of X on 1 July 2000 if needed.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(a) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(b) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(c) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(d) | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2) | A New Tax System (Goods and Services Tax) Act 1999 section 72-5 | A New Tax System (Goods and Services Tax) Act 1999 Division 75 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-10(3) | A New Tax System (Goods and Services Tax) Act 1999 section 75-11 | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1) In this ruling: | unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | all terms marked by an *asterisk are defined terms in the GST Act all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au | Question 1 | Will the sale of the house, to be built on the proposed subdivided rear of X, be a taxable supply under section 9-5 of the GST Act? Section 9-40 provides that you must pay GST on any taxable supply that you make. | Under section 9-5, 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. | The sale of the house, to be built on the proposed subdivided rear of X, is not GST-free under the GST Act. Therefore, the sale is not excluded from being a taxable supply on account of it being GST-free. We now consider whether such a sale is input taxed. | Input taxed | Subsection 40-65(1) states: | A sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). | However, subsection 40-65(2) provides that the sale is not input taxed to the extent that the residential premises are new residential premises. New residential premises are defined in section 40-75 to include residential premises that have not previously been sold as residential premises. The house you propose to build and sell, will not have been previously sold as residential premises. Therefore, it will be new residential premises and your sale will not be input taxed. Accordingly, the sale is not excluded from being a taxable supply on account of it being input taxed. | You need to satisfy paragraphs 9-5(a), (b), (c) and (d) for the supply to be taxable. Paragraph 9-5(a) is satisfied because the supply will be for consideration. Paragraph 9-5(c) is satisfied because the property is in Australia. | We now consider whether paragraph 9-5(b) is satisfied. | Enterprise | We need to evaluate whether your intended supply will be made in the course or furtherance of an enterprise that you carry on. | 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 (MT2006/1) provides information on whether an enterprise exists. | The term 'enterprise' is defined for GST purposes in section 9-20. The term enterprise is wider than the income tax concept of business and relevantly to your circumstances includes, among other things an activity or series of activities done; | • in the form of a business (paragraph 9-20(1)(a)) | • in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)), or | • on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property (paragraph 9-20(1)(c)). | The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise. | Activities done in the form of a business. | Although the Trust has previously carried on a business of property development, we do not consider that any proceeds, from the current activities associated with the X property and sale of the new residential premises on the subdivided lot, would be derived in the course of carrying on that business. | Activities done in the form of a licence, lease or other grant of an interest in property | Since the purchase of the X property, you, the Trust, have made the property available to the beneficiaries of the trust, the X Family, for their personal use as a holiday home. | Trusts are given statutory status as entities in themselves under subsection 184-1(1). The Act does not create two separate entities (the trust and trustee) but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. This is recognised in subsection 184-1(2) which provides that the trustee in that capacity is taken to be the trust entity. The trust is a separate entity to the beneficiaries of that trust. As a result, a trust will make a supply to a beneficiary when it provides the beneficiary with anything of value. By making the X property available to the beneficiaries to use, you, the trust, is making a supply to the beneficiaries. This supply would be a licence to use the property and would be activities that amount to an enterprise. Relevantly, these supplies would be input taxed under section 40-35 and the provisions in Division 72, that tax supplies for no consideration to associates, would not apply. Therefore, the supplies would not have contributed to your GST turnover calculation. | This enterprise was expanded when you supplied the property to other unrelated third parties as a holiday rental though through X. These supplies of residential accommodation would also be input taxed and would not have been included in any GST turnover calculation. | Once you commenced construction of the new residential premises that you intend to sell, you ceased to use that portion of the X property in a lease/licencing enterprise. | Activities done in the form of an adventure or concern in the nature of trade. | Paragraph 244 of MT 2006/1 explains that 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. It refers to 'the badges of trade' and outlines a number of factors that may be considered when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment. | While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on. | Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. | Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are ordinary income. | The term isolated transaction refers to: | • those transactions outside the ordinary course of business of a taxpayer carrying on a business; and | • those transactions entered into by non-business taxpayers. | If a taxpayer is not carrying on a business, makes a profit from an isolated transaction or operation, that profit is assessable ordinary income if both of the following elements are present: | • the intention or purposes of the taxpayer in entering into the transaction or operation was to make a profit or gain; and | • the transaction or operation was entered into and the profit was made in carrying out a business operation or commercial transaction. | Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. | The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: | 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. | No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. | Numerous cases have considered the assessability of profits or proceeds from the sale of land including the following cases: | Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer's activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land. | Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 ( Statham's case ) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property. | Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty's case ) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income. | Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 where the taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970's he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land. | As displayed in the above cases, a taxpayer can embark on a profit-making scheme after property was acquired for a different purpose. | In determining whether activities relating to isolated transactions one-off developments are an enterprise, 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. | Application to your situation | In this situation, X has been held for several years. You have decided to subdivide the property, construct a house and sell the subdivided lot. | In this case, you acquired the property in April 20XX for the purpose of making it available for the X family, your beneficiaries, to use as a beachside holiday home. | In the context of considering the above authorities and factors when determining whether your project would be viewed as an adventure or concern in the nature of trade, the following general observations have been made: | • There is a coherent plan for the subdivision of the property and construction of an additional house, which is more complex than to subdivide the property and sell the back block without a construction. | • The back lot is for sale and not for investment purposes. There has been a partial change in the purpose of owning the property. | • You have been involved in property development business activities in prior years and have used the X property in a leasing and licencing enterprise. | • The subdivision and construction costs will be relatively substantial. | • There is an intention to profit from the subdivision of the property and provide additional retirement funds for your beneficiaries. | • The transaction has been undertaken in a commercial manner. | • You have engaged contractors to undertake the various activities involved in the development of the property for sale. | • You want control of what is built on the back block. | • NBN capabilities, electricity and gas, water, drainage connection, and sewerage facilities will be undertaken by you to comply with the permit to obtain subdivision. | • You have obtained a planning permit. | A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion the intention for holding the property has changed from the leasing and licencing enterprise to an enterprise in the form of an adventure or concern in the nature of trade. | Although the property was purchased with the intention to provide to the beneficiaries for use as a holiday home, the intention in relation to the property changed when it was decided to subdivide the property and build an additional house. Whilst you contend finances are tight, you have undertaken the riskier option of borrowing more funds in order to build the house on the rear lot for sale. You obtained funding by using the X property as security. The decision to pursue the subdivision shows a choice to engage in exposure to the risks of the development, including the profits, losses and its general success. Your purpose is to maximise the potential profit made on the sale of the rear lot. | In developing your land you wanted control over what was built on the land. We consider the construction of the house constitutes a level of development of the X property, such that, it cannot be said that minimal development work will be undertaken as in Statham's case and Casimaty's case . | Although you will not be doing the subdivision and construction work, you have undertaken the organisation and management of the activities. A number of entities will be engaged to sub-divide, construct the house and market the lot. It is viewed that your subdivision activity is planned and has the characterisation of a commercial or profit-making undertaking. | You (the Trust) also have previous experience undertaking property developments involving the construction of houses for sale. | As stated above, no single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade. We have also considered examples contained in MT 2006/1. | Paragraphs 284 to 287 (Example 31) of MT 2006/1 illustrates a scenario with some similarities to the circumstances in your case: | 284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land. | 285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block. | 286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for: | their house to be demolished; | the land to be subdivided; | a builder to be engaged; | two houses to be built; | water meters, telephone and electricity to be supplied to the new | houses; and | a real estate agent to market and sell the houses. | 287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. | The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses. | In your circumstance, whilst you have not demolished the house, you have owned the property for a number of years, principally (but not exclusively) for the purpose of supplying to the beneficiaries of the trust for their private use. However, you have subdivided the land, engaged a builder, constructed a new dwelling, including provision of services, for the purpose of sale. | By way of contrast, we refer to examples 32 and 33 contained in MT 2006/1 illustrating circumstances that are not considered an enterprise. Example 32 illustrates either a private or non-commercial purpose, and an example 33 illustrates where the taxpayer has merely subdivided the property into two and sold the land, without development. | We consider that your development activities fall within the scope of an isolated transaction of real property and have gone beyond the mere realisation of a capital asset as discussed in MT 2006/1. Your activities will therefore be considered an 'enterprise', being an activity or a series of activities, done in the form of an adventure or concern in the nature of trade as defined in subsection 9-20(1)(b). It is our view this form of enterprise commenced on or around X. | Therefore, we consider your activities in building and selling the house on the subdivided rear of X are an enterprise. You satisfy paragraph 9-5(b). | We now consider whether you satisfy paragraph 9-5(d). | Requirement to be registered | As you are not registered for GST, we will consider whether you are required to be registered for GST. | Section 23-5 provides that you are required to be registered for GST if: | you are carrying on an enterprise, and | your GST turnover meets the GST registration turnover threshold, which is currently $75,000 for entities other than non-profit entities. | As stated above your activities constitute an enterprise. | Next, we will consider whether your GST turnover meets the GST registration turnover threshold. | GST registration turnover threshold | Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if: | your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or | your projected GST turnover is at or above the registration turnover threshold. | Subsection 188-15(1) provides that your current GST turnover at a time during a particular month is the value of all the supplies that you have made during the current month and the previous 11 months. This subsection excludes supplies that are input taxed or supplies that are not for consideration (and are not taxable supplies under section 72-5) or supplies that are not made in connection with your enterprise that you carry on. | The registration turnover threshold applicable to you is $75,000. | As the only supplies you are currently making, or have made for the past 11 months, would have been input taxed supplies of residential accommodation, your current GST turnover would be below the threshold. | It is necessary to determine whether your projected GST turnover meets the threshold. | Subsection 188-20(1) provides that your projected GST turnover at a time during a particular month is the value of all the supplies that you have made or likely to make during the current month and next 11 months. This subsection excludes supplies that are input taxed, or supplies that are not for consideration (and are not taxable supplies under section 72-5), or supplies that are not made in connection with your enterprise that you carry on. | Section 188-25 provides that in working out your projected GST turnover, you relevantly exclude supplies made or likely to be made by way of a transfer of a capital asset. | Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets providing the following: | • Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. | Assets can change their character from a capital/investment asset to a trading/revenue asset, or vice versa, but cannot have a dual character at the same time. | Paragraph 31 of GSTR 2001/7 provides commentary on what is meant by 'capital assets'. It refers to those assets that make up the 'profit yielding structure', as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations. | This asset is not for personal use or enjoyment or to retained for investment purposes. We consider that the property being sold is not a capital asset, but a revenue asset sold in the course of your enterprise. | The value of the supply will be included in your projected GST turnover because the supply of the house is relevantly, made in connection with an enterprise that you carry on, and is neither input taxed, or a transfer of a capital asset. | You are likely to make a supply once a contract of sale is entered into by the relevant parties and accordingly your GST turnover will meet the registration turnover threshold. | You will either be registered or required to be registered at the time the sale of the house on the subdivided rear of X (the house), settles, satisfying paragraph 9-5(d). | As you will satisfy all the requirements in section 9-5, your sale of the house will be a taxable supply. | GST will be payable on the sale of the property. | Question 2 | Can you choose to apply the margin scheme under Division 75, in working out the amount of GST, on sale of the house to be built on the proposed subdivided rear of X? | You can choose to apply the margin scheme if: | you and the recipient of the supply have agreed in writing that the margin scheme is to apply; and | such an agreement is made on or before the making of the supply; and | you did not acquire the freehold interest through a taxable supply on which the GST was worked out without applying the margin scheme. | You advised that you satisfy all the conditions above. | Therefore, you can choose to apply the margin scheme, in working out the amount of GST, on sale of the house to be built on the proposed subdivided rear of X. | Question 3 | What is the margin, under Division 75 of the GST Act, for your supply of the house to be built on the proposed subdivided rear of X? Under subsection 75-10(2) the margin for a supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest unless subsection 75-10(3) applies. | 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 (GSTR 2006/7) deals with the margin scheme. Paragraph 45A of GSTR 2006/7 provides information on when a taxpayer is taken to have held or acquired real property for the purposes of subsection 75-10(3). It states: | 45A. The Commissioner considers that the Full Federal Court decision in Brady King v. Commissioner of Taxation ( Brady King ) is authority for the view that, for the purposes of subsection 75-10(3), an entity supplying real property is taken to have held or acquired a sufficient interest in that property at the time it entered into a contract for its acquisition. As such, if the entity entered into the contract before 1 July 2000, the entity may work out its GST liability under the margin scheme by reference to an approved valuation of the real property as at the day specified in subsection 75-10(3), even if settlement of the contract occurred on or after 1 July 2000 (assuming the requirements for application of the margin scheme are satisfied). | You entered into a contract for the purchase of the X property before 1 July 2000. Therefore, you are taken to have held or acquired the X property prior to 1 July 2000 for the purposes of subsection 75-10(3). | Subsection 75-10(3) states: | Subject to section 75-11, if: | (a) the circumstances specified in an item in the second column of the | table in this subsection apply to the supply; and | (b) an *approved valuation of the freehold interest, *stratum unit or | *long-term lease, as at the day specified in the corresponding item | in the third column of the table, has been made; | the margin for the supply is the amount by which the *consideration for the supply exceeds that valuation of the interest, unit or lease. | Section 75-11 alters the margin scheme calculation where the interest in the property is acquired in particular circumstances, including from a GST group member or a joint venture party, through a GST-free supply or from a deceased estate. The circumstances in section 75-11 are not relevant to your acquisition and therefore the section does not apply. | You have stated that, if necessary, you will obtain an approved valuation of the property at the relevant date. Therefore, where you do obtain the valuation, the margin for your supply of the X property will be the amount by which the consideration for your sale of the property exceeds that valuation. | The date at which the valuation will need to be made will be determined by which item in the table in subsection 75-10(3) applies. We consider that the circumstances specified in item 1 in the second column of the table in subsection 75-10(3) applies to your circumstances. Item 1 in the table states where the supplier acquired the interest, unit or lease before 1 July 2000 and items 2, 3 and 4 do not apply, the valuation is to be made as at 1 July 2000. | In relation to the margin scheme you are of the view that item 2 in the table in subsection 75-10(3) applies. Item 2 provides that where the supplier acquired the interest before 1 July 2000 but does not become registered or required to be registered until after 1 July 2000, the date of the valuation is the date of effect of your registration, or the day on which you applied for registration (whichever is earlier). | ATO Interpretative Decision ATO ID 2004/223 GST and valuation date for calculating GST under the margin scheme (ATO ID 2004/223) explains the operation if item 2 in circumstances where an entity selling property they acquired before 1 July 200, was registered at 1 July 2000, ceases their registration for a period and re-registers prior to selling the property. It states: | Item 2 provides that where the supplier acquired the interest unit or lease before 1 July 2000, but does not become registered or required to be registered until after 1 July 2000, the valuation date is the earlier of either the date of effect of the entity's registration or the day on which the entity applied for registration. | That is, Item 2 only applies to determine the valuation date in circumstances where the supplier was not registered or required to be registered until after 1 July 2000. | The entity was registered for GST on 1 July 2000. As such, Item 2 does not apply. | While you acquired the X property before 1 July 2000, and you were unregistered for a period of time prior to commencing your use of the X property for the current development, you were registered as at 1 July 2000. Therefore, item 2 does not apply in your circumstances. | Contentions: | You contend that the date the X property should be valued is when you re-register for GST, or the date of effect of your re-registration, and this would not be a date before the XX February 20XX. This is because: | The X property is a private asset acquired by the Trust as a holiday home for the beneficiaries. | For the purposes of calculating the margin, the date of valuation of the property should be the date the property became an 'enterprise asset' within the GST system. | The earliest date would be XX February 20XX as explained in the income tax context with respect to a profit-making undertaking. | The start date for this property undertaking should be consistent for both income tax and GST. | The date for GST registration should be when the Trust is required to be registered 'in relation to this property' or 'in relation to the supply' of any part of that property. | When an entity is registered for GST, their GST registration covers all of their activities that amount to an enterprise. A single entity may carry out multiple enterprises but will only have one GST registration. An entity cannot register only for one enterprise and exclude others. Further GST registration is not linked to particular supplies or assets. Once registered for GST, any supply that the entity makes that is in the course or furtherance of any enterprise they carry on will be subject to GST where the requirements of the GST Act are met. As discussed earlier under Question 1, a Trust is a separate entity for GST purposes. You, the Trust, acquired the X property with the intention of allowing another entity, the beneficiaries (the X family) to use the property. In making the X property available to the beneficiaries you are making a supply to the beneficiaries. The supply by way of a licence to use the property to the beneficiaries on the regular and continuous basis since 2000 would be an enterprise for GST purposes. As noted in question 1, this supply is an input taxed supply of residential premises. | While we accept that you did not acquire the X property with the intention of including it in the property development enterprise that you were carrying on, we do not agree that the Trust acquired the property as a private asset and not in the course or furtherance of a GST enterprise. We understand that there has been no consideration provided by the beneficiaries to the Trust for the use of the X property as their holiday home. However, the GST Act addresses circumstances where entities make supplies to associates for no, or less than market value, consideration. If your supply had not been an input taxed supply of residential accommodation you would have had a GST liability as a result of the beneficiaries' private use of the property as a holiday home. We have concluded that in relation to the X property, it was part of an enterprise you were carrying on at 1 July 2000. You continued to use the property in this enterprise until around February 20XX when you changed your intention and used part of the property in an enterprise in the form of an adventure or concern in the nature of trade. | We agree that the current form of enterprise being carried on, on the to be subdivided portion of the X property commenced on or around February 20XX. This is consistent with the view communicated in Private Ruling, Authorisation Number 1051798121686. It is not our view that for GST purposes, this development enterprise commenced on the 1 July 2000. However, the property was part of your, the Trust's, enterprises at 1 July 2000. | Further, it is considered the words of item 2 in the table in subsection 75-10(3) are clear. The item will only apply if the entity is neither registered, nor required to be registered until after 1 July 2000. There is no provision in this item or any other item number in the table, for an entity that has previously cancelled their GST registration to form a conclusion that the date for GST registration should be when the Trust is required to be registered 'in relation to this property' or 'in relation to the supply' of any part of that property. | You do not satisfy item 2 as, while you acquired the X property before 1 July 2000, you were registered on 1 July 2000. | We recognised that this results in a different valuation date than required for income tax purposes. However, the GST Act is separate legislation that needs to be applied according to its text. You advised that if needed, an approved valuation on 1 July 2000 of X will be made. We note that such a valuation is required. | Apportionment of valuation | The subdivided rear of X is part of the X property you acquired in 20XX. In applying section 75-10 in working out the margin for the taxable supply, use only the corresponding proportion of the approved valuation of that freehold interest as at 1 July 2000. | We note for your information that Schedule 2 to GSTR 2006/7 contains the A New Tax System ( Goods and Services Tax ) Margin Scheme Valuation Requirements Determination MSV 2009/1 . The Determinationspecifies the requirements for making valuations for the purposes of applying the margin scheme in Division 75. | Paragraph 105 of GSTR 2006/7 states: | If an approved valuation is required to work out the margin for the taxable component of a supply, the valuation is to be obtained for the entire real property supplied. The valuation is then apportioned on any fair and reasonable basis to ascertain the part of the valuation that relates to the taxable component of the supply. | Accordingly, the margin under Division 75 for the supply is the amount by which the consideration for the supply exceeds the corresponding proportion of the approved valuation, on 1 July 2000, of X.