Private ruling: Goods and services tax (GST) and property subdivision
Date of advice: 27 April 2018
Published: July 2018

Ruling: Q1: Will your supplies of Unit 1 and Unit 2 at the property be considered taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No, your supplies of Unit 1 and Unit 2 at the property are not considered to be taxable supplies pursuant to section 9-5 of the GST Act. | Q2: Will your supply of Unit 3 at the property be considered a taxable supply pursuant to section 9-5 of the GST Act? | A2: Yes, your supply of Unit 3 is considered a taxable supply pursuant to section 9-5 of the GST Act.

Relevant facts and circumstances: You, the taxpayer, purchased vacant land (the property) during the year XXXX. Your ABN and GST registration was cancelled at XX date XX month XXXX year. No set plans had been put into place at time of purchase. It was more likely that you planned to construct a principal residence for yourself and your parent rather than purely build units on the whole block for the purpose of resale. You have now decided to build three units on the land. When the units are completed they will be strata titled. The first unit (Unit 1) which includes land and residential premises will be your parent’s main residence when it is finished. The building of Unit 1 commenced during XX month XXXX year and was completed during XX month XXXX year. It was occupied by your parent when it was completed. You have not charged rent for Unit 1 occupied by your parent before transfer of ownership via strata title. Your parent funded the entire building of Unit 1. Upon completion of all of the units, you will transfer the title of Unit 1 to your parent for nil consideration. The building of Unit 2 will commence shortly after the completion of unit 1. Unit 2 will be your main residence once it is completed. The building of Unit 3 will commence when Unit 2 is completed. You have an estimated completion date of the third unit during XX month XXXX year. The building of Unit 2 and Unit 3 will be funded from a home loan/line of credit facility. You estimate that the total cost of the construction of both units to be about $X amount. Upon completion of Unit 3 you will engage a real estate agent to sell it. This is the only project of this nature you have undertaken to date. Your normal occupation is not in property development.

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 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-75

Reasons for decision: Summary: The supplies of Unit 1 and Unit 2 made by you are not considered to be taxable supplies pursuant to section 9-5 of the GST Act. However, your supply of Unit 3 is considered a taxable supply pursuant to section 9-5 and you are required to be registered for GST since the sale of Unit 3 and related activities forms part of your enterprise for GST purposes. | Detailed Reasoning - Detailed reasoning: In the reasoning unless otherwise stated, ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act You are an entity for the purposes of the GST Act and will be liable for GST on any taxable supplies you make. Section 9-5 provides that 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. For the supply of the 3 units to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In your case, you will supply Unit 1 which includes land and residential premises to your parent at nil consideration, you will retain Unit 2 for yourself as a private residence and will sell Unit 3 to a third party using a real estate agent. The 3 units are connected with Australia and they are located in the indirect tax zone. The enterprise issue to be considered is limited to the proposed sale of Unit 3 to a third party. | Detailed Reasoning - Enterprise: The term ‘carrying on an enterprise’ is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise. Section 9-20 relevantly defines enterprise to include an activity, or series of activities, done: ● In the form of a business ● In the form of an adventure or concern in the nature of trade or ● On a regular or continuous basis, in the form of a lease, license or other grant of an interest in property The ATO view on the meaning of the term ‘enterprise’ is explained in detail in 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). You are currently not registered for GST. Based on the information provided in your ruling application, we have assumed that the sale or transfer of Unit 1 and Unit 3 (if at arm’s length consideration) to your parent and a third party respectively will exceed the GST turnover threshold of $75,000. It is necessary to consider whether your activities are in the form of a business or an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. The issue is whether the vacant land your initially purchased has been changed to a revenue asset as a result of your decision to undertake development activities on your land. Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to a business: ● a significant commercial activity; ● a purpose and intention of the taxpayer to engage in commercial activity; ● an intention to make a profit from the activity; ● the activity is or will be profitable; ● the recurrent or regular nature of the activity; ● the activity is carried on in a similar manner to that of other businesses in the same or similar trade; ● activity is systematic, organised and carried on in a businesslike manner and records are kept; ● the activities are of a reasonable size and scale; ● a business plan exists; ● commercial sales of product; and ● the entity has relevant knowledge or skill. Furthermore, paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a ‘business’ and those done in the form of ‘an adventure or concern in the nature of trade’. ● a business encompasses trade engaged on a regular basis. ● an adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. Paragraph 244 to 261 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 taken into account 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. 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. 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. The following discussion is centred on applying the facts of this case to the above indicators of a business and the factors used in determining whether activities are a business or an adventure or concern in the nature of trade (with reference to the indicators established in Statham and Casimaty in the context of real property transactions). In your case, you are not carrying on a business of property development. However, we consider you are carrying on an adventure or concern in the nature of trade which has a flavour of enterprise. Paragraph 288 of MT 2006/1 provides an example of subdivisions of land that are not enterprises and states: | Detailed Reasoning - Example 32: 288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live. 289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house. 290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter. | Detailed Reasoning - Application to your situation: In your case, you purchased the property during XX month XXXX year. Your ABN and GST registration has been cancelled from XX date during XX month XXXX year. Your normal occupation is not in property development. No set plans had been put into place at time of purchase. It was more likely that you planned to construct a principal residence for yourself and your parent rather than purely build units on the whole block for the purpose of resale. You have now decided to build three units on the land. When the units are completed they will be strata titled. The building of Unit 2 and Unit 3 will be funded from a home loan/line of credit facility. You estimate that the total cost of the construction of both units to be about $X amount. This is the only project of this nature you have undertaken to date. You will supply Unit 1 to your parent at nil consideration, will retain Unit 2 for yourself as a private residence and sell Unit 3 to a third party using a real estate agent. The supply of Unit 1 to your parent has no profit intention and it is a domestic and private arrangement. The supply of Unit 2 to yourself is considered a private and domestic arrangement. On this basis, there is no enterprise pursuant to paragraph 9-5(b) and hence there is no taxable supply made by you for the supply of Unit 1 and Unit 2 respectively However, the supply or sale of Unit 3 to a third party at arm’s length consideration will be a sale of a revenue asset as part of your enterprise for GST purposes and the sale will be a taxable supply under section 9-5. You can claim eligible input tax credits under section 11-20 in relation to the costs and expenses incurred for the construction and sale of Unit 3. | Detailed Reasoning - Requirement to register for GST: Under section 23-5 you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold of $75,000. You are required to be GST registered assuming the sale of Unit 3 will exceed the GST turnover threshold of $75 000. Since you are not currently GST registered, you can backdate GST registration from when you commence enterprise activities in relation to developing, building and selling Unit 3. | Detailed Reasoning - Conclusion: We have reviewed your property development in the light of the enterprise factors considered important by the Commissioner. Based on a consideration of all relevant factors we consider that your activities are not in the course of carrying on a business of property development. However, we consider you are carrying on an adventure or concern in the nature of trade which has a flavour of enterprise for GST purposes but only limited to your supply or sale of Unit 3, which will be a taxable supply of new residential premises (refer to section 40-75). However, the supply or transfer of title for Unit 1 to your parent and Unit 2 to yourself is not considered to be part of your property development enterprise and are not taxable supplies under section 9-5. The 2 supplies are considered to be domestic and private in nature with no profit intention evident.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover