Private ruling: GST and sale of real property
Date of advice: 8 February 2019
Published: May 2019

Ruling: Q1: Will Entity A’s supply of their interest in the Sale Lot (defined below) be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes, apart from the input taxed supply of their interest in the house and curtilage. | Q2: Will Entity B’s supply of their interest in the Sale Lot be a taxable supply under section 9-5 of the GST Act? | A2: No. | Q3: Will Entity C’s supply of their interest in the Sale Lot be a taxable supply under section 9-5 of the GST Act? | A3: No.

Relevant facts and circumstances: Entity A, B and C are siblings. We will refer to them collectively as you, or by their individual names depending on the circumstances. Entity A, B and C own a property Located in Australia (Lot A). Lot A has been in the family for approximately 100 years. Lot A contains a farm house, which has been located on the property for a while, some sheds and storage areas. Entity A and C own lots adjacent to Lot A. Entity A, B and C hold their interests in Lot A as Tenants in common in various percentages. Entity A is registered and has used part of Lot A since YYYY with the consent of the other owners for the following purposes: ● to grow vegetables for sale; and ● to lease a portion of the property to Entity Z. Entity A also derives consulting income from other sources. Entity A has also some experience in selling real estate when he sold off a portion of the land where their residence is located. Entity B and C are not registered for GST and do not have an ABN either individually or together with each other or Entity A. However Entity C is part of a GST registered partnership which operates a store. However this partnership has no interest in the land of Lot A. Rent of farm house During the past 15 years the farm house located on Lot A has been rented out to a caretaker for $X.00 per fortnight, plus an additional $X.00 for electricity. The caretaker had exclusive use of the land immediately surrounding the house. The caretaker is also required to undertake gardening and maintenance activities in respect of the Property. The caretaker’s arrangement is best described as a tenancy at will over the house and immediate surrounding area. There is no fixed term or security of tenure. There is no standard form Residential Tenancies Authority rental agreement. The caretaker’s rent is paid into a joint account held in the names of Entity A, B and C. The caretaker’s rent is then expended on rates, insurance, some costs of tractor maintenance and fencing. The rent received from the caretaker has always been less than these expenses and has remained largely unchanged during the last 15 years that the current tenant has occupied the premises. Sale of a portion of Lot A Lot A has never been publicly advertised for sale. However it is located adjacent to significant developments being undertaken in the area. A number of unsolicited offers had been received during the past 15 years due to their proximity to schools, train station, shopping and medical facilities and general development in that area. In late YYYY, you sought advice from a property lawyer for the purpose of determining whether any of the offers received represented a good offer for Lot A. In addition, you needed to evaluate whether the offers were commercially acceptable. None of the offers progressed to a formal sale agreement due to Entity A, B and C not being able to agree. In YYYY, entity A, B and C’s personal circumstances changed and the realisation of Lot A needed to be addressed with them either being passed retirement age, or contemplating retirement. They engaged the services of a consulting civil engineering firm, to provide preliminary advice about the supply of Lot 2, as a whole or in part. In addition, they considered whether they ought to undertake the subdivision themselves. Mud maps of potential subdivisions were prepared. They decided that part of Lot A would be kept and they wished to sell the balance of the land. In YYYY, the Regional Council’s Planning Scheme was updated and Lot A was rezoned as ‘General Residential’. In mmyyyy, the services of the lawyers were engaged to provide legal advice in relation to the sale of the Sale Lot. Advice was also sought on seeking expressions of interest (EOI) for its sale. As a result of the EOI process an offer of $XX.00 million was received In your discussion with the Purchaser you considered two options for the sale. Scenario A Keeping the Retained area and selling off the Sale Area as a single lot or Scenario B Allowing the developer to subdivide the property in a number of lots up to 50. On dd mm yyyy you advised that you would not be proceeding with Scenario B. The Purchaser has undertaken to organise the Scenario A subdivision prior to sale and your role will be to sign the relevant subdivision papers. Entities B and C have not undertaken property development enterprises in the past. The purchaser does not intend that a farming business be carried on, on the land. The land will not be supplied to an associate of Entities A, B or C.

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 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | A New Tax System (Goods and Services Tax) Act 1999 subsection 40-35(1) | A New Tax System (Goods and Services Tax) Act 1999 section 40-65 | 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 188-10(1) | A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision: Summary: ● 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. | Detailed Reasoning - Partnership or sale by individuals of their interests: We have considered below whether Entity A, B or C formed a partnership for GST purposes in relation to their activities on Lot A. Initially their joint activities were ● the lease of the farm house to the caretaker and ● subsequently working together to sell a portion of their property. We have considered below whether these activities amount to an enterprise partnership. Lease or license of farmhouse. The partnership definition includes an association of persons in receipt of income jointly. We need to consider whether there was an enterprise in relation to the receipt of income from your leasing activity to the caretaker. Paragraph 9-20 (2) (c ) excludes the activities of an individual or a number of individuals without a reasonable expectation of profit or gain. We consider the activities of allowing the caretaker to use the property for minimal rent where the income received did not cover the expenses to be an activity that meets this exclusion in 9-20. Therefore there was no partnership formed then. Is the sale of the Sale Lot a sale in the course of an enterprise conducted by you as partners? We will now consider whether jointly the parties are conducting a property development enterprise in organising the sale of the Sale Lot. Of relevance is whether you collectively are making a supply of the Property in the course or furtherance of an enterprise that you carry on and if so, whether you are required to be registered for GST. Section 9-20 provides that the term ‘enterprise’ includes, among other things, 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 Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. | Detailed Reasoning - In the form of a business: Paragraphs 170 to 232 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? , lists indicators of carrying on 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. Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. In this case members of your family have lived on or around the Property for a significant amount of time and both Entity A and C have lived adjacent to the property and acquired the property via inheritance. You have not previously been involved in the development of any property in a manner that would be considered to be in the course of a business. Given the facts provided we consider that the activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. We do not consider that your actions of obtaining advice and negotiating a sale of a portion of the Property alone, constitutes being activities in the form of a business. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: Paragraph 234 of MT 2006/1 provides that ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions: ● the subject matter of the realisation; ● length of period of ownership; ● frequency or number of similar transactions; ● supplementary work on or in connection with the property realised; ● circumstances that were responsible for the realisation; ● motive Paragraph 244 of MT 2006/1 clarifies 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 with such transactions being of a revenue nature. However, the sales of the family home or 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. As discussed above, you and members of your family have lived on or around the Property for a significant amount of time and both Entity A and C have lived adjacent to the property and acquired the property via inheritance. Given the facts provided you do not have a history of buying and selling property on a regular or consistent basis. Furthermore, you will not be subdividing or conducting any development works on the Property prior to the date of settlement. Your motive for selling the Property is primarily due to age and a need to reduce your level of activities on the farm. Given the above, a balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion that the sale of the Sale Lot was not for the purpose of trade and not a commercial-like undertaking. As such we do not consider that your actions of obtaining advice and negotiating a sale of the Sale Lot constitute an activity being done in the form of an adventure or concern in the nature of trade. Therefore we consider that you are not acting as a partnership. We will now consider the GST implications for each of you in turn. | Detailed Reasoning - Entity A’s supply of his interest in the Sale Lot: 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 (ie 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. For Entity A’s supply of his interest in the Sale Lot to be a taxable supply, all of the requirements in section 9-5 must be satisfied. Entity A will satisfy all the requirements of section 9-5. The intended supply will be for consideration. The supply will be made in the course or furtherance of vegetable selling and leasing enterprise. In addition, the supply will be connected with Australia and he is registered. In addition, the supply will not be GST-free. However, the supply will not be a taxable supply to the extent that it is input taxed. Section 40-65(1) provides that: 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). We consider that the sale of part of Entity As interest in the Sale Lot, comprising the house and curtilage, is input taxed under subsection 40-65(1). The sale of the remainder (ie besides the house and curtilage) of Entity A’s interest in the Sale Lot will be taxable supply. | Detailed Reasoning - Entity B’s supply of her interest in the Sale Lot: For the supply of Entity B’s interest in the Sale Lot to be a taxable supply, all of the requirements in section 9-5 must be satisfied. One of the requirements for a taxable supply is that you are registered or required to be registered for GST. GST registration 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 registration turnover threshold, which is currently $75,000 for entities other than non-profit entities. Entity C must meet both criteria for them to be re quired to be registered for GST. In this case we have found that the supply of Entity B’s interest is not in the course of either a lease or licensing enterprise nor is it in the course of a property development enterprise. Therefore, Entity B is not required to be registered under section 23-5. Conclusion As Entity B does not meet all the requirements of section 9-5 their supply of their interest in the Sale Lot will not be a taxable supply. | Detailed Reasoning - Entity C’s supply of her interest in the Sale Lot: For the supply of entity C’s interest in the Sale Lot to be a taxable supply, all of the requirements in section 9-5 must be satisfied. One of the requirements for a taxable supply is that you are registered or required to be registered for GST GST registration 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 registration turnover threshold, which is currently $75,000 for entities other than non-profit entities. Entity C must meet both criteria for them to be required to be registered for GST. In this case we have found that the supply of Entity C’s interest is not in the course of either a lease or licensing enterprise nor is it in the course of a property development enterprise. Therefore, Entity C is not required to be registered under section 23-5. Conclusion As Entity C does not meet all the requirements of section 9-5 their supply of their interest in the Sale Lot will not be a taxable supply.

ATO view documents: 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