Private ruling: goods and services tax (GST) and property subdivision
Published: October 2013

Ruling: Q1: Will GST be payable on your sales of the two new lots that will be created by the subdivision? | A1: No.

Relevant facts and circumstances: Individual 1 and individual 2 (you) are not registered for GST. You purchased a property a number of years ago. The property is located in Australia. Since that date, you have leased out the house on the property with the intention of holding it for many years and eventually building a family home. Since that date, you have struggled to keep up with bills etc and raise your children. You were intending to market the property for sale as is. Given the flat economic conditions, you would not have recouped your costs in interest and maintenance to the property. Hence, it has now been suggested that you subdivide the property to retrieve the funds outlaid. You will demolish the existing house on the property and subdivide the property into two lots. You are considering two options. You will sell the two new lots as vacant lots or you will sell one of these lots as a vacant lot and build a new house on the other new lot, in which case you will hold and lease out the new residential premises for the long term. You did not acquire additional land to be added to the original parcel of land You do not have a business organisation. The subdivision will cost a small amount of money. You will borrow a small amount of money to do the subdivision. You will connect the water supply to one of the new lots to be created by the subdivision as required by local council to secure approval for the subdivision. You will not do any further development in connection with the subdivision other than possibly building a new house. The existing house on the property in question is currently tenanted, but the current tenants will move out shortly. You lease out one residential premises elsewhere. You do not currently carry on any enterprise other than leasing out residential premises. The planned subdivision will be a one-off subdivision project.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(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 paragraph 9-20(1)(c) | 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 paragraph 23-15(1)(b) | A New Tax System (Goods and Services Tax) Act 1999 section 40-35 | 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 188-15(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 188-20(1) | A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision: Summary: GST will not be payable on your sales of the two new lots because you are not registered for GST and will not be required to be registered for GST when you sell these lots. | Detailed Reasoning - Detailed reasoning: GST is payable by you on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) You will meet the requirements of paragraphs 9-5(a) and 9-5(d) of the GST Act. This is because: · you will supply the properties by way of sale for consideration, and · the sales of the lots will be connected with Australia as the land is located in Australia Enterprise Section 9-20 of the GST Act defines enterprise to include: · an activity or series of activities done in the form of a business (paragraph 9-20(1)(a) of the GST Act) · an adventure or concern in the nature of trade (paragraph 9-20(1)(b) of the GST Act) · leasing out properties on a regular or continuous basis (paragraph 9-20(1)(c) of the GST Act) In accordance with paragraph 75 of Goods and Services Tax Ruling GSTR 2003/13, we consider that the supply, sale or disposal of enterprise assets will be in the course or furtherance of the enterprise in which those assets are used. Miscellaneous Taxation Ruling MT 2006/1 provides guidelines on the meaning of enterprise for ABN purposes. Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of enterprise for GST purposes. Paragraph 178 of MT 2006/1 sets out the main indicators of carrying on a business. It states: 178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are: · 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. Paragraphs 251, 253 to 259 and 261 to 265 discuss adventures or concerns in the nature of trade. They state: The frequency or number of similar transactions 251. The greater the frequency of similar transactions the greater the likelihood of trade. 253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties. Motive 254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. Trade v. investment assets 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. 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. 261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes. | 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) 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 (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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. We consider that where a property subdivision activity is of a large size and scale, it is more likely to be an enterprise. This is in line with the business indicator next to the eighth dot point in paragraph 178 of MT 2006/1. In accordance with paragraph 283 of MT 2006/1, the incurring of significant development costs in relation to a property subdivision activity and taking out a substantial loan to finance the development are indicators that the development may be an enterprise. You will sell a maximum of two lots in the situation in question. The property subdivision activity in question will be a one-off project. You will sell the property (or part thereof) due to financial difficulties. You did not purchase the existing property for the purpose of re-selling. You purchased the existing property with the intention of holding it for the long term as an income producing asset - you produce rental income from the property. You have held the property for the long term to produce rental income. Therefore, the existing property is an investment/capital asset. There will not be a change of purpose for which you hold the land. If you build a new house on one of the lots to be created by the subdivision, you will hold this lot to produce rental income, which is your current purpose of holding the existing property. You did not acquire additional land to be added to the original parcel of land. You do not have a business organisation. You have a coherent plan for the subdivision of the land. You will borrow very little to carry out the subdivision itself. You have not carried out the subdivision yet. You will connect water supply to one of the lots to be created from the subdivision as required by council in order to secure their approval for the subdivision. You may build a new house on one of the lots to be created from the subdivision. The level of development of the land will not be beyond that necessary to secure council approval for the subdivision (apart from possibly building a new house). Several of the factors in paragraph 265 of MT 2006/1 will be present in your case. However, the construction of the new house should be disregarded as you would retain the new house lot as a capital asset (you will retain it to produce rental income), rather than a trading asset. If the construction of the new house is disregarded, an analysis of the factors in paragraph 265 of MT 2006/1 would not suggest that your subdivision activity is a business or adventure or concern in the nature of trade. Additionally, you will only borrow a small amount of money to do the subdivision itself. Your property subdivision activity will be of a reasonable size and scale, and you would incur significant development costs, if you build a house on one of the lots created by the subdivision. However, the construction of the new house should be disregarded as far as determining whether you will be carrying on a business or adventure or concern in the nature of trade is concerned as you will retain the new house lot as a capital asset, rather than a trading asset. Your property subdivision activity would be of a very small scale, and you would incur very low development costs, if the construction of the new house was disregarded. We do not consider that your property subdivision activity would be a business or adventure or concern in the nature of trade based on the following factors: · the frequency of property sales will be low · you will sell the property (or party thereof) due to financial difficulties · you did not purchase the property for the purpose of re-selling · the fact that the existing property is currently a capital asset · you would hold the new house lot as a capital asset (as you would retain it to produce rental income) · if the construction of the new house was disregarded, an analysis of the factors in paragraph 265 of MT 2006/1 would not suggest that your subdivision activity is an enterprise (the construction of the new house should be disregarded because you would retain the new house lot as a capital asset), and · the property subdivision activity would not be of a large size and scale, and you would incur very low development costs, if the construction of the new house was disregarded (which is appropriate because it would be a capital asset), Your sales of the two new lots will be the mere realisation of capital assets. However, your sales of the two new lots will be supplies you make in the course or furtherance of the leasing enterprise that you carry on, because you are using the existing property in that leasing enterprise. GST registration You are not registered for GST. We shall now consider whether you are required to be registered for GST. Section 23-5 of the GST Act provides that an entity is required to be registered for GST if: (a) the entity is carrying on an enterprise, and (b) the entity's GST turnover meets the registration turnover threshold (which is $75,000). In accordance with paragraph 23-15(1)(b), the registration turnover threshold is $75,000. You are carrying on a leasing enterprise. Therefore, the requirement of paragraph 23-5(a) of the GST Act is met. Subsection 188-10(1) of the GST Act sets out the circumstances under which an entity's GST turnover meets a particular turnover threshold. It states: You have a GST turnover that meets a particular *turnover threshold if: (a) 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 (b) your projected GST turnover is at or above the turnover threshold. Subsection 188-15(1) of the GST Act specifies how to calculate current GST turnover. Your current GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connection with an *enterprise that you carry on. Subsection 188-20(1) of the GST Act specifies how to calculate projected GST turnover. It states: Your projected GST turnover at a time during a particular month is the sum of the *values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than: (a) supplies that are *input taxed; or (b) supplies that are not for *consideration (and are not *taxable supplies under section 72-5); or (c) supplies that are not made in connected with an *enterprise that you carry on. Section 188-25 of the GST Act provides that in working out your projected GST turnover disregard any supply made by you by way of transfer of ownership of a capital asset of yours. Rental income from residential premises is excluded from the calculation of GST turnover because renting out residential premises is an input taxed supply (in accordance with section 40-35 of the GST Act). Your sale of the two new lots to be created from the subdivision will be sales of capital assets of yours. Therefore, these sales will not be included in the calculation of your projected GST turnover. Hence, based on your current income earning activities and your two alternative plans in relation to the two new lots to be created from the subdivision, your projected GST turnover will be zero when you sell the two new lots. Therefore, you will not have a GST turnover that meets the registration turnover threshold when you sell the two lots. Hence, you will not meet the requirement of paragraph 23-5(b) of the GST Act. As you will not meet the requirements of section 23-5 of the GST Act, you will not be required to be registered for GST. Therefore, you will not meet the requirement of paragraph 9-5(d) of the GST Act because you are not registered for GST and will not be required to be registered for GST when you sell the two new lots. As you will not meet all of the requirements of section 9-5 of the GST Act, you will not make taxable sales of the two new lots. Hence, GST will not be payable on your sales of these properties. Additional information If local council requires you to connect utilities in addition to the water supply to one of the lots created by the subdivision, this would not result in different GST implications. The decision in this ruling is based on the facts provided. If your circumstances change between now and when you sell the new lots (for example, you start up a business elsewhere), this may affect the GST implications.