Private ruling: GST - Property
Date of advice: 26 September 2018
Published: November 2018
Ruling period: 26 September 20xx to 25 September 20xx
Date scheme commenced: 26 September 20xx

Ruling: Q1: Will your sale of the vacant subdivided land be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | A1: No | Q2: Will your supply of new residential premises constructed on the subdivided land be a taxable supply pursuant to section 9-5 of the GST Act? | A2: Yes

Relevant facts and circumstances: You are not registered for GST. You own a residential house situated on approximately XX square metres of land (the Property). You have owned the Property since XXYYYY. The property has been rented continuously since acquisition and has never been used as your primary residence. The house was constructed in the late 19XX’s/early 19XX’s and has never been renovated. You want to the sell the Property so that you can purchase a new house closer to your ageing parents. You have been advised by your real estate agent that a substantially higher price can be achieved by demolishing the house and subdividing the land as the house is in poor condition and would require substantial expenditure to ready it for sale. Due to the ageing housing stock, much of which is in poor condition, most properties of this type sold within the area are subdivided by the incoming owners. You do not have a formal business plan but have engaged builders who offer subdivision services. You have paid a deposit to have the required plans and documents prepared to enable a subdivision request to be submitted. The builder will manage the subdivision on your behalf. The builder will also provide a quotation for the construction of new houses on each of the blocks in accordance with the plans. If it will increase the eventual sale proceeds, you may build two houses (one on each property) and immediately sell them. If this occurs, the builder will manage all aspects of both the subdivision and the construction process. The proposed dwellings will be detached three bedroom houses, each with two bathrooms, one living area and single garage. The subdivision has not yet commenced and a final decision has not been made on whether the houses will be built. Final costings have not been provided by the builder as these cannot be completed until soil tests are conducted. Bank finance will be sought initially, but no application has been made at this stage. The property has been held for residential leasing since you acquired it. You have not previously undertaken a subdivision process and have no expertise in the tasks required to complete the subdivision. You will engage a real estate agent to market and sell the properties. Your intention in subdividing the property is to maximise the yield on the disposal of the property which you held for xx years. You previously owned one other rental property, which was sold recently. You also own your primary residence which was purchased in YYYY and in which you resided for xx years prior to moving in with your partner. The property was then rented between YYYY and late YYYY following which your relationship ended and you moved back to this property.

Relevant legislative provisions: A New Tax System (Goods and Services Tax ) Act 1999 Section 9-5 | Section 9-20 | Paragraph 9-20(1)(a) | Paragraph 9-20(1)(b) | Section 9-40 | Section 23-5

Reasons for decision: Summary: Will your sale of the subdivided, vacant land be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 9-40 provides that you are liable for GST on any taxable supplies that 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 (Australia); and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. On the facts supplied, paragraphs 9-5(a) and 9-5(c) are satisfied. Further, the supply of the vacant lots in your factual situation will neither be GST-free nor input taxed. The question in this case is whether you will be making the supply of the vacant subdivided lots in the course or furtherance of an enterprise that you carry on. 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; ● in the form of an adventure or concern in the nature of trade; ● on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. You are carrying on an enterprise of supplying residential property by way of lease as per the definition above. Section 195-1 states that the phrase ‘carrying on’ in the context of an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’. The property in question was a capital asset held as part of your leasing enterprise. However, your GST turnover from this enterprise is below the GST registration threshold and you are not registered for GST. The relevant issue in your circumstances is whether the nature of the asset has changed from a capital asset used in your leasing enterprise to trading asset as a consequence of your engaging the developer to subdivide and sell the Lots. 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). 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 in 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. | Detailed Reasoning - In the form of a business: Paragraphs 170 to 179 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. Given the facts of this case, in particular the length of time you held the property, the small scale of the subdivision and that you have not previously engaged in any subdivision activities, we consider that the activities which you plan to undertake in subdividing the land and selling the vacant lots do not display the indicators of a ‘business’ listed above. | Detailed Reasoning - 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. Paragraph 245 of MT 2006/1 refers to ‘the badges of trade’. Paragraphs 247 to 257 of MT 2006/1 discuss the various ‘badges of trade’ which may provide guidance as to whether the activities concerning an asset have the characteristics of ‘trade’ or whether the asset is 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. Paragraph 264 of MT 2006/1 references the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) which provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. Paragraph 265 of MT 2006/1 states that from the cases of Statham and Casimaty, a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: ● there is a change of purpose for which the land is held; ● additional land is acquired to be added to the original parcel of land; ● the parcel of land is brought into account as a business asset; ● there is a coherent plan for the subdivision of the land; ● there is a business organisation – for example a manager, office and letterhead; ● borrowed funds financed the acquisition or subdivision; ● interest on money borrowed to defray subdivisional costs was claimed as a business expense; ● there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and ● buildings have been erected on the land. Paragraph 266 of MT 2006/1 provides in part, that 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, rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. | Detailed Reasoning - Application to your situation: You have owned the Property since YYYY and have rented it continuously during this period. You now wish to sell the property as you want to purchase a new house close to your ageing parents and need to release the equity from the property to do so. Due to the age of the property and the substantial expenditure required to ready it for sale, a real estate agent has advised that a substantially higher price could be obtained for the property by either demolishing the existing house, subdividing the land and selling the vacant lots or alternatively, two new residential homes could first be constructed on the respective blocks before they are sold. Although you have engaged builders and finance will be sought from a bank, we consider that, on balance you will not be carrying on an enterprise when you subdivide and sell the vacant lots. You will merely be realising a capital asset. | Detailed Reasoning - Will the supply of new residential premises constructed on the subdivided land be a taxable supply pursuant to section 9-5 of the GST Act?: As discussed above, 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. In applying the factors listed in paragraph 265 of MT 2006/1: ● there will be a change of purpose for which the land is held; ● there is a coherent, though limited, plan for the subdivision of the land; ● borrowed funds will finance the acquisition or subdivision; ● interest on money borrowed to defray subdivisional costs will be 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 will be erected on the land. Given the above, we consider that your activities involving the construction and sale of new residential premises will constitute ‘carrying on an enterprise’ for the purposes of the GST Act. As you are not currently registered for GST, the next issue to consider is 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 registration turnover threshold (currently $75,000). As discussed above, it is considered that the subdivision of the land and construction of new residential premises constitutes an ‘enterprise’ for GST purposes. The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or b) your projected GST turnover is at or above $75,000. Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months other than supplies that are input taxed. You are currently making input taxed supplies of residential rent and therefore your current GST turnover does not exceed the turnover threshold. However, when you construct and sell the new residential homes, you will be required to register for GST and make a taxable supply of the new residential premises constructed as your projected GST turnover will not be below $75,000. | Detailed Reasoning - Conclusion: You will make a taxable supply of new residential premises pursuant to section 9-5 as you will be making a supply for consideration, in Australia, in the course or furtherance of a property development enterprise and you are required to register for GST.