Private ruling: GST and property subdivision
Date of advice: 12 November 2021
Published: January 2022
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: The date of issue of this private ruling

Ruling: Q1: Since 20XX, has the trust been required to register for GST? | A1: No | Q2: Is the trust now required to register for GST? | A2: No | Q3: Do any of the trust's historical or future sales of lots constitute taxable supplies? | A3: No

Relevant facts and circumstances: A trust owns land. The trust engaged a developer to undertake the subdivision and development into multiple residential lots (the lots). The Commissioner previously issued a private ruling (the income tax ruling) confirming that the sales of the lots represent the mere realisation of a capital asset, which falls for consideration under the CGT provisions. The application for the income tax private ruling, the supporting documentation attached, and the further submissions form part of the facts of this ruling. The trust cancelled its GST registration with effect from 20XX and has not been registered for GST since this date. Prior to the development, the property comprised farmland and a residence. The trust purchased the property in the 19XXs for use as a private residence for one of the beneficiaries of the trust and also for carrying out a primary production / farming business. In respect of the primary production activities, the property was used for primary production since its date of purchase until 20XX. Since 20XX, the farmland has been leased, who used the land for farming purposes. In respect of the residence, this was leased out for investment purposes from 19XX until mid-20XX. In 20XX, the leases of both the farmland and the residence were terminated as all the land came under the control of the developer. For many years, the only activities of the trust were its lease of the farmland and the residence. The rent received for these leases has been less than $10,000 per annum, noting that part of this rent is residential rent. Council rezoned the property which allowed the property to be developed for residential purposes. From 20XX onwards, the trust received various offers to purchase the property as a single lot. Ultimately, the trust decided the best way to realise the sale of the land was via a development arrangement with the developer and hence entered into a Development Agreement (the agreement) with the developer for the development and sale of the property. The Development and the Development Agreement The Development Agreement forms part of the facts of this ruling. The features of the arrangement include: The Landowner appoints the Developer to undertake the Development. The Developer is responsible for the control, management, co-ordination and supervision of all activities required for the Development. The Landowner grants the Development Rights to the Developer in consideration of the Development Rights Fee. The Development Rights entitle the Developer to: be the sole and exclusive developer of the Development and of the Land; payment of the Development Fee from the Landowner; and to carry out the Development. There are three development phases with pre-agreed prices for each lot sold. The role of the Landowner is described in the Development Agreement. The Landowner does not play any active role in undertaking or executing the Development. The trust's main involvement in the development has been a review of the sales reports provided by the Developer approximately every X months and raising queries regarding particular details of those reports. The trust has only received the Landowner Lot Amount that it was entitled to. During the income year, it has not received any other payments nor incurred any other costs other than transaction costs for sales and water rates (These costs were reimbursed by the Developer. The Developer's role is described in the Development Agreement. The Developer must pay and fund all costs and charges associated with the Development. The Development will be undertaken at the Developer's sole risk, including the risk of obtaining the Approvals. The Developer receives a Development Fee in consideration for the completion of the Developer's obligations. The Landowner agrees to grant security to the Developer over any part of the Land that is either Development Land or Drawndown Land (Security Land). The Landowner agrees to allow any security granted to be registered on the title. Aside from the Securities provided, the Landowner did not enter in, provide, or act as a guarantor for any loan in relation to, or for the purpose of, the Development. Developed lots are vacant land. No residences have been constructed on the lots prior to their sale by the trust. Lots were generally sold off the plan. Settlements of lots commenced in 20XX. Settlements have taken place periodically since that time. The development of the property continues. The development is expected to be completed by June 20XX. To illustrate the development, you have provided an example of the sale of one lot. You note the arrangements with the developer are not the subject of this ruling application, however, are provided for completeness. The trust is not registered for GST, so there is no GST on the sale of the lot. The documents illustrating this arrangement, including the executed sale contract, settlement statement and the developer's tax invoice, are attached to your private ruling application. In a recent financial year, the trust commenced investing some of the sale proceeds in Australian term deposits, shares and other ASX listed investments. It received interest and dividends in that financial year (which it distributes to beneficiaries). It expects to continue to invest the sales proceeds in this manner for the foreseeable future. You also provide the following additional information: • The trust was registered for GST but cancelled its GST registration. It has not been registered since 20XX. • The developer has been registered for GST since 1 July 20XX. • The only income received by the trust recently has been rent from leasing the farmland, residential rent, sales proceeds from lot sales and dividends and interest. The only income expected to be received by the trust in the future is the sale proceeds from lot sales and the receipt of dividends and interest from its investment activities. • Once the lots are sold and the development complete, the directors of the trustee expect that its only activities will be its investment activities as described above. • Going forward, the trust does not expect to carry on any activities other than the sale of lots and its investment activities as described above. Further, the trust has no expectation to earn any revenue other than the sales proceeds from lot sales and dividends and interest.

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 188-10 | A New Tax System (Goods and Services Tax) Act 1999 section188-15 | A New Tax System (Goods and Services Tax) Act 1999 section 188-20 | A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision: Summary: Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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. Under paragraph 9-5(d) of the GST Act, one of the requirements for making a taxable supply is that the supplier is: (i) registered for GST, or (ii) required to be registered for GST. | Detailed Reasoning - Whether your GST turnover meets, or does not exceed, a turnover threshold - s188-10 of the GST Act.: (1) 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. Under section 188-15 of the GST Act, generally: (1) 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. Under section 188-20 of the GST Act, generally: (1) 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 connection with an *enterprise that you *carry on. In your case, the income you have derived in the current month and the preceding 11 months has been income derived from the sale of vacant land which is over $75,000. In calculating projected GST turnover, section 188-25 of the GST Act provides: In working out your *projected GST turnover, disregard: (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and (b) any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an *enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise. The requirements in sections 188-15 and 188-20 largely mirror the requirements of paragraph 9-5(b) of the GST Act. The words 'in connection with an enterprise that you carry on', should therefore be read as having the same meaning as the words 'in the course or furtherance of an enterprise that you carry on' in paragraph 9-5(b) of the GST Act. A supply of a private commodity, such as when a plumber sells his classic car privately, will not be a supply 'in connection with' an enterprise he carries on. 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 includes guidance onthe meaning capital assets. GSTR 2001/7 explains: 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income [...] 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47. 36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. [Footnotes excluded]. Considering the explanation in GSTR 2001/7, the land is potentially a capital asset of relevance to determining your projected turnover. If the dealing in land is considered part of a business, or a one-off adventure in the nature of trade, the sale will not be considered capital but rather revenue in nature. The ATO view is set out 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 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 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. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following: • Assets can be categorised as trading/revenue assets or capital/ 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. • 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. The property was originally held as a residence and also as part of your leasing enterprise. Paragraph 264 of MT 2006/1 discusses two court cases [ Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty)] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets. From these 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 as opposed to the mere realisation of a capital asset. Paragraphs 178 of MT 2006/1 set out the indicators of a business and paragraph 265 sets out relevant factors when examining isolated transactions. | Detailed Reasoning - Factors used to examine an isolated transaction:: In addition, other factors that may be relevant include: No single factor will be determinative. Rather, it will be a combination of factors that will lead to a conclusion as to the character of the activities. In applying the above factors to this case, we acknowledge that: • The trust decided the best way to realise the sale of the land was via a development arrangement with the developer. • The developer undertakes all aspects of the development of the property and sale of the lots and is liable for all costs of the development. The developer was compensated for its services via a development fee. The trust has had an entirely passive role in the development; its only role being as the vendor of the lots. • The indicators above for isolated transactions also do not apply in your case based on the facts you have provided. On balance, we consider that over the period that the land was held by you, its character has not changed from capital to revenue. Accordingly, paragraph 188-25(a) of the GST Act will apply and the supply such that the sale will not be included in your projected turnover. The Commissioner is satisfied that you not required to be registered for GST and the sale of the land is not taxable as it apparent that you are not in business buying and selling property as trading stock.

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; | commercial sales of product; and | the entity has relevant knowledge or skill. | 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. | the length of time the property had been held and the purpose to which it was put to in that time; and | the personal involvement in the development activity. | The property the trust is selling is the now vacant land originally purchased as a primary residence and farmland which has been held since the 19XXs. | The trust has used the property as an asset to derive income from the leasing of the land or as a private residence since it was acquired until the development commenced.