Private ruling: Goods and services tax (GST) and the sale of subdivided land
Published: July 2014

Ruling: Q1: Are you making a taxable supply when you sell subdivided vacant land? | A1: No. Consequently, you must repay the GST credits claimed for the subdivision expenses.

Relevant facts and circumstances: You are a partnership carrying on a commercial leasing enterprise in relation to shops. Your turnover for the commercial leasing enterprise is below the GST registration threshold. You have registered for GST as you believed that you would be carrying on an enterprise in regards to a subdivision of land and wanted to claim the GST credits. You now believe that you are not carrying on an enterprise in regards to a subdivision of land and should not have registered for and claimed GST credits. In your private capacity, you purchased land (land 1) and built a house, your primary residence. In your private capacity, you purchased further adjacent land (land 2). You have run steers on this land to keep the grass down. It has not been used for commercial purposes. You have subdivided Land 1 into two blocks, a block with your primary residence (Lot 1) and another block (Lot 2). You have subdivided Land 2 into two blocks (Lots 3 and 4). These Lots are in a different location to your shops and are not part of the commercial leasing enterprise. You are selling the three subdivided blocks, Lots 2, 3 and 4. The Shire approved the subdivision subject to various conditions. You have provided a copy of the Planning Permit. You have claimed GST credits on the development costs. All of the Shires conditions have been met and they have approved the subdivision. You have engaged a real estate agent to sell the blocks of land. None have been sold at this stage. You have funded the development partly with personal capital and partly with a bank loan. You have not claimed the interest on the bank loan as a business expense. The zoning of the land is residential and has not changed.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 and | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-20(1).

Reasons for decision: Summary: In this ruling, please note: • All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless stated otherwise. • All terms marked by an asterisk are a defined term in the GST Act unless stated otherwise. You must pay the GST payable on any taxable supply that you make. Section 9-5 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. In your case, you will make a supply of land in Australia for consideration and you are registered for GST satisfying subsections 9-5(a), (c) and (d). Further, the GST-free and input tax provisions do not apply in your circumstances. While you carry on an enterprise of commercial leasing, it is necessary to determine if the supply of the land is made in the course or furtherance of an enterprise you carry on. | Detailed Reasoning - Enterprise: Subsection 9-20(1) states: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a *business; or (b) in the form of an adventure or concern in the nature of trade; or … 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) considers the meaning of carrying on an enterprise. Paragraphs 262 and 263 of MT 2006/1 state: | 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. ... Your subdivision and sale of the property will be a 'one-off' or isolated real property transaction. Paragraphs 264 to 269 of MT 2006/1 outline factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade' and state: 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… 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. 266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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. … 269. The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience… In your case, the purpose for which the land was held remains residential. The additional land acquired was acquired a long time ago and you have not been involved in property developments previously. You had a coherent plan for the subdivision in that you have lodged the development application and completed all the requirements to obtain the subdivision approval and you have also engaged a real estate agent to sell the properties. However, the level of development on the land consisted only of that necessary to obtain Shire approval for the subdivision and no buildings have been erected on the land. Also, while you have borrowed funds to partially finance the subdivision, you have not claimed the interest as a business expense. We consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the subdivision does not amount to an enterprise and is a mere realisation of a capital asset. Therefore, you did not satisfy paragraph 9-5(b) in relation to the subdivision of land. As all the requirements of section 9-5 are not satisfied if you proceed with the sale of the land in the manner outlined, you will not be making a taxable supply. There will be no GST on the sale of the land. As you have claimed GST credits in relation to the subdivision you will need to pay back the GST credits. There is information available on the ATO website ato.gov.au titled, Correct a mistake or dispute a decision that may be of assistance.