Edited version of private ruling

Authorisation Number: 1011432759106

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Ruling

Subject: Goods and service tax (GST) and the sale of subdivided land

Question A: Are you carrying on an enterprise for GST purposes for which you would be required to register for GST, or is your sale of this land the disposal of a capital asset for which you are not required to register for GST?

Question B: If any of the remaining blocks of land are sold will this be treated as carrying on an enterprise for GST purposes?

Answer

Question A: Yes. You are carrying on an enterprise for GST purposes, and you are required to be registered for GST.

Question B: Yes. If any of the remaining blocks of land are sold, you will still be regarded as carrying on an enterprise for GST purposes.

Relevant facts and circumstances

Your ruling is based on the following facts.

· You are registered for GST.

· Our records for your GST registration show that you are running an enterprise of land development and subdivision.

· You and your late partner acquired land many decades ago.

· This land is located in Australia.

· Together, you and your late partner built a residential dwelling as your family home on this land soon after purchase.

· Together, you and your late partner farmed the land at this address until your spouse died some years ago.

· On that date you acquired your spouse's share in the land.

· You have lived on the property since you moved into the family home many decades ago, and you intend to remain there in residence indefinitely.

· In more recent years you intended to gift a block of land to each of your children.

· As a consequence you commenced the process of subdividing your land into a number of house blocks.

· You have submitted a plan of this subdivision for examination.

· The remaining land has been left as broad acres.

· This subdivision was to be carried out in stages.

· One stage of this subdivision consisted of a number of lots on the plan of subdivision.

· The titles to some of these lots in the first stage were to be transferred into your children's names, and the remaining blocks were to be sold to the public.

· The next stage of the subdivision consisted of more blocks, as marked on the plan of subdivision.

· You will retain the final house blocks as marked on the plan of subdivision, and also the remaining acreage.

· You originally engaged a relative to oversee and co-ordinate the subdivision process, after which one of your children assumed the task of supervision of the subdivision.

· The services of contractors and engineers have been employed to undertake the work of subdividing the land and providing services to the land.

· However you have not been personally involved in the day to day management of the subdivision or in dealing with the local council and engineers.

· The costs of subdivision thus far have been several hundred thousand dollars.

· These costs have included council fees, surveyors and engineers fees, legal fees, agent's fees, interest on a bank loan, and sewerage and drainage excavation work.

· The council required that gas, underground electricity and sewerage services be supplied to the subdivided blocks.

· The land has only been developed to the minimum level required by the council.

· Each block has been sold or will be sold only as vacant land.

· Due to a blow out in the costs associated with the subdivision and other personal borrowings you were unable to gift the blocks of land to your children as you intended to do.

· You have now sold all of the blocks originally subdivided.

· All of these blocks were sold recently for in excess of $75,000 each.

· You engaged a real estate agent to advertise and sell these blocks.

· The real estate agent originally advised you to sell these blocks by auction.

· However, the auction was cancelled the day before it was due to be held due to lack of interest.

· The sale contracts for each block showed that the margin scheme would be applied to each taxable supply of land.

· You prepared and lodged an activity statement for the relevant recent tax period which showed a GST liability.

· A valuation of the property was carried out by a certified practicing valuer.

· This valuation provided a substantial retrospective valuation of the property which was still less than the total sale price of the blocks.

· You used this valuation to apportion values to each block for the purpose of calculating the GST liability using the margin scheme.

· You have not decided whether to sell the other blocks..

· Council has not issued a final subdivision certificate for this stage of the subdivision.

· You will need to contribute a further several thousand dollars to the council to obtain this certificate.

· You did not have a profit motive when you first undertook this subdivision as your original intent was to gift a block of land each to your children.

· You have had no business plan in undertaking this subdivision.

· You have not undertaken any activity of subdivision before.

Reasons for decision

The term 'enterprise' is defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) so as to include an activity or series of activities done:

· in the form of a business

· in the form of an adventure or concern done in the nature of trade, and

· in the form of a lease, license or other grant of property on made on a regular or continuous basis.

The definition of the term 'enterprise' for GST purposes is discussed in the following two public rulings available on our website www.ato.gov.au

· 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)

· Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2006/6)

Paragraphs 6 and 10 to 15 of GSTD 2006/6 state:

What is an enterprise?

6. An enterprise is defined as an activity or series of activities done in a certain

manner or by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade, leasing on a regular or

continuous basis, activities done by charitable or religious institutions, superannuation

funds, and activities done by the Commonwealth, a State, a Territory, or local government.

…

An activity or series of activities

10. Essentially, this is any act or series of acts that an entity does. The meaning of the term 'activity or series of activities' for an entity can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

In the form of a business

11. An enterprise includes an activity, or series of activities, done in the form of a

business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

12. The definition of 'business' in section 195-1 is the same as that used in

subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the

ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'.

In the form of an adventure or concern in the nature of trade

13. 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.

However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or

concern in the nature of trade' is wider than 'an adventure or concern in the nature of

trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

When is an enterprise being carried on?

15. The term 'carrying on' is defined in section 195-1 and ensures that activities done

in the course of commencement or termination of an enterprise are included in determining whether the activities of the entity amount to an enterprise.

Paragraphs 159 to 160 of MT 2006/1 state:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise…

In considering whether or not you are carrying on an enterprise for GST purposes, it is first necessary to identify whether or not you are carrying on an identifiable activity that may be regarded as an enterprise. Based on the facts that you have provided, you are carrying on the identifiable activity of the subdivision and sale of land.

As it is established that you are carrying on your activity of the subdivision and sale of land, it is then necessary to determine whether or not in doing so you are carrying on an enterprise for GST purposes. If so, it is then necessary to determine whether or not you are registered or required to be registered for GST purposes, and whether or not your supplies of subdivided land are taxable supplies.

As discussed in paragraphs 177 to 179 of MT 2006/1, to determine whether an activity or a series of activities amounts to a business, the activity needs to be considered against the indicators of a business established in case law.

The following indicators of carrying on a business have been so established:

· whether there is a significant commercial activity

· there is a purpose and intention to engage in commercial activity

· an intention to make a profit, and whether the venture is profitable

· the activity is recurrent or regular in nature

· the activity is carried on in a similar manner to that of other businesses in the same trade

· the activity is carried on in a businesslike manner with records being kept

· the activities are of a reasonable size or scale

· there is a business plan

· there are commercial sales of product, and

· the entity has relevant knowledge and skill.

MT 2006/1 continues:

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…

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

• 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.

It is understood that it was not your initial intention to engage in a commercial activity. It is also understood and that you did not have the original intention of making a profit, and that your original intent was to pass on land to your children. It is also understood that you did not start out with a business plan, and that you had not undertaken any activity of this kind previously. The fact that the land has only been developed to the minimum level required by the council is also noted. Together these factors might indicate that your activity of subdividing and selling land does not amount to an enterprise.

However, the view of the Taxation Office as stated in GSTD 2006/6 is that for GST purposes the meaning of the term 'enterprise' is wider than the terms 'business' or 'activity in the nature of trade', and that a single activity can constitute an enterprise in some circumstances. Whether or not an activity constitutes an enterprise will depend on a number of factors. As stated in MT 2006/1, to determine whether or not an enterprise exists it is necessary to examine all of the facts of each case, and whether there is a combination of factors that will lead to a conclusion as to the character of the activities.

In terms of the indicators of whether there is a business discussed above, it can be said that your activity of subdividing and selling land is a significant commercial activity as there have been several sales of blocks of subdivided land and the total proceeds of these sales is in excess of $75,000. This view is supported by the level of expenses incurred in proceeding with this subdivision.

It can also be said that your activity of selling the land is profitable given, the valuation of the land, the costs involved and the relatively greater price for which the blocks sold thus far have been sold.

Further, your activity of subdivision is continuing at present as the process is not completed for all blocks. In addition, your selling of subdivided blocks may continue in future as you have not sold all of the blocks already subdivided, and you are considering selling more of these blocks. Thus it can be said that your activity is recurrent in nature.

Given that you have finished the subdivision of a number of blocks of land, that you are in the process of creating more blocks of land by way of subdivision, that you have sold a number of subdivided blocks, and that you are considering selling more, your activity of subdividing and selling land is of a significant size and scale, and it is ongoing in nature.

In addition, the prices for which you have sold the blocks so far, the fact that you have employed the services of an estate agent to sell the land and also the services of professional valuer for the purpose of land valuation indicate that you have made commercial sales of land.

Further, you have employed the professional services of real estate agents and land valuers; contractors and engineers have been employed to undertake the work to subdivide and provide services to the land; you have appointed family members as manager of your activities; and planning permission has been obtained from the local council to subdivide the land. These facts support the view that this is a significant commercial development. They demonstrate that you have employed people with the relevant knowledge and skill to undertake your activity of subdividing and selling land.

The employment of these professional and skilled people also demonstrates that you have both carried on your activity of subdividing and selling land in a manner similar to a business or an adventure or concern in the nature of trade. As the definition of the term 'enterprise' for GST purposes encompasses activities done in the form of a business or in the form of an adventure or concern done in the nature of trade, it is determined that your activity of subdividing and selling land is an enterprise for GST purposes.

The view that your activity of subdividing and selling land is an enterprise for GST purposes is also supported by the commercial nature, size and scale, recurrent nature and use of professional and skilled services to undertake the activity.

As such, there has been a change in purpose for which this land has been held. The subdivided land has changed in nature from being a capital asset to be being brought into account as a revenue asset. On that basis the sale of the subdivided blocks of land cannot be regarded as the mere disposal of a capital asset.

Additional support for the view that your activity of subdividing and selling land is an enterprise for GST purposes is to be found in the facts that you have borrowed funds to carry out this activity on such a significant scale, and that given the size and scale of the activity, the planning involved in carrying it on have required a coherent plan. Indeed, you have obtained a GST registration, applied the margin scheme to the sale of the blocks of land and paid GST on these supplies of land by way of sale. As such, you have already accepted that you are carrying on an enterprise for GST purposes and that you have made taxable supplies under section 9-5 of the GST Act.

Under section 23-5 of the GST Act you are required to be registered for GST if:

you are carrying on an enterprise; and

your GST turnover meets the registration turnover threshold.

You are required to be registered if you are carrying on an enterprise and your GST turnover exceeds the registration turnover threshold, which is currently $75,000.

Based on the facts provided, the GST turnover from your sale of the blocks of land is over the registration turnover threshold. As such you are required to be registered for GST.

Question B:

It has been determined that for GST purposes you are carrying on an enterprise of subdividing and selling land. Any further sales undertaken as part of this activity will still be regarded as carrying on an enterprise for GST purposes.

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