GST - sale of subdivided lot

1 Will GST be payable on the sale of subdivided vacant land under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

1 No. This ruling applies for the following period XX XXX 20XX - XX XXX 20XX The scheme commences on: X XXX 20XX

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You purchased vacant land located at on XX XXX XXXX for $XXXX The Property was formally known as Lot XX on Plan of Subdivision XXX being the land contained in Certificate of Title volume XX folio XX When purchased, the Property consisted of approximately XX sqm in size and was zoned General Residential Zone 1 (GRZ1). You funded the purchase of the Property through a mortgage with the Bank XX XXX XXXX Your initial intention was to build a single house on the Property, but after receiving advice from your spouse you decided to subdivide the Property into two lots and to build a two-story house on each lot. The intention was to lease one of the houses and reside in the other. Subdivision and development of the Property On the XX XXX XXXX you applied for the development of the Property.

On XX XXX XXXX you obtained a Planning Permit for the development of the land for two dwellings in accordance with the endorsed plans from the Council. The endorsed plans were drafted. There was no reference to the subdivision of the property. On XX XXX XXXX there was an appeal outcome. On XX XXX XXXX you received an email from your mortgage broker notifying you that you were not able to secure finance for the construction of both houses as planned. You decided to subdivide the Property into two lots and only construct one house on the rear lot known as Unit XX, whilst leaving the front lot - Unit XX vacant. On XX XXX XXXX you entered into a contract with builder - to construct the two-storey house on Unit X for $XXXX. This contract also included the construction of an access driveway along the entire boundary fence and an underground drainage system which provides for both lots. On the XX XXX XXXX you engaged Surveyors to provide surveying, land and engineering and town planning consultancy services relating to the subdivision/development of the Property. On XX XXX XXXX you applied for the subdivision of the Property.

On XX XXX XXXX you obtained a planning permit for the two-lot subdivision in accordance with the development permit for two dwellings in accordance with the endorsed plans. The Planning Permit provides for the subdivision of the vacant land as follows: •                     front lot comprising of approx. XXXsqm (Unit XXX X or XXX) •                     rear lot comprising of approx. XXX sqm (Unit<number) •                     common area comprising being approx. XXX sqm communal driveway and the construction of a two-story, 3-bedroom, 2-bathroom house on the rear lot. This planning permit would expire if within XXX years of its issue date, the plan of subdivision was not certified or not registered within XXX years of the certification of the plan of subdivision Construction of the house commenced on the XX XXX XXXX, final inspection was conducted XX XXX XXXX and was completed on XX XXX XXXX. This property has been leased since XX XXX XXXX.

Due to delays in the development/subdivision of the Property, you applied and were granted a planning permit extension on the XX XXX XXXX from the Council. The planning permit expires if the development of the land for two dwellings is not completed by XX XXX XXXX. On XX XXX XXXX the Certificate of Titles were issued for both Lots - Lot XXX A and Lot XXX B on Plan of Subdivision contained in Certificate of Titles. Funding You refinanced your loan to fund the construction of the house on Unit XXX. On XX XXX XXXX you obtained approval for an investment loan of $XXXX requiring principal and interest repayments for the term of the loan being XXX years. You nominated as your security for this mortgage: •                    Property A •                    Property B •                    Property C You funded a number of subdivision costs from your savings. Sale of subdivided vacant land Since you were unable to secure finance to construct a house on Unit XXX, the land is excess to your needs, and you plan to sell the subdivided vacant land to reduce the mortgage on the existing property. This will allow you to live in the house upon retirement.

To date, you have not engaged a real-estate agent to market the subdivided vacant land. The estimated market value of the subdivided vacant land is between $XXXX to $XXXX. Other properties/investments You currently own the following other investment properties: •                     Property B This property was purchased in XX XXX XXXX and has since been consistently used as a rental property. •                     Property C Other You are not currently registered for GST. You have not undertaken any property developments in the past. You have no projected cash flow statements and projected financials relating to the development of the Property as your initial intention was to reside in one of the properties.

A New Tax System (Goods and Services Tax) Act 1999 section 9-5 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 section 40-65 A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Issue 1 In this ruling, •                     unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) •                     all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. •                     all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Question 1 Will GST be payable on the sale of subdivided vacant land under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Detailed reasoning Section 9-40 provides that you are liable for GST on any taxable supplies that you make. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which provides: 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; 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. Division 38 and 40 provides for certain supplies to be GST-free and input-taxed respectively. We do not consider Division 38 and 40 to be applicable to the facts of this case. Accordingly, the sale of the Subdivided Vacant Land will not be a GST-free or an input-taxed supply. For the sale of the Subdivided Vacant Land to be a taxable supply, all the requirements in section 9-5 must be satisfied. Based on the information that you provided, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act when you sell the Subdivided Vacant Land as: •                     The sale of the Subdivided Vacant Land will be for consideration; and •                     the supply will be connected with the indirect tax zone as the Subdivided Vacant Land is located in Australia. The primary issue to be resolved is whether the supply of the Subdivided Vacant Land will be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b)). If so, a further issue to be considered is whether you will be required to be registered for GST.

Supply in the course or furtherance of enterprise Section 9-20 relevantly defines enterprise to include an activity, or series of activities done: a)            In the form of a business b)            In the form of an adventure or concern in the nature of trade or 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'. This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise. The meaning of 'enterprise' is considered 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) and in 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) which provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act. Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise: 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. Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise: 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. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Consequently, the relevant activities are the activities associated with the purchase of the Property, its subdivision, the marketing and eventual sale of the Subdivided Vacant Land. Firstly, is it necessary to consider whether your activities are in the form of a business. In the form of a business Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Paragraphs 170 to 232 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. Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, with reference to the principles in TR 97/11: Indicators of a business 177.        To determine whether an activity, or series of activities amounts to a business, the activity needs to be considered against the indicators of a business established by case law. 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 •                     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 or product and •                     The entity has relevant knowledge or skill 179.        There is no single test to determine whether a business is being carried on.

Overall, the facts of the case suggest that the indicators set out in paragraph 178 MT 2006/1 are not present to a sufficient degree to warrant the conclusion that you are carrying on a business. We consider that the activities you have undertaken or will undertake to subdivide and eventually market and sell the Subdivided Vacant Land do not display the salient indicators of a business which are, amongst other things, transactions entered into a continuous and repetitive basis In the form of an adventure or concern in the nature of trade Paragraph 234 of MT2006/1 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'. 234.        Ordinarily, the term 'business' would encompass trade engaged in, or a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

The commercial nature of a transaction or scheme is significant in determining whether the activities are done in the form of an adventure or concern in the nature of trade. This is further explained in MT 2006/1. 237.        The term 'profit-making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said: It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 244 of MT 2006/1 further explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to business, but which has the characteristics of a business deal are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, and adventure or concerns in the nature of trade. Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or a capital/investment asset held for either investment or 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. The Commissioner has made the following comments about the badges of trade in MT 2006/1: The subject matter of realisation

247.               this badge of trade considers the form, and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. Length of period of ownership 249.        A trading asset is generally dealt with or traded within a short time after acquisition. 251.        The greater the frequency of similar transactions the greater the likelihood of trade Supplementary work on or in connection with the property realised 252.        Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade. The circumstances that were responsible for the realisation 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. 255.        Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment. Paragraphs 262 to 267 apply to the 'badges of trade' concept discussed above to isolate property transactions, in order to determine whether an isolated property transaction can be considered to be an enterprise in the form of an adventure or concern in the nature of trade.

Paragraph 263 states that the issue to be decided is whether the activities being conducted are an enterprise in that they are o 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 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset: 265.        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. 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 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 •                     Building have been erected on the land. In relation to land bought with the intention of re-sale paragraph 270 of MT 2006/1 specifically provides: Land bought with the intention of resale

270.        In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. Application to this case You purchased the Property in XX XXX XXXX with the intention to subdivide it into two lots and construct a residential premises on each lot. You intended to use one of the residential premises as your principal place of residence and the other as an investment property to generate ongoing rental income and took a number of steps to progress your plans (e.g. submitted development application to council, engaged surveyors/draftsman, applied for finance etc).

Whilst you held the property for a relatively short period of time you did not purchase the Property with the intention to re-sell it at a profit. It was only after being unable to secure funding to proceed with the initial intention, that you decided to only build a residential premises on the rear lot and to sell the front vacant lot, as it was in excess of your needs, to reduce your financial burden. The activities undertaken to develop and subdivide the Property, included among other things, the construction of an access driveway along the entire boundary fence and adding an underground drainage system which provides for both subdivided lots. We do not consider this level of development to be substantially greater that the level required to secure council approval for the subdivision. You funded the subdivision costs, with the exception of the driveway and the underground drainage system, from your savings. The construction of the access driveway and underground drainage system formed part of the contract to build the house on the rear lot and was funded via a bank loan.

You have not acquired additional land to add to the original parcel of land and you have not constructed and do not plan to construct any buildings on the Subdivided Vacant Land prior to selling it. Whilst you kept some records of your expenditure to subdivide the XX Property you have not brought the Subdivided Vacant Land into account as a business asset and have not maintained business records (such as business plan, projected cashflow statements etc), relating to the development of the Property. You also have not undertaken subdivision or land development activities in the past. On balance having considered the facts of the case against the badges of trade and other factors listed above, we consider the activities you have undertaken or will undertake in the subdivision, eventual marketing and sale of the Subdivided Vacant Land do not amount to an enterprise for GST purposes pursuant to subsection 9-20(1). We consider the disposal of the Subdivided Vacant Land will be a mere realisation of a capital asset Conclusion

As paragraph 9-5(b) is not satisfied, you will not meet all the requirements of a taxable supply. Therefore, the sale of the of subdivided vacant land will not be a taxable supply pursuant to section 9-5 and GST will not be payable.