In January 2012 the ATO published over 80 private rulings dealing with GST issues, a busy month given the holiday period. The rulings can be accessed here and from the menu on this site.
Discussed below are some of the more interesting rulings. They are all about real property, which continues to raise difficult issues.
Subdivision of Property and Enterprise
- The Private Rulings Register contains a large number of rulings dealing with the issue of whether a real property owner is required to register for GST where the owner looks to subdivide and sell the property. There is no easy test to determine which side of the line the entity sits (i.e., whether there is simply the realisation of a capital asset in a profitable way, or the entity changes its purpose and commences to carry on an enterprise). MT 2006/1 provides a helpful outline of how the Commissioner will approach such issues, but in each case it is a question of fact and degree, and it is something upon minds may differ.
- The following three rulings published in the same month show how difficult the issue is.
- When regard is had to the facts of this ruling, I consider that the matter is close to the line and while the Commissioner considered that an enterprise was carried on, it could well be argued that this was not the case. The ruling is a good example of how difficult this area of the law can be – not just in GST, but also in the area of income tax.
- The facts can be summarised as follows:
- the entity acquired the property pre-2000 for the purposes of constructing a family home and since than has used it as the principal place of residence. Improvements were made to the property, including a family home, tennis court, swimming pool, and barn. The entity is approaching retirement and is finding the broadacre lifestyle tiring.
- The property has been recently rezoned from rural to residential and the entity has engaged a consultant to advise how to sell the property and realised the increased value
- The entity decided to proceed with the subdivision, which will proceed in stages with the entity being required to construct an access road and to connect services to the lots. Houses will not be constructed on the lots and the entity will not be involved in the sale or marketing of the completed lots. The entity simply plans to sell the subdivided lots.
- The entity has no history of property development and does not intend to undertake any further development activities in the future.
- The entity will preserve the family home on one of the subdivided lots and continue to live there.
- In finding that the entity was carrying on an enterprise, the Commissioner adopted the approach of looking at “the overall impression gained after examining the activities as a whole and the intention of the taxpayer undertaking the activity. The Commissioner found that it was relevant that the entity had engaged a project manager to oversee the subdivision process and had employed an agent to undertake the sale of the subdivided lots; and that the council had required that certain things be done as part of the subdivision; and that the entity will borrow money to undertake the project.
- It may be that borrowing money to undertake the project may indicate the carrying on of an enterprise, one may have cause to question the relevance of engaging an agent to sell the property or a project manager to assist a person to subdivide the property. Also, that the council may impose conditions on the subdivision is also arguably of questionable relevance. Based upon the facts, it would appear that the entity is doing the bare minimum to sell the lots in a subdivided form. One could argue that the entity was a unlucky.
- the facts of this private ruling are almost identical with the Commissioner coming to the same finding. One wonders whether this signals a tightening of approach by the Commissioner on what constitutes an enterprise where real property is subdivided and sold.
- this application involved very similar facts, but the Commissioner found that no enterprise was carried on. The similar facts are as follows:
- the premises were used as the main residence and a decision was made to vacate the premises to reside in a smaller home
- it is intended to submit a development application to the local council seeking permission to subdivide the property and sell as vacant land – nothing will be built on the land or works undertaken beyond the minimum requirements necessary to satisfy the development application
- consultants and contractors will be engaged to perform the work
- the question here was whether the purchaser under a purchase of commercial property was entitled to attribute input tax credits on the whole of the purchase price upon the payment of the “deposit” payable under the contract, which was to be paid in two separate instalments
- not surprisingly, on the basis that the amounts constituted a valid deposit, the Commissioner found that Division 99 applied and attribution was deferred until the earlier of settlement or forfeiture
- what is interesting is that the amounts exceeded 10% of the purchase price and the ruling provides a helpful analysis of the Commissioner’s view of what constitutes a valid deposit (particularly where that amount exceeds 10% of the purchase price)
- also, the ruling notes that in GSTR 2000/28, the Commissioner considers that a contract for the sale of land does not constitute an invoice for GST purposes (which would trigger attribution) – this is a somewhat controversial view – now that taxpayers have objection and review rights on private rulings, it may not be too long before this issue is considered at a higher level