In Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation (Taxation) [2022] AATA 628 (4 April 2022) the Tribunal determined that the applicant taxpayer was liable to pay GST on the subdivision of land into 11 lots and the sale of those lots. The Tribunal found that the applicant was “required to be registered” for GST at the time the sales occurred.

The decision deals with some important issues in the context of GST and the subdivision of land. In particular, whether – as contended by the applicant – the sales were to be excluded from GST turnover pursuant to s 188-25 of the GST Act on the basis that the sales were the mere realisation of a capital asset, or alternatively that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise or substantially or permanently reducing the size or scale of an enterprise. In considering these questions, the Tribunal observed that in the income tax context, the capital vs revenue distinction was well-traversed, however s 188-25 had not been the subject of judicial consideration and raised untested issues concerning the extent to which the income tax jurisprudence is relevant for GST purposes and the proper application of s 188-25.

The applicant was registered for GST and paid GST on rental receipts from the unsubdivided land, which comprised Lots 11 and 12 and 50 acres in total. Lot 11 was acquired in 1986 and Lot 12 was acquired in 1992. The land was leased from August 2004 and in July 2015 an application was lodged to subdivide the land into 11 rural residential lots. The application was approved in February 2016 and the leases expired in August 2016. In October 2016, the applicant applied to cancel its GST registration and a plan of subdivision was registered in June 2017. 10 of the lots were sold with settlements occurring between June and November 2017. Each lot sold for a price in the order of $1m.

The question was whether the applicant was required to register for GST due to the sales. Registration was required if the applicant was carrying on an enterprise and it met the GST turnover threshold. It was common ground that the applicant, as  the trustee of a superannuation fund, is taken to have carried on an enterprise. The value of the sales exceeded the GST turnover threshold and the issue was whether the sale proceeds were to be excluded from the applicant’s GST turnover pursuant to s 188-25, which required the following supplies to be disregarded:

(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.

S 188-25(a) – the sales were not of capital assets

The Commissioner submitted that the expression ‘capital asset’ does not appear elsewhere in the GST Act and that the context of the characterisation of the supply of an asset as a transfer of ownership of a capital asset in s 188-25(a) – in determining an entity’s projected turnover – is quite different to the role played by the revenue/capital distinction in determining the assessibility of receipts or deductibility of outgoings or losses. Further, in the income tax context, in determining whether the proceeds of sale of an asset are on revenue or capital account attention is focused upon whether the seller had an intention, at the time of acquisition of the asset, that the asset would be sold at a profit. In contrast, for s 188-25(a) purposes, the character of an asset must be determined at the time of the supply. This was described by the Commissioner as a ‘key point of distinction from the income tax framework’.

The Commissioner submitted that whether the taxpayer had a profit-making intention at the time of the acquisition of an asset is not determinative for s 188-25(a) purposes. The focus must be on the time a supply of the asset is made or is likely to be made. The applicant agreed with this proposition and the Tribunal adopted the proposition that for s 188-25(a) the character of an asset must be determined at the time the supply is made. The Tribunal observed that the Commissioner did not submit that income tax cases on the capital/revenue distinction should be wholly disregarded and both parties referred to the concept which has evolved in the cases of the mere realisation of an asset in an enterprising way being on capital account.

The Tribunal was of the view that the the applicant’s undertaking amounted to more than a mere realisation of the property in an enterprising way. The works required to achieve the subdivision were substantial. The applicant acknowledges that it spent in total $4,538,757.64 in developing the property in the context of land that in aggregate sold for around three times that amount. The extent of the works is reflected in the nature of the development as stated in the advertising material for the subdivided lots, which referred to fully sealed roads with rolled curb edges; security gates and front road fencing; 2 extensive lakes plus a peaceful pond; landscaping throughout the estate; picnic areas; and a pontoon. The applicant twice applied to modify the development approval; and obtained multiple, costly expert reports in relation to engineering, geotechnical, soil testing, environmental and vegetation management issues. The Tribunal considered that these activities took the character of this matter beyond mere realisation into a commercial venture entered into for the purpose of obtaining the gain on sale of the subdivided lots.

In coming to this view, the Tribunal made the following observations about the role undertaken by the applicant in the development and that the lots were sold as vacant land:

• The engagement by the applicant, who had no professional experience in land development, to provide advice and carry out engineering and construction works and real estate agents to market land is a hallmark of modern subdivision projects. While that may mean the applicant was relatively passive in respect of these activities, the Tribunal did not accept that this weighed heavily in the applicant’s favour in the context of a development of this nature which involved the undertaking of extensive skilled work.
• That the applicant chose to sell vacant land and, as the applicant expressed it, left further profits on the table by not constructing and selling houses on the lots for further profit, provides little assistance to the applicant. Every operator of a land development business that chooses to sell allotments rather than house and land packages has made such a choice.

The Tribunal was not persuaded that the supplies of the subdivided lots were or were likely to be made by way of transfer of ownership of capital assets.

S 188-25(b) – the sales were not solely as a consequence of ceasing to carry on an enterprise

The Tribunal did not accept the Commissioner’s submission that the “enterprise” referred to in s 188-25(b) must be the same enterprise that the applicant acknowledges it carried on; that is, carrying out activities as trustees of a complying superannuation fund. The Tribunal found that the section in its terms refers to ‘an’ enterprise. The Tribunal could see nothing in the context of this provision which would warrant limiting the enterprise referred to in s 188-25(b) to a particular enterprise. The Tribunal accepted the applicant’s submission that it is sufficient to demonstrate that the sales were made solely as a consequence of the applicant ceasing to carry on an enterprise of subdividing and selling the subdivided lots. However, that was not the end of the matter.

The Tribunal did not consider the applicant’s characterisation of the sales, or even the final sale, as made as a consequence of ceasing to carry on the land development was reasonably open, let alone solely as a consequence of the ceasing of that enterprise. The Tribunal considered that it would be quite artificial to say such sales occur in consequence of the business ceasing. The sale of lands was the central objective of a land development enterprise and the sales occurred as part and parcel of – as a consequence of – the ongoing conduct of the enterprise.

Observations

The main takeaway from this decision appears to be that if the applicant had simply sold the pre-subdivided land (lots 11 and 12) after the leases had expired, the sale proceeds would have been excluded under both (a) and (b) of s 188-25. Those lots being capital assets of the leasing enterprise carried on by the applicant. Also, the sale of the lots was made solely as a consequence of ceasing to carry on the leasing enterprise.

The difficulty for the applicant arose due to its decision to subdivide the lots for sale and to undertake activities the Tribunal saw as being more than merely realising the properties in an enterprising way. If the applicant had undertaken a smaller-scale subdivision, the position may well have been different. The line between realising the properties in an enterprising way and carrying on commercial activities is notoriously difficult to draw. There is no bright line test. As observed by the Tribunal, the task inevitably becomes a matter of scale and impression.