The oft-debated question as to whether the development, subdivision and sale of land constitutes the mere realisation of a capital asset in an enterprising way has once again been considered in the Administrative Appeals Tribunal (AAT) case of Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation (Taxation) [2022] AATA 628 (Collins)

Unlike many cases in this space that address this enquiry from the income tax perspective, Collins focused on GST. Specifically, was the taxpayer required to be registered for GST because the land sales did not constitute “capital assets” or were not otherwise excluded from its “Projected GST Turnover”?

Facts

Mr and Mrs Collins acquired two parcels of land in 1986 and 1992 (Land) and carried on a nursery business on the Land. ln 2004, they sold the nursery business to a third party but retained ownership of the Land and derived rental income from the lease of the Land.

In 2014, Mr and Mrs Collins transferred the Land to a company they controlled (which acted as a bare trustee of their SMSF (Taxpayer) of which they were the individual trustees). The Taxpayer was registered for GST and charged GST on the rental receipts from the tenant of the Land.

In 2015, the Taxpayer submitted a development application (‘DA’) to the local authority, seeking approval to subdivide the Land into 11 community title rural residential lots.

In 2016:

• The DA was approved.

• The Taxpayer served a notice to the tenant to vacate the Land.

• The Taxpayer cancelled its GST registration.

• The Taxpayer obtained further reports and consents and caused construction works to be undertaken on the Land.

In 2017, a plan subdividing the Land into residential lots was registered and the Taxpayer sold 10 of these lots for $1 million each.

Issue

By way of background, taxpayers are required to register for GST if they carry on an enterprise and:

• their Current GST Turnover is more than $75,000 and the ATO is not satisfied that their Projected GST Turnover is less than $75,000; or

• their Projected Turnover is more than $75,000.

Relevantly, excluded from Projected Turnover are supplies made or likely to be made:

• by way of transfer of ownership of a capital asset or

• solely as a consequence of ceasing to carry on an enterprise or

• solely as a consequence of substantially and permanently reducing the size or scale of an enterprise’

The Taxpayer self-assessed that the sale of the lots was not subject to the GST because, although it carried on an enterprise and its current GST Turnover was more than $75,000, the Taxpayer considered that its Projected GST Turnover was less than $75,000 based on the exclusions above.

Decision

The Taxpayer failed in discharging its evidential burden and was therefore required to be registered for GST in relation to sales of the Land.

In relation to the capital asset point:

• The AAT acknowledged that, unlike the income tax enquiry which focuses on the intention of the seller at the time of acquisition (in 2014), the GST law is concerned with the intention of the seller at the time of the supply (in 2017). Mr Collins acknowledged that by the time the tenant vacated the property in August 2016, it was intended that the Land would be subdivided, and the lots sold.

• The Taxpayer incurred over $4.5 million in costs to achieve the subdivision and was proactive through-out the process (applying twice to modify the DA and obtaining multiply costly expert reports). The subdivision works were extensive (as reflected in the marketing materials) and the Land was sold for a substantial profit.

• The fact that the Taxpayer had no professional experience in property development and engaged others to market and undertake the subdivision was not considered persuasive considering the other factors above.

• Although not determinative, the evidence objectively weighed in favour of a “not insignificant purpose” of subdivision and sale at the time of acquisition, particularly as Mr Collins obtained feasibility reports and valuations (with instructions concerning DA approval) prior to and around the time of acquisition.

This was at odds with Mr Collins’ contention that the transfer of the Land to the Taxpayer in 2014 was to provide for a higher retirement income and to enable access to the Taxpayer’s cash reserves to fund remediation works which in turn would enhance the rental income able to be derived from the Land.

In relation to the ceasing to carry on an enterprise / substantial reduction in size of activities point:

• The land development enterprise did not cease before the last of the lots were sold, particularly as the legislative definition of “carrying on an enterprise” includes anything done in the course of termination of an enterprise.

• The sale of land is an inherent feature of a land development enterprise, and which underpins the ongoing conduct of the enterprise. Accordingly, the sales of the Land could not have occurred as a consequence of the enterprise ceasing.

• The sales of the Land were made in the course of and as a consequence of carrying on the enterprise, not as a consequence of a reduction in its size or scale. The taxpayer's interpretation would mean land developers could escape GST.

Principles

The key take-aways from the case are:

• Voluntarily deregistering for GST does not mean that you cease to be required to be registered for GST. The ATO generally has 4 years to closely scrutinise a transaction and assert that you were required to be registered for GST.

• Income tax and GST considerations often overlap in the context of property development: 

  • While income tax focuses on profit making intention at time of acquisition whereas GST focuses on profit making intention at time of supply, income tax cases such as Whitfords Beach, Casimaty, and McCorkell can be instructive (but not determinative) in deciphering whether land is a “capital asset” under GST law.

  • Merely because a taxpayer registers for GST and carries on an enterprise does not of itself mean for income tax purposes that they are carrying on a business or have engaged in an isolated profit-making transaction (however, the distinction is fine, and it could be onerous for taxpayers to discharge the burden of proof on the fine distinction).

• There is limited legislative, AAT or judicial guidance surrounding the meaning of a “capital asset” under the GST law. As well as reading this case, taxpayers should have regard to the ATO’s views in GST Ruling GSTR 2001/7. Here the ATO states that “capital assets” relate to the “profit-yielding subject” of the enterprise and are distinguishable from “revenue assets” which are incidental to the carrying on of a business.

• In the GST context, it is difficult for taxpayers who conduct land development enterprises to assert that land sales can be made solely as a consequence of ceasing to carry on an enterprise, or in reducing its enterprise.

• Activities, or a series of activities, conducted by an SMSF constitutes an enterprise under the GST law. There is no need for the activities to be in the form of a business. Therefore, most SMSFs will be carrying on an enterprise for the purposes of the GST law.

Sladen Legal regularly assists clients with respect to the federal and state tax implications of land transactions. If you have any questions about this article, please contact one of our experts.

Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E: ehennebry@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 |  T +61 3 9611 0105
E: dsmedley@sladen.com.au