Property Development and GST

Q&A Tax

Question :

Mr. and Mrs. Smith have owned a house and land for 30 years and decided to separate off and sell their
large backyard. In order to increase its value (and with an eye to avoiding a development that might
overshadow their own home), they build a small cottage on the segregated land before sale.

As the property is situated in a prime metropolitan area with a view of the Sydney Harbour, the land
value of the segregated backyard is $2,000,000. The costs of construction of the cottage are
$100,000.

They did not register for GST and both have a full-time job.

Is the sale of the land with the cottage subject to GST?

 

Answer :

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.

In this case, the main issue here is whether there is an enterprise has been carried on.

It is strongly arguable that this does not amount to an enterprise. It almost certainly would not amount
to starting a business of property development. They did not register for GST, and there is no clear
indicator that they are in a business.

However, if the work is extensive enough, it could be regarded as a business (If instead of a modest
cottage, a 6-unit tower were built on the backyard, the position would be different).

The question still is: has the sold backyard with cottage on top changed from a capital asset to a
revenue asset?

Arguably no. The backyard was owned as a capital asset for 30 years, was much more valuable than the
cottage and at common law the cottage becomes part of the land.

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