The AAT has held that an SMSF, that sold subdivided residential lots, was subject to GST on their sale, despite not being registered for GST. This was on the basis that it was ‘required to be registered’, which, in turn, depended on whether their sales proceeds could be excluded from the relevant turnover calculations. This brings into focus provisions not commonly considered, and involved the first time parts of this test have been litigated.
The facts were these.
- Mr and Mrs C resided and conducted their nursery business on 25 acres of land they acquired in 1986.
- In 1992 they acquired an adjoining 35-acre lot.
- The applicant superannuation fund was created in 1995.
- In 2004 (after the 2000 commencement of GST) they leased this land and sold the nursery business to the tenant.
- In August 2014, they transferred both lots to a company they controlled (Flora Pacific), which held them as bare trustee for their super fund (the Taxpayer).
- The Taxpayer was registered for GST and paid GST on the rental receipts.
- In early 2016, Flora Pacific obtained a Development Authority (DA) from the local authority to subdivide both lots into 11 community title rural residential lots and one community association lot.
- The Applicant SMSF applied to cancel its GST registration with effect from 1 October 2016 and the Commissioner duly cancelled the registration
- The taxpayer caused construction works to be undertaken and
- On 16 June 2017, a subdivision plan subdividing these two ‘parent lots’ into 11 residential lots and a community association lot was registered.
- Between late June and mid-November 2017 the Applicant SMSF (Taxpayer) sold 10 of the residential lots for $1m each.
- The remaining residential lot was transferred to Mr and Mrs Collins in June 2018.
The Issue was whether the Taxpayer’s sales of the 10 subdivided lots was subject to GST, and the parties agreed that this issue turned on whether the deregistered SMSF was ‘required to be registered’ – as that would make the sales taxable (quite why Div 138 didn’t apply or wasn’t enough, I don’t know – perhaps it only recouped input tax credits and the ATO wanted GST on the profit element as well).
Being ‘required to be registered, depended on the ‘turnover’ of the SMSF being under $75k. The relevant turnover provision is s188-10(1) and it requires an entity to take into account both ‘current GST turnover’ and ‘projected GST turnover’. The SMSF deregistered prior selling the Lots (so their sale proceeds did not make it into ‘current GST turnover’). The SMSF then argued that it was entitled to ‘disregard’ the turnover from selling the 10 Lots, in its ‘projected GST turnover, under s188-25(1), which excludes sales of capital assets and sales to close or reduce the size of an ‘enterprise’.
Section 188-25(1) provides as follows.
In working out your * projected GST turnover , disregard:
(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.
The Applicant SMSF argued:
- that the sale of the Lots was on ‘capital account’ as they were no more than an ‘enterprising’ realisation of a capital asset; or
- if the subdivision of the land and sale of the subdivided lots was on current account, the sales resulted in it ‘ceasing to carry on that enterprise’ or ‘substantially and permanently reducing the size of that enterprise.
‘Capital / income’ distinctions are largely irrelevant in GST – except in a provision such as this (entitling an entity to disregard certain turnover). In fact the AAT member said that this was the first case where the role of the ‘capital / income’ distinction, and the role of income tax learning, for GST purposes, had been litigated.
The AAT has held that the taxpayer was liable for GST on the sales of the residential lots because it was ‘required to be registered’ for GST when the sales occurred. This was because the relieving provisions in s188-25(1) were NOT engaged. It was for these purposes that it decided that:
- the sales were MORE than the mere realisation of a capital asset (for the purposes of s188(1)(a) about transferring a ‘capital asset’). Amongst the considerations was that over $4.5m was spent to achieve the subdivision.
- whilst the sale of the Lots had the effect of ending that ‘enterprise’ (or substantially and permanently reducing its size or scale) – this was not the same as the requirement set out in the section. It required that the ‘supply’ of the Lots was a ‘consequence’ (indeed ‘solely’ a consequence) of ‘ceasing to carry on an enterprise’ (or reducing its scale). Here the sales were a ‘consequence’ of carrying out the enterprise (not of ‘ceasing it’). In this case carrying out the enterprise had the effect of ultimately ceasing the enterprise but that is the obverse of the statutory test.
All in all, this turned out to be quite a bit more interesting (technically) than a headline, something like: ‘GST payable on sale of subdivided lots’, might indicate.
(Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and FCT [2022] AATA 628, AAT, Olding SM, 4 April 2022.)
[Tax Month – April 2022 – Previous Month, 10.4.22] [LTN 67, 8/4/22]