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would owning multiple IP's and subdivisions = a business

Discussion in 'Accounting & Tax' started by Keentolearn77, 3rd Oct, 2016.

  1. Keentolearn77

    Keentolearn77 Well-Known Member

    1st Sep, 2016
    Just a ballpark question,

    Wondering if it would be normal that for accounting purposes if one owned multiple investment properties and conducted a splitter 2 dwelling subdivision - would that be considered a business that would require BAS statements etc,

    would this be more financially beneficial to the person in this position
    or would this just add a lot more accountancy management costs if it was run like a business...
  2. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    9th Jul, 2015
    Owning IPs wouldnt be classified as a business but the real income can be used as income.

    Propety devoloping can be considered a business but you would need to have some runs on the board and a few years financials to support your claims for a bank to consider as a source of income.

    @Westminster may be able to add value as I believe she does this as a business amongst other things.
  3. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

    18th Jun, 2015
    There is a case from a few years ago with a couple owning about 12 properties and this wasnt considered a business. From memory they took a passive role as an investor would and this was one of the determining factors.

    But i think you are really asking whether the subdivision would be on capital or revenue account? See my most recent tax tip for a case about this topic. A taxpayer can be capital account on one or more properties and revenue account on others.
    York likes this.
  4. Westminster

    Westminster Tigress at Tiger Developments Business Member

    13th Jun, 2015
    In terms of it being a business and being registered for GST you cannot claim the GST costs of renting out (ie PM fees) for having IPs as part of BAS.
    You can however claim GST as part of conducting developments if you are selling within 5yrs and using the Margin Scheme etc as part of doing business in new housing.
    If there is going to be more than 75k worth of GST then you should be registered.
    Does that answer your question? I'm not sure. The question is a little vague.
    There are pros and cons to doing things in personal name, business/company and/or corporate trustee and trust. All can have BAS.
    Last edited: 4th Oct, 2016
    Perthguy likes this.
  5. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent Business Member

    24th Jun, 2015
    seems like the question is do i need to be registered for GST and if registered for GST do i need to do a BAS return.

    A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied.

    Section 9-5 of the GST Act states:
    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 Australia; and

    (d) you are *registered or *required to be registered.

    However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed
    (* denotes a defined term under section 195-1 of the GST Act)

    Based on your brief post, you seem to satisfy the requirements under paragraphs 9-5(a) and 9-5(c) of the GST Act as the supplies that you make are for consideration and the new units are located in Australia respectively.

    Therefore, you need to consider:

    ● whether your sale of the new units is in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b) of the GST Act), and

    ● whether you are required to be registered for GST (paragraph 9-5(d) of the GST Act).
    The definition of an enterprise in section 9-20 of the GST Act includes (amongst other things) an activity or series of activities, done:

    ● in the form of a business

    ● in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, license or other grant of an interest in property.

    You need to consider whether your proposed activities on the Land will constitute an enterprise of property development.

    Paragraph 9-20(1)(b) of the GST Act was recently considered by the Federal Court in Professional Admin Service Centres Pty Ltd v. Commissioner of Taxation [2013] FCA 1123 where Edmonds J stated at [39]:

    • …But para (b) of s 9-20(1) makes it clear that an "enterprise" can include an isolated commercial venture in the nature of trade, which implies that it be entered into for a commercial purpose, including the purpose of profit-making:

      Edwards (Inspector of Taxes) v Barnstow [1956] AC 14;

      Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199;

      Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344-345 per Mason CJ, Brennan and Gaudron JJ; at 351-351 per Dawson J; and at 360 per McHugh J.
    In this context, the Court focussed on the entity entering into a transaction for a commercial purpose, which includes the purpose of profit making. Similar comments were expressed by Dowsett J in the broader context of 'enterprise' in Russell v Commissioner of Taxation [2011] FCAFC 10 at [21] to [22].

    21. The word "enterprise" is of some significance in the operation of art 7. The meaning of that word, in the context of an agreement with Switzerproperty, was considered by the High Court in Thiel v Federal Commissioner of Taxation 90 ATC 4717; (1990) 171 CLR 338, especially at 344-5 per Mason CJ, Brennan and Gaudron JJ, at 350-352 per Dawson J and at 357-359 per McHugh J. It seems that the word has a broad meaning. As Mason CJ, Brennan and Gaudron JJ said at 344

    "... an activity, as well as a framework within which such activities are engaged in, may constitute an 'enterprise' for the purposes of the agreement.

    22. In other words, a business, in the usual sense, will be an enterprise. However an activity, which might not generally be treated as a business because of lack of continuity, may also be an enterprise; certainly if the activity amounts to an adventure in the nature of trade:

    Edwards v Bairstow
    (1956) AC 1;

    Minister of National Revenue v Tara Exploration and Development Co Ltd
    (1972) 28 DLR (3d) 135; Thielat 352 per Dawson J; at 360 per McHugh
    The meaning of enterprise is considered in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, and Goods and Services Tax Determination GSTD 2006/6: does MT2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

    Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity. Therefore, an enterprise can incorporate a single or one-off transaction such as the subdivision, building and sale of real property.

    The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

    It seems that you have never been involved in property development before and that your activities represent a one-off transaction on the Land. In the absence of other facts, it would probably be considered that your activities are not carried out in the form of a business if these activities are part of a one-off transaction on the Land and not the beginning of an ongoing property development business.

    As your activities of development and sale of new units is an isolated transaction, it is necessary to determine whether the development and sale of the new units will have a commercial flavour that goes beyond the mere realisation of an investment asset or private asset.

    In the form of an adventure or concern in the nature of trade

    Paragraph 13 of GSTD 2006/6 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature.

    Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions and sales of real property. Paragraph 263 of MT 2006/1 states that the issue to be decided is whether the activities are an enterprise, in that they are of a revenue nature, as opposed to the mere realisation of a capital asset.

    Certain factors listed at paragraph 265 of MT 2006/1 can be used as indicators of whether or not there is an activity done in the form of a business or in the form of an adventure or concern in the nature of trade. These factors include whether:

    ● there is a change of purpose for which the land is held,
    ● additional land is acquired to be added to the original parcel of land,
    ● the parcel of land is brought into account as a business asset,
    ● there is a coherent plan for the subdivision of the land,
    ● there is a business organisation (for example, a manager, office and letterhead),
    ● borrowed funds financed the acquisition or subdivision,
    ● interest on money borrowed to defray subdivisional costs was claimed as a business expense,
    ● there is a level of development of the land beyond that necessary for council approval for the subdivision, and
    ● buildings have been erected on the land.

    In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

    Paragraphs 258 to 260 of MT 2006/1 provide that certain type of assets, such as rental properties, business plant and machinery, the family home, family cars and other assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment and private assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

    Something for your accountant to consider.
    Perthguy likes this.
  6. Or Read MT 2006/1 which explains if you need a BAS....Which leads to the issue of GST.

    Q : Do you propose to sell any ? If Yes, then its highly probably you have an enterprise and a need for GST etc. You may need early advice if you wish to reduce impacts of GST by using the margin scheme.

    You dont have to have a business to have a GST issue or a profits from isolated transaction issue. Isolated transactions intended to produce profit and business are two separate but closely linked issues.
  7. Keentolearn77

    Keentolearn77 Well-Known Member

    1st Sep, 2016
    I might better b able to isolate the answer by stating that the property was purchased over 5 yrs sgo. We may plan to sell the still existing 50yr old front dwelling BUT keep the newly built rear dwelling.

    If then again we have another property with another subdivision development opportunity and we plan to keep all / any newly built townhouses and not sell any.

    My understanding is that we would not need or qualify to set up as a business....
    Or would an accountant see the tax benefits of an individual setting up as a business, could / would this qualify.... or only if we sold one of the new townhouses within the 1st 5 yrs after build completion

  8. Terry_w

    Terry_w Structuring Broker and a Structuring Lawyer Business Member

    18th Jun, 2015
    I think you are confusing a few issues here.

    Why are you asking? Is it from cgt concerns?
  9. There are two basic ways to bypass CGT.
    1. Ordinary Income principles; and
    2. Business income

    You dont need to have a business, repetition etc for ordinary income principles to apply. This is "old" tax law and also common law (ie law derives over a long period from case law precedent). A great example is intention to make a profit. You can do that when you buy the lot or you can change intentions later (eg turn a former PPOR into a dev site).

    Both a property dev business and ordinary income likely have requirements re a ABN + BAS / GST merely by expecting to have turnover that exceeds $75K.