Back in May of this year I was very pleased to share details of a tax case that held that a farmer need not pay Capital Gains Tax (CGT) on the subdivision and sale of his 10-acre holding. CGT was avoided as it only applies to capital assets acquired on or after 19 September 1985.
However, not every farmer who sells down all or part of their property gets the ultimate tax outcome, this being highlighted by a recent case, VZFS v FCT 2025 ARTA 2013, decided in the Administrative Appeals Tribunal (ART).
In this case, paying of GST was the issue. For a supply to be subject to GST, it must meet the “GST enterprise” tests set out in the GST Act.
When a farmer sells part of their property there are significant advantages where the sale of a property represents the mere realisation of a capital asset, as referred to above, and the profit on the sale is dealt with solely under the CGT rules (i.e., as a capital gain). The other benefit as that GST does not apply as the sale is not considered as part of a GST enterprise. The sole focus of this sale is GST implications.
The Administrative Review Tribunal (ART) has confirmed that a taxpayer was liable to GST on the sale of subdivided farmland as the sales were made in the course or furtherance of carrying on an enterprise.
- Facts
The taxpayer and his late brother were the owners of 70 hectares of rural land in South Australia that was previously farmed by them.
The taxpayer, acting both in his own right as well as in his capacity as trustee of his brother’s estate, entered into an agreement with a developer to subdivide the land into more than 750 housing lots. Under the agreement the developer at its own cost sought rezoning and development approvals, carried out the development works and marketed the subdivided lots. The development works included the construction of streets, the provision of utilities and stormwater management, public spaces and provision for a childcare centre.
The agreement provided that the taxpayer would receive 20% of the proceeds of sale progressively as sales of the subdivided lots were completed, with the developer receiving the remaining 80%. The taxpayer gave the developer access to the property as required and signed documents where necessary as owner, including contracts for the sale of the subdivided lots.
The taxpayer brought GST to account on the sales in both his and his late brother’s respective GST returns but subsequently objected to the resulting deemed assessments of net amount. The objections were disallowed by the ATO and the taxpayer sought review of those decisions by the Administrative Review Tribunal.
The central issue between the parties was whether the activities carried out by the taxpayer were such as to characterise the sales of the subdivided lots as made in the course or furtherance of an enterprise carried on by the taxpayer for the purposes of the GST Act. The taxpayer contended that his role in the sale of the subdivided lots was passive in nature and such rights as he had and the actions, he took under the agreement were merely of an administrative nature not amounting to a series of activities in the form of a business or an adventure or concern in the nature of trade.
2. GST enterprise factors if selling land
For the ART to decide that the taxpayer sold these holdings as part of a profit-making GST enterprise, some of the factors which may be relevant in determining whether a property transaction amounts to a commercial “profit-making” transaction broadly include the following (note that this is not an exhaustive list).
- The amount of money involved in the transaction, and the magnitude of the profit sought or obtained. The higher these amounts, the more likely it is that the transaction is commercial.
- The nature, scale and complexity of the transaction. A large-scale and complex transaction is more likely to be commercial than a small-scale and straightforward transaction.
- The nature and scale of other activities undertaken by the taxpayer. For example, if the taxpayer carries on property development through other entities, then the transaction is more likely to be commercial.
The taxpayer’s purpose or intention in acquiring, and disposing of, the property. For example, inherited land that is subdivided and sold is less likely to amount to a commercial transaction, compared to land that is specifically acquired by the taxpayer for this purpose.
- The taxpayer’s personal involvement in the transaction. The more extensive the taxpayer’s personal involvement (e.g., in the development planning process, etc.), the more likely it is that the transaction is commercial.
As a general comment, it must be noted that the threshold in demonstrating a “GST enterprise” is lower than if a taxpayer was trying to demonstrate an income tax business or “profit-making” venture.
3. Decision
Affirming the decisions under review, the Administrative Review Tribunal held that activities carried out by the taxpayer had the appearance or characteristics of business activities, i.e. “in the form of business” per the enterprise definitions in the GST Act. The parties’ agreement to undertake the project was a commercial arrangement. The taxpayer’s role was not passive and, critically, the aims of the project could not have been achieved without the taxpayer granting access to the lands and subsequently executing contracts of sale. The sales of the lots were made in the course or furtherance of a series of activities in the form of a business.
The taxpayer’s activities were also a “series of activities in the form of an adventure or concern in the nature of trad” in terms of the “enterprise” definition GST Act.
The entry by the taxpayer into a sophisticated commercial agreement for a very substantial project, with ongoing obligations and activities spanning many years, ongoing monitoring of aspects of the project relevant to the achievement of the taxpayer’s financial outcome, and returns received progressively over a number of years, were the sort of things a businessperson or person in trade did.
4. What the administrative review tribunal considered
As the farmer’s team emphasised, it is the activities of the farmer, not the Developer, that must be characterised. Hence, for example, it is not the activities of the Developer in obtaining the necessary approvals; carrying out the development works; and marketing the lots, that were the focus of the GST enterprise inquiry.
The ATO referred to a body of older cases said to reflect a view that even extensive subdivision of land need not go beyond mere realisation of a capital asset or constitute venturing an asset into a business or profit-making undertaking or scheme. The ATO went on to submit that those older authorities do not reflect what the ATO called “the more modern view” said to be adopted by Mason, Murphy and Wilson JJ in the landmark Whitford’s Beach case.
5. Were the sales of the lots made in the course or furtherance of an enterprise?
Of all the elements, it was the taxpayer’s active input into the ultimate sales, coupled with his commitments around the sophisticated development agreement of the lots that turned the sales to be part of a “GST enterprise” and thus subject to GST.
The case is essentially that the farmer’s role was passive and such rights as the applicant had and actions it took under the agreement were of an administrative nature not amounting to a series of activities in the form of a business or an adventure or concern in the nature of trade.
It is therefore appropriate to start by examining what the tribunal found that the farmer actually did in relation to the development, it noted:
(a) The applicant entered into a commercial agreement for the re-zoning, development, subdivision and sale of their land which bound the Developer to carry out the development works and other activities at very substantial costs in return for which the applicant received 20% of the sale proceeds. I consider it is reasonable to describe the development agreement as a sophisticated commercial agreement.
(b) The development, which the applicant caused to occur by entering into and discharging its obligations under the agreement, transformed the land both physically and legally from farming land to a large modern residential estate of over 750 residential allotments with substantial infrastructure and amenity.
(c) The applicant facilitated the development and sale of the land by progressively granting access to the Developer; executing documentation required for the Developer to seek re-zoning and development approvals; committing to, and actually, refraining from encumbering or selling the land for an extended period; executing over 700 sale contracts or allowing contracts to be executed under power of attorney.
(d) The applicant became the registered proprietor of the newly created lots. It was the applicant with whom the purchasers entered into contracts to purchase the lots and from whom title to the lots was transferred.
(e) The applicant engaged accountants to review the settlement statements for each and every one of the hundreds of sales.16
(f) The applicant filed business activity statements and paid amounts as GST over the sales phase of the development, which would require the applicant to account for GST on in excessive of 750 sales over an extended period.
“Business” indicators
The ART noted that the sales related activities of the farmer exhibited some of the well-known indicia of a business:
(a) Although entry into the development agreement was a one-off action, the applicant’s activities in facilitating its implementation were not. They had a degree of regularity and repetition:
(i) Access to the land was made available progressively as required.
(ii) The obligation not to encumber or sell the land during the project was ongoing.
(iii) In the selling phase, the signing of sales contracts and monitoring of sales returns was continuous, as each sale contract and settlement statement were received, and in the latter case carried out with professional assistance on each occasion.
(b) The development agreement, as already mentioned, was a sophisticated commercial arrangement with the applicant’s returns dependent upon sales prices achieved. It had, in my view, a commercial flavour. The applicant gave up 80% of the proceeds of sale of their land in return for the Developer’s obligations under the agreement. That reflected a commercial judgement by the applicant that the project would deliver, as it did, very substantial financial returns to the applicant.
(c) In that regard, the applicant re-negotiated terms of the agreement directly relevant to their commercial return. The applicant gave up 5% of the sale proceeds when agreeing to reduce their return from 25% to 20% of the sale proceeds. The applicant also gave up entitlement to a floor amount of $35,000 per lot that previously applied and agreed to allow more years to pass before the applicant would be able to exercise an option to sell the land. I infer from the Director’s account of his discussions with the applicant that this reflected a commercial judgement by the applicant that the previous arrangement would be a disincentive to the creation of additional but smaller lots and that, overall, both the Developer and the applicant’s returns would likely be improved as a consequence of the agreed changes.17
(d) The applicant monitored the performance of the project, to the extent that such performance could affect the financial outcome of the project for the applicant by way of receiving regular updates by the Developer and, in particular, monitoring sales proceeds for each sale with professional assistance. There was in that way a systematic approach by the applicant that was proportionate to the applicant’s financial interests in the outcome of the project.
(e) The applicant’s activities were on a substantial scale. The applicant’s obligation to grant the Developer access to the land and refrain from dealing inconsistently with the agreement applied and was discharged over an extended period. The applicant’s monitoring of the project was also ongoing over an extended period, both in terms of progress of the development by way of updates from the Developer, and the applicant’s returns by way of causing the applicant’s accountants to review every settlement statement as they were progressively received. The applicant’s engagement in signing contracts was significant, involving hundreds of sale contracts.
Please do not hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.
PAUL CARRAZZO CA, CPA
Partner - Baumgartners
1/35 Cotham Rd, Kew, VIC, 3101
TEL: +61 3 9851 9000
MOB: 0417 549 347
E-mail: p.carrazzo@baumgartners.com.au
