SMSFs undertaking property development may be hit with GST
The recent case of Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation  AATA 628 is an important reminder for advisers about the application of the goods and services tax (GST) laws to SMSFs.
This case also raises previously untested issues concerning the extent to which the income tax jurisprudence is relevant for GST purposes and confirms the proper application of GST principles in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) to SMSFs.
- In 1986 Mr and Mrs Collins acquired the relevant land referred to as ‘Lot 11’ and proceeded to reside and conduct their nursery business from this land.
- In 1992 they acquired the adjacent lot – Lot 12.
- In 1995 the Collins Retirement Fund (fund) was established, with Mr and Mrs Collins as the members.
- In 2004 they leased both lot 11 and 12 (lots) to a tenant and sold the nursery business to the tenant.
- In 2014, they transferred the Lots to a company acting as bare trustee for the Fund.
- The Fund was registered for GST and paid GST on the rental receipts from the Lots.
- In 2015 the bare trustee submitted a development application (DA), seeking to subdivide the Lots into 11 residential allotments with one community association lot.
- In 2016 the DA was approved.
- The Fund applied to cancel its GST registration with effect from 1 October 2016 and the Commissioner cancelled the registration.
- On 16 June 2017, a subdivision plan subdividing the Lots was registered.
- Between late June and mid-November 2017 the Fund sold 10 of the residential lots with one residential lot transferred to Mr and Mrs Collins in June 2018. Each lot sold for a price in the order of $1 million.
- In 2019 the Commissioner issued a number of assessments on the basis that the sales of the subdivided lots were subject to GST calculated under the margin scheme for a total of $692,479.
The main issue was whether the Fund was liable for GST on the sales of the land it caused to be subdivided into 11 lots (Sales).
Section 188-25(b) excludes certain amounts from the annual registration turnover threshold and the key question examined was whether the proceeds from the sale of subdivided lots of land were disregarded or included in the $75,000 turnover test. This test is set out below:
188-25 Transfer of capital assets, and termination etc. of enterprise, to be disregarded
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 Fund contended that the Sales were the mere realisation of a capital asset and thus, under s 188-25(b) ought to be disregarded.
The Fund also submitted that the GST Act provides that the Sales would otherwise be disregarded because each Sale was made solely as a consequence of ceasing to carry on an enterprise (under s 188-25(b)(i)) or substantially and permanently reducing the size or scale of an enterprise (under s 188-25(b)(ii)).
Importantly, the Tribunal confirmed that an SMSF will always be taken to be carrying on an enterprise (in contrast other taxpayers must establish they are conducting an enterprise before being registered for GST). It stated at paragraph 10:
The applicant would have been required to be registered for GST only if it carried on an enterprise and its GST turnover met the registration turnover threshold. It is common ground that the applicant, as the trustee of a superannuation fund, is taken to have carried on an enterprise. That is because s 9-20(1) relevantly defines an ‘enterprise’ as follows:
An enterprise is an activity, or series of activities, done:
(a) in the form of a *business; or
(b) in the form of an adventure or concern in the nature of trade; or
. . .
(da) by a trustee of a *complying superannuation fund . . .
The Tribunal found that the Fund’s undertaking amounted to more than a mere realisation of the property in an enterprising way. That is, it amounted to ‘a commercial venture entered into for the purpose of obtaining the gain on sale of the subdivided lots’.
The Tribunal took into account the value of the works undertaken of more than $4.5 million and the amount of work involved, such as that the Fund applied twice to modify the DA and obtained multiple, costly expert reports in relation to engineering, geotechnical, soil testing, environmental and vegetation management issues. The 10 Lots sold for in excess of $10 million.
The Tribunal noted that - in determining an entity’s projected turnover - is quite different to the role played by the revenue/capital distinction in determining the assessibility of receipts or deductibility of outgoings or losses.
For instance, whether an amount is received in the course of a commercial or business-like transaction may be significant to or even determinative of whether the receipt is assessable to income tax. In contrast, the application of s 188-25(a) will only arise for consideration where the supply under consideration is or would be made in the course of an enterprise the taxpayer carries on.
The Tribunal also found that due to the nature of the enterprise, the Sales did not occur as a consequence of the enterprise ceasing, and thus rejected the Fund’s second argument.
Accordingly, the GST assessments were held not to be excessive.
ATO decision impact statement
The Commissioner issued a decision impact statement (DIS) on 9 June 2022. The ATO’s view in the DIS is as follows:
The Tribunal’s interpretation of the exclusions in section 188-25 from the projected turnover and its reasoning are consistent with the Commissioner’s view set out in … GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover. This case illustrates that the GST liabilities of a complying super fund turn on the requirements for registration, as the enterprise test in paragraph 9-20(1)(da) will always be satisfied. The case is a reminder that the activities of some entities are deemed to be an enterprise requiring only the turnover threshold for registration to be considered.
Many SMSFs invest and get involved with improving or developing property. This case reminds us that an SMSF that satisfies the annual GST turnover test, will be required to be registered.
This decision also highlights the revenue/capital distinction in determining the assessable income and deductible outgoings for income tax purposes (eg, is the gain related to a commercial or business-like transaction that is on revenue versus capital account). In contrast, the Tribunal confirmed that GST examines whether the supply was in the course of an enterprise a taxpayer carries on (and a complying SMSF is taken to be carrying on an enterprise under s 9-20(1)(da)) of the GST Act.
This case also provides helpful guidance on the extent of works and other matters that may amount to more than a mere realisation of an asset for an SMSF. While, in this case substantial works were undertaken in relation to 11 subdivided lots (costing more than $4.5 million) and more than $10 million in sales were made, advisers should be wary that much smaller property developments carried on within an SMSF may readily give rise to a requirement to register for GST.
Naturally, advice should be obtained if there is any doubt and, if not properly planned for, the GST implications can be substantial.
By Shaun Backhaus, senior associate and Daniel Butler, director, DBA Lawyers