GST on Subdivision Projects: Understanding Taxable Activities for GST Purposes

When embarking on a subdivision project in New Zealand, one of the key considerations is whether the project qualifies as a "taxable activity" for Goods and Services Tax (GST) purposes. Understanding when a subdivision project becomes a taxable activity can help developers, property owners, and investors avoid unexpected tax liabilities and ensure compliance with Inland Revenue regulations.

In August 2024, Inland Revenue released Question We’ve Been Asked (QB) 24/04, which provides clarity on the circumstances in which a subdivision project qualifies as a taxable activity for GST purposes. This guidance is crucial for individuals and businesses involved in property subdivision, as it sets the framework for determining GST obligations in such projects.

What is GST in New Zealand?

GST in New Zealand is a value-added tax applied to most goods and services at a standard rate of 15%. When a person or business conducts a taxable activity, they must register for GST if their turnover exceeds $60,000 per annum. Once registered, they are required to charge GST on their supplies (output tax) and may also claim GST on their purchases and expenses (input tax). However, not all activities automatically qualify as taxable for GST purposes. The activity must meet specific criteria under the Goods and Services Tax Act 1985.

Definition of a Taxable Activity

A taxable activity is defined under section 6 of the GST Act 1985. For an activity to be considered taxable, it must be carried on continuously or regularly and involve the supply of goods and services for consideration. The definition encompasses business-like activities, including trading, manufacturing, or any form of venture with a profit motive.

In the context of property development, subdivision projects may involve the sale of land or sections. The GST implications of these sales depend on whether the subdivision is deemed to be part of a taxable activity.

Subdivision Projects and GST

Subdivision projects typically involve dividing a larger piece of land into smaller lots or sections, which are then sold to the public or other developers. Depending on the nature of the subdivision project, it may be classified as a taxable activity. Inland Revenue’s QB 24/04 provides guidance on how to assess whether a subdivision qualifies as a taxable activity, particularly in relation to continuous or regular activities and the sale of subdivided land.

1. Continuous or Regular Activity

   One of the key criteria for determining whether a subdivision project qualifies as a taxable activity is whether it is conducted "continuously or regularly." A subdivision project that is undertaken as part of a long-term plan to develop and sell land on an ongoing basis is likely to be considered a continuous or regular activity.

   For example, if a property developer acquires land with the intention of subdividing it into multiple sections for sale, and this activity forms part of their regular business operations, it would generally be considered a taxable activity. The developer would be required to register for GST if their turnover exceeds the $60,000 threshold.

   On the other hand, if an individual undertakes a one-off subdivision of their personal residential property, with no intention of making it part of a broader development plan or business, it may not meet the criteria for a continuous or regular activity. In such cases, the subdivision may not be considered a taxable activity for GST purposes.

2.  Sale of Subdivided Land

   The sale of subdivided land is a significant factor in determining whether GST applies. Under the GST Act, the sale of land in the course of a taxable activity is subject to GST. However, the type of land sold and the purpose of the subdivision play a critical role in this determination.
   

   -Land Used for Residential Purposes:

   If the subdivided land is part of a person’s personal residence and the sale is not part of a regular business activity, the sale may not be subject to GST. For example, if an individual subdivides their backyard and sells a section, Inland Revenue may not treat this sale as a taxable supply if it is a one-off transaction.
   

   -Land Held as Part of a Business or Development:

   If the land was acquired or developed with the intention of selling it as part of a business or for profit, the sale of subdivided sections is likely to be subject to GST. For instance, if a person buys a large piece of land, subdivides it, and sells multiple sections over time, this is likely to be considered a taxable activity, and GST would need to be applied on the sale of each section.

   In QB 24/04, Inland Revenue provides examples to illustrate how different subdivision projects may or may not meet the criteria for GST taxation. These examples help clarify when a project transitions from being a personal venture to a taxable business activity. 

3.  Determining the Nature of the Activity

One of the challenges in determining whether a subdivision project qualifies as a taxable activity is assessing the nature and intent of the activity. Inland Revenue looks at several factors to make this determination, including:

-Intent:

Did the person or business acquire the land with the intention of subdividing and selling it for profit? If so, the subdivision is more likely to be considered a taxable activity.

-Frequency of Sales:

Are the land sales happening regularly, or is it a one-off event? Regular sales suggest a continuous taxable activity.

-Involvement of a Business Entity:

Is the subdivision being carried out by a property development company or an individual? Activities undertaken by a business entity are more likely to be deemed taxable.

Inland Revenue also considers whether the person or business is actively involved in marketing or advertising the sale of subdivided sections, which would indicate that the activity is carried out in a business-like manner.

Registering for GST

If a subdivision project meets the criteria for a taxable activity, the person or business undertaking the project must register for GST if their annual turnover exceeds $60,000. Once registered, they are required to charge GST on the sale of subdivided sections and remit this to Inland Revenue. They may also claim GST input tax credits for expenses related to the subdivision, such as surveying, earthworks, and legal fees.

Conclusion

Inland Revenue's QB 24/04 provides valuable guidance for determining when a subdivision project qualifies as a taxable activity for GST purposes. Key factors include the regularity and continuity of the activity, the intent behind the subdivision, and the nature of the land being sold. By understanding these criteria, property developers and individuals can make informed decisions about their GST obligations, ensuring compliance with tax laws and avoiding potential penalties.

For anyone involved in property subdivision, it is crucial to assess whether the project qualifies as a taxable activity early in the process. If in doubt, consulting with a tax professional or Inland Revenue is recommended to clarify any uncertainties regarding GST obligations.