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Ruling

Subject: Capital Gains Tax

Questions:

1. Will the proceeds received from the sale of subdivided land be taxed under the capital gains tax provisions of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer:

Yes.

2. Will the goods and services tax (GST) provisions apply to the sale of the land?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You purchased a property in 2010, primarily for domestic use in future retirement. The property has been rented out since purchase to assist in the repayments.

You also intended to utilise the part of property to repay part of the debt, by subdividing the block.

In late 2010, you commenced a subdivision of the block, resulting in two blocks; an upper block containing the house, and a lower block of vacant land.

As part of the subdivision, the vacant land was connected to the utilities and council services. You have had minimal involvement in the subdivision of the land and the only changes made to the land were those required for council purposes. No other development of the land was undertaken.

The vacant land is currently listed for sale.

The upper block is being kept as your retirement property and is currently being rented out.

You are not in the business of buying, selling or developing land and you are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5

A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 - Section 23-5.

Reasons for decision

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

· those transactions entered into by non business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

· your intention or purpose in entering into the transaction was to make a profit or gain, and

· the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

In your case, you do not carry on a business of buying, selling or developing land. You purchased the initial property primarily for domestic use in future retirement, but have used it as a passive investment since purchase. You had minimal involvement in the subdivision of the land and have only changed the land to the extent that you are required for council purposes. Accordingly, the proceeds from the sale of the subdivided block will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. As you purchased and sold the land after 21 September 1999, and have held the land for more than 12 months, you will be eligible to apply the 50% CGT discount on the sale of the land.

Goods and services tax provisions

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and states that you make a taxable supply if the supply is for consideration, is made in the course of an enterprise, is connected to Australia and you are, or are required to be, registered for GST. However, a supply is not a taxable supply to the extent it is GST free or input taxed.

In your case, you will supply the lower block for consideration and the supply is connected with Australia. The property is subject to a residential lease and the letting of a property is an activity in the nature of a lease, licence or other grant of an interest in property as it is done on a regular and continuous basis. Hence, the activity meets the definition of enterprise.

The issue to be determined is whether you are required to be registered for GST and whether the supply is GST-free or input taxed.

Registration

Section 23-5 of the GST Act provides that an entity is required to be registered if it is carrying on an enterprise, and it has a GST turnover of $75,000 or more (other than non-profit entities is $75,000).

In calculating current and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

· supplies that are input taxed (which includes residential rent and sale of residential premises) and

· supplies that are not made in connection with an enterprise that you carry on.

In addition, you disregard any supply made or likely to be made, by you by way of transfer of ownership of a capital asset.

In your case, the lower block was part of the property which is a capital asset used in conducting your leasing enterprise. You will be transferring ownership of this asset when you sell the lower block. Therefore, your GST turnover is nil.

As your projected turnover will be below the GST turnover threshold, you will not be required to be registered. Therefore, as all the requirements of section 9-5 of the GST Act have not been met, the sale of the lower block is not a taxable supply.

It is not necessary to consider whether the supply is GST-free or input taxed.

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