Edited version of your written advice

Authorisation Number: 1012867208153

Date of advice: 28 August 2015

Ruling

Subject: Subdivision of land

Question 1

Are the proceeds from the sale of the subdivided land assessable as capital receipts?

Answer

Yes.

Question 2

Will a capital gains tax (CGT) event A1 occur when each individual lot is sold?

Answer

Yes.

Question 3

Will your supply of the subdivided lots be a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on

1 July 2014

Relevant facts and circumstances

You acquired a property early December 20XX. You have primarily used the property as your main residence and for private recreational purposes. It has not been used for a primary production enterprise or any other enterprise activity.

You are not registered for GST.

You have not previously been involved in the subdivision and sale of land. However you have interests in a real estate company and a trust related to you is a commercial property operator. You and your spouse are beneficiaries of a self-managed super fund that owns an investment property and you also own a residential investment property that is being rented.

Development of property

An unrelated third party developer has approached you with a proposal to develop the whole Property. You have entered into a contract with them to prepare the property for subdivision into X lots and to sell them on your behalf.

The contract details are set out in the draft Development Agreement (DA) between yourself and the developer.

You will remain the legal and beneficial owners of the land throughout the course of the development until the lots are sold to third parties in the course of the project.

You will initially pay between $X and $X thousand per month to the developer until the settlements of the lots take place. As the lots settle you will pay any outstanding amounts of the developers' fees and costs from the sale proceeds of the lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1

We need to determine whether the proceeds from the sale of the lots:

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or

• are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.

Carrying on a business of property development

Based on the information provided, we do not consider that any proceeds received from the sale of the subdivided land would be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the land will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the property will be a mere realisation of a capital asset.

Question 2

Under subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) capital gains tax (CGT) event A1 happens if you dispose of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(3) of the ITAA 1997, the time of an event is when the entity enters into the contract for the disposal.

When you enter into a contract to dispose of each lot, CGT event A1 will occur.

Question 3

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that 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 the indirect tax zone; 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.

For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 of the GST Act must be satisfied.

In this case, you will be selling vacant lots for consideration and the property is connected with Australia as it is located in the indirect tax zone (Australia). Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. In addition the supply of the vacant lots in your factual situation will neither be GST-free or input taxed.

Accordingly, we must determine whether your sales are in the course or furtherance of an enterprise that you carry on and if so whether you are required to be registered for GST.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines enterprise as an activity, or series of activities, done:

• in the form of a business or

• in the form of an adventure or concern in the nature of trade.

The ATO view on the meaning of the term 'enterprise' is explained in detail in Miscellaneous Taxation Ruling MT 2006/1 'The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' (MT 2006/1).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade:

• A business encompasses trade engaged in on a regular or continuous basis.

• An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

In your case, your activity does not amount to a business engaged in, on a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraph 247 considers the subject matter of realisation and provides the following commentary.

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset…

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

• Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

Paragraph 261 of MT 2006/1 provides further discussion on the nature of assets.

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

The property which is the subject matter of this ruling was held as a private asset, (being your principle place of residence). The relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of your entering into an agreement with a developer to develop your property, subdivide and sell the Lots.

Paragraph 178 of MT 2006/1 outline the indicators of a business and paragraph 265 sets out the factors when examining whether activities are an adventure or concern in the nature of trade. We have listed these indicators below.

Indicators of carrying on a business

• a significant commercial activity

• a purpose and intention of the taxpayer to engage in commercial activity

• an intention to make a profit from the activity

• the activity is or will be profitable

• the recurrent or regular nature of the activity

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade

• activity is systematic, organised and carried on in a businesslike manner and records are kept

• the activities are of a reasonable size and scale

• a business plan exists

• commercial sales of product; and

• the entity has relevant knowledge or skill.

Factors used to examine an adventure or concern in the nature of trade:

• 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 to secure council approval for the subdivision; and

• buildings have been erected on the land.

In addition it is relevant to consider:

• the length of time the property had been held and to what purpose it had been put to in that time; and

• the personal involvement in the development activity.

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.

Section 23-5 of the GST Act requires you to be registered for GST if you are carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold. The current registration turnover threshold is $75,000.

As set out above we consider that you are not carrying on a property development enterprise and therefore you are not required to be registered.

Conclusion

Therefore as your sales are not in the course of an enterprise they will not be taxable supplies pursuant to section 9-5.

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