Edited version of your written advice

Authorisation Number: 1051281765865

Date of advice: 12 September 2017

Ruling

Subject: CGT implications on subdivision and sale of property

Question 1

Are the proceeds from the sale of the subdivided land ordinary income?

Answer

Yes.

Question 2

Is the subdivided land trading stock?

Answer

Yes.

Question 3

Is the supply of the subdivided land a taxable supply for GST purposes?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on

01 July 2017

Relevant facts and circumstances

The Taxpayers aged XX and XX (together ‘you’) are married.

In 19XX, you purchased the Land. The Land area is approximately XX hectares (approximately XX acres).

Soon after acquiring the Land, you constructed your main residence on the Land (first occupied in December 19XX) and have lived there ever since.

Improvements on the Land consist of your main residence, shedding and fences for farming.

You have carried on a farming business on the Land at all times since acquiring the property.

When the Land was acquired, it was zoned rural. At that time, there was no residential development near the Land. However, after significant development in the area, the Land is now approximately 2kms from the nearest shopping centre.

In August 20XX, the Council rezoned the Land to residential. You had no involvement in the rezoning, that is, it was not at your instigation (or on your behalf by any other party).

A neighbouring landholder, the Y Family, held a first right of refusal to purchase the Land (and had a Caveat over the Land) upon it being offered for sale.

The first right of refusal was granted in 20XX.

In 20XX, you negotiated with a 3^rd party for the sale of the Land which required you to offer the Land to the Y Family on similar terms.

You were prepared to sell the Land to the Y Family for $X.X million, but no agreement was reached. No agreement has been reached since and the Y Family Caveat over the Land has since been removed.

After a sale to the Y Family failed, your intention was to continue to live on the Land and carry on the farming business for many years to come.

However, in April 20XX, you suffered an illness which has forced you to reassess your plans.

You have since recovered from the worst effects of the illness, but your ability and capacity to work in the farming business have been reduced. Relevantly:

● Your driver’s licence was initially revoked. This has since been reinstated subject to you passing an annual medical assessment and driving with spectacles.

● Your truck driver’s licence was revoked for 10 years.

● Operating the farming business is now a significant chore and no longer a practical option for you in the long term.

You will be moving into new residential premise in town. A property has been acquired and the existing house on the property has been demolished. Construction has commenced on a new residence.

You expect to move into the new main residence in September 20XX.

The subdivision and sale of the land

In light of your respective ages, health, reduced ability to continue working in the farming business and your intention to move into new residential premises, you propose to sell the Land.

You have determined that the most beneficial way to realise the Land is to subdivide it and sell the individual lots (Subdivided Land).

It is proposed that the Land will be subdivided as follows:

● A creek area not suitable for housing would be transferred to the Council in lieu of Contributions to the value of $XXX,000:

● This is an area of X.0 Ha and will be public parkland.

● There would be XX blocks of subdivided land in total, mostly of approximately X00sqm, There would be one block of X,X00sqm which would include the existing main residence.

● The subdivision would be undertaken in four stages.

A detailed budget has not been prepared by the engineers yet, however, in broad terms, an estimate has been provided with this ruling.

The cost to undertake the subdivision and development works at once is too great for you, at an estimated figure of $X,XXX,X00 plus interest on borrowed funds.

As such, it is proposed that the subdivision be done over four stages noted in the table above.

Each stage of the subdivision will commence once funding for that stage is available, either from borrowed funds initially or from sales later on.

You have started to engage external professionals to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging and managing contractors.

A local real estate agent will handle the marketing and sales of the Subdivided Land.

The engineers will manage the associated development works, including the engagement and oversight of contractors on your behalf to undertake the development works (such as road works, kerbing, electricity, water and sewerage works).

You will pay the contractors directly once the engineers have confirmed the supply and satisfactory completion of the works.

The level of development will be the minimum required by Council for the subdivision.

No buildings will be constructed on the Subdivided Land. Rather, the Subdivided Land will be sold as vacant land, with the exception of the block of X,X00sqm which would include the main residence.

Prior subdivision experience

You have had some limited experience with two subdivisions of land (X and Y) many years ago. Specifically:

● A subdivision in X between 20XX and 20XX (X0 blocks with gross sales of approximately $XXX,000 and an overall loss of approximately $XX,000), and

● A subdivision in Y between 20XX and 20XX (X blocks with gross sales of approximately $XXX000 and an overall profit of approximately $XXX,000).

Both of these subdivisions were treated on revenue account at the time as they involved land acquired for the purpose of subdivision and sale.

You did not participate in the planning or construction of these subdivisions. This work was all contracted out to third parties.

GST

Neither of you are registered for GST.

Your partnership was registered for GST up until 31 December 2016.

Further information requests

The following additional information was provided by your tax agent via email, which for the sake of brevity, we have extracted and summarised the relevant responses.

Previous land sales and subdivision experience

Property A and Property B

● You engaged the engineering firm, who managed both subdivisions concurrently from start to finish.

● You acted in your capacity as Directors of the trustee of A Family Trust. In that capacity, you acquired the properties for subdivision, appointed engineers, marketing agents and conveyancing solicitors and in the course of the project did little else other than give approval to proposed actions upon recommendation by the engineers, pay contractors and execute contracts. Some blocks were sold through the family Real Estate Business operating at the time (now ceased operation).Other blocks were sold using third party agents.

● You gave formal approval in regard to the design of the development, without anything more than a cursory review, acting on the advice of your consultants.

● Paying contractors – upon the recommendation of the engineers once work had been satisfactorily completed, you made the required payments.

● Overseeing the day to day management of the development and its progress was undertaken by the engineers.

● From accounting records, the final payment was made on X XXX 20XX and no construction costs were incurred after that date. Payment for lodgement of the subdivision plan was made to a legal firm on XX XXXXXX 20XX. A total of $X0,XXX was paid for both subdivisions.

Property B

Email dated XX XXXX 20XX:

● You purchased the farmland in 19XX and 19XX in two tranches from an Estate.

● One tranche was approximately X00 acres and was acquired for $XX,000. The other tranche was approximately XX acres and was acquired for $XX,000.

● The land was purchased with the intention of holding it for long term farming purposes and not for the purpose of resale.

● The land was used for farming purposes during the five years that you held it.

● No development was undertaken on the land.

● Property B was sold as vacant in 20XX for $X,X00,000 on capital account.

● There was council rezoning during the period of ownership which gave rise to the increase in value. You were not involved in the rezoning process.

● After the sale, you leased the property back until XXXXX 20XX and continued your farming operations. There was no formal lease agreement in place between the parties.

● The lease ceased upon the new owners deciding to operate their own farming activities on the land.

● You have not retained copies of the acquisition or sale contracts. Your former accountant, who looked after you through the acquisition and sale, disbanded around 20XX/20XX and as such, you are not able to provide any copies of the contracts. The solicitor that handled the sale has advised that they no longer hold a copy of the sale contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Section 104-220

Income Tax Assessment Act 1997 Subsection 995-1(1)

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 23-10

A New Tax System (Goods and Services Tax) Act 1999 Section 23-15

Supplementary Explanatory Memorandum for the Tax law Improvement Bill 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter ‘part iva general’ in the search box on the top right of the page, then select: ‘Part IVA: the general anti-avoidance rule for income tax’.

Reasons for decision

The first two questions posed are closely related and will be answered collectively

Question 1

Are the proceeds from the sale of the subdivided land ordinary income?

Answer

Yes.

Question 2

Is the subdivided land trading stock?

Answer

Yes.

Question 1 & 2

Summary

The proceeds from the proposed sale of land are considered to be ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as income from carrying on a business of property development. As such the subdivided land is considered trading stock for the purpose of Division 70 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Ordinary income generally includes income that arises in the ordinary course of a taxpayer’s business. In certain circumstances proceeds not within the ordinary course of the taxpayers business may form part of their ordinary income.

Therefore the following needs to be considered in order to determine whether the proceeds to be received from the sale of the Land are:

● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; or

● assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to a profit.

Carrying on a business of property development

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition simply states what activities may be included in a business; it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Profits made on the sale of land can be considered ordinary income under section 6-5 of the ITAA of 1997 if the activities become a separate business operation.TR 92/3, paragraph 11 states:

The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer’s business.

Further, Gibbs CJ in Whitfords Beach provided the following commentary,

On the day that the shares were transferred…. ‘the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit.’ (page 4039)

The purpose of those controlling the taxpayer company was to engage in a business venture with a view to profit: ‘Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes.’ (page 4039)

Paragraph 13 of Taxation Ruling TR 97/11 states that the courts have held that the following indicators are relevant to whether or not a person is carrying on a business (although TR 97/11 specifically deals with carrying on a primary production business, the principles discussed in that Ruling can apply to any business):

a) does the activity have a significant commercial purpose or character?

b) does the taxpayer have more than a mere intention to engage in business?

c) is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable?

d) is there repetition and regularity in the activity? i.e., how often is the activity engaged in?

e) is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

f) is the activity organised in a businesslike manner?

g) what is the size or scale of the activity?

h) is the activity better described as a hobby, a form of recreation or a sporting activity?

Application to your’ circumstances

The following considers the above indicators for your circumstances:

a) Significant commercial purpose or character:

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

Paragraph 29 of TR 97/11 provides that a way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business.

Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative.

You had previous experience with two subdivisions of land and were linked to the family Real Estate Business demonstrating knowledge and previous experience in the activity.

The Commissioner considers that your activities exhibit a significant commercial purpose or character and this indicator suggests you commenced carrying on a business of land development.

b) Intention to engage in a business:

In Inglis, Brennan J stated:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.

You contend that your intention remained unchanged from acquisition in that the land was used for farming.

You have stated the subdivision of the Land and the sale of the Subdivided Land is to realise a capital asset given your ages, health, your reduced ability to continue working in the farming business and your intention to move into a new residential premises in town.

The Commissioner’s position at paragraph 42 of TR 92/3 indicates a taxpayer’s intention may change to profit-making after the time of acquisition. This is supported by the decision of the Federal Court in Stevenson where doubt was raised in relation to the position that a landowner may only form a profit-making intention in respect of any asset at the time of acquisition. Although the landowner in Stevenson did not acquire land with an intention to resell it many years later, the landowner subdivided his land into 180 lots and the scale of the borrowings used to finance the subdivision and sale of the land resulted in the commitment of the use of the land to a profit-making undertaking scheme or business activity.

The Commissioner considers that you committed the land to subdivision from the moment of lodging the DA with the Council.

At this point your intention changed to holding land as trading stock for the purposes of a land development business. (For a further discussion on the point in time your intention changed, refer to the later discussion appearing under the heading “Change in Purpose”).

The Commissioner considers this to be a positive indicator of carrying on a business of land development.

c) Is there an intention to make a profit or a genuine belief that a profit will be made?

Stronger evidence of an intention to make a profit occurs when you have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business.

You stated that you purchased Property A and Property B. Both farmlands were adjacent properties to the Land in question.

Property B was purchased in two tranches from an Estate. One tranche was approximately X00 acres and was acquired for $XX,000. The other tranche was approximately XX acres and was acquired for $XX,000.

In 20XX you sold Property B for $X,X00,000 on capital account. You recall that there was council rezoning during the period of ownership that gave rise to the increase in value.

In 20XX you sold Property A to the Y Family for $X,X00,000.

In 20XX you tried selling the Land as a whole on two occasions for $X,X00,000 but were unsuccessful.

In 20XX, you lodged the DA and received approval in 20XX.

You stated that a town planning consultancy firm, prepared and lodged the DA for the proposed subdivision with the Council.

You also stated in your ruling application that your accountant provided a table for the proposed subdivision estimate of costs and sales which was included in the private ruling application.

The table provides that you anticipate sales proceeds of $XX,XX0,000, expects subdivision costs of $X,XXX,000 and the gross profit of $X,XXX.

The Commissioner regards that you have intentions to make profit from the activity as you have done previously. You have conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before starting the business. These are all positive indicators of carrying on a business of land development.

d) Is there repetition and regularity in the activity?

It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business.

You contend this is an isolated venture or a “one-off” transaction.

You stated you have had some limited experience with two subdivisions of land many years ago. Both of these subdivisions were treated on revenue account as they involved land acquired for the purpose of subdivision and sale.

The Commissioner notes that you have previous experience in land developments of this nature and sale of land in an enterprising, advantageous and businesslike way. The Commissioner also notes that there is repetition and regularity in the current land development designed to be carried out over 4 stages.

The Commissioner considers these to be positive indicators of carrying on a business of land development.

e) Is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

You estimate to incur an average cost of $X0,000 per block to comply with Council restrictions and an estimated total cost of $X,XXX,000 to subdivide the Land which is above the supposed market value of the Land.

You stated that you have to borrow funds for the proposed subdivision and will be assuming the financial risk of the development.

You stated you will not be undertaking an active role in the subdivision. Rather, you are engaging external professional to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging and managing contractors.

The Commissioner contends that the development is to be carried on in a manner similar to other land developers.

The Commissioner considers that these are positive indicators of carrying on a business of land development.

f) Is the activity organised in a businesslike manner?

A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

You stated you have engaged third parties to undertake the planning approval stage (submissions to Council, etc), manage and undertake the subdivision activities (engineering, etc), and an agent to market and sell the lots.

You stated that you have a minimal involvement in the subdivision. As you are the owners of the land and it is you undertaking the subdivision, you will be signing documentation as required, however this would be on advice provided by your advisers.

The Commissioner notes that you engaged the services of professionals for planning the subdivision, carrying out civil works and marketing of allotments for sale. You will also be assuming the financial risk of the development. All these activities conform to ordinary commercial principles of a land development.

The Commissioner considers that this is a positive indicator of carrying on a business of land development.

g) What is the size or scale of the activity?

The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way. However, if the scale of the activities result in more than is required for your own domestic needs combined with an intention to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale.

Mason J in Whitfords Beach made the following comments at paragraph 37:

I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

You stated that you have decided to subdivide the land as you believe it is the most advantageous way to realise the land.

You stated that in 20XX, you attempted selling the Land as a whole for $X,X00,000 to a third party and to the Y Family however these did not materialise into sale.

In 20XX, you lodged a DA with the Council and in 20XX the DA was approved. As such, you confirmed that you will subdivide XX acres into XX blocks, most of approximately X00m². There would be one block of X,X00m² which would include the existing main residence.

According to you, it is projected the development will be completed in 4 stages. Each stage of the subdivision will commence once funding for that stage is available, either from borrowed funds initially or from sales later on.

You further stated the total cost of subdivision will be approximately $X,XXX,000 and the gross sales of $XX,XXX,000.

The Commissioner contends that the scale of the activities and the improvements to the land goes beyond merely realising the asset in the most enterprising way. Therefore the Commissioner contends there was a change of purpose in relation to the use of the land and this is a positive indicator of carrying on a business of land development.

h) Is the activity better described as a hobby, a form of recreation or a sporting activity?

You have not provided any argument to support that the activity is better described as a hobby, a form of recreation or a sporting activity.

The Commissioner considers that your activities are not a hobby or a form of recreation and this indicator is not relevant.

Change in purpose

In Casimaty, Ryan J held that a landowner’s change of purpose in relation to the use of an asset may enliven the income tax provisions.

At paragraph 42 of TR 92/3, the Commissioner relevantly states:

For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either

(a) as the capital of a business; or

(b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer [then] constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be… The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

[emphasis added]

TR 92/3 does not provide further detail on the time at which the Commissioner considers that a transaction has been “entered into” to constitute the carrying on of a business or business operation or commercial transaction.

In Whitfords Beach, Bowen CJ, Morling and Fitzgerald JJ stated that:

it does not follow that all activities engaged in by the taxpayer were necessarily in the course of that business or that some of them were not merely preparatory to it. In order to determine when the taxpayer’s relevant business commenced and when its land or the various parts of it were committed to or venture into that business, it is necessary to have regard both to the taxpayer’s purposes or its activities.

In TD 92/124, at paragraph 2, the Commissioner considers that a business activity is taken to have commenced when a taxpayer “embarks on a definite and continuous cycle of operations designed to lead to the sale of the land”.

This follows the comments by the Court in Whitfords Beach where it was held that the “taxpayer’s business of developing, subdividing and selling the land commenced as soon as the intention to take steps for that purpose in relation to the entire land was formed and activities directed to that end were commenced…”.

It is not necessary that the acquisition of land be repetitive. While ordinarily the carrying on a business of development will involve repeated acts of buying and selling, this is not an essential feature of trading, and a taxpayer can commence a business prior to any acts of subdivision.

There are generally six stages in the development process, as set out by Emmett J in FCT v Kurts Development Ltd:

1. Rezoning

2. Subdivision approval

3. Engineering and design process

4. Construction process

5. Plan sealing process

6. Registration of titles

From analysis of the facts the Commissioner considers that you embarked on a definite and continuous cycle operations of property development with the intention to lead to the subdivision and sale of the land, at the time you submitted the DA with the Council in October 2015. At this point of time you’ve commenced to take steps (undertaking stage 2 of the development process as set out by Emmett J in FCT v Kurts Development Ltd) for the purpose of developing, subdividing and selling the land.

Therefore, the Commissioner considers that it is reasonable to conclude that you commenced a property development business at the time, when you lodged the DA with the Council in October 2015.

Conclusion:

You contend that the subdivision is a mere realisation of a pre-CGT asset.

The Commissioner asserts that your activities, as reflected in the indicators above, go beyond the mere realisation of a pre-CGT asset.

Therefore the Commissioner considers that the indicators reflect that a land development business was commenced by you when you lodged the DA with the Council in XXXXX 20XX. You engaged a town planning consultancy firm and development consultants with surveyors, planners and civil engineers to prepare and lodge the DA and to commence the Development Summary. The Commissioner considers that you commenced a land development business at this time.

As the Commissioner affirms that a business of land development has commenced, it was not necessary to consider whether your activity would generate profits from an isolated transaction as assessable income as described in TR 92/3 are income and section 15-15 of the ITAA 1997.

Trading stock issues applying to your circumstances

The trading stock provisions in Division 70 of the ITAA 1997, apply to your land. Section 70-10 of the ITAA 1997 discusses the meaning of trading stock. It states:

Trading stock includes:

a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and

b) live stock.

The Supplementary Explanatory Memorandum for the Tax law Improvement Bill 1997 explains that the definition of ‘trading stock’ which was altered by the Tax Law Improvement Act 1997 was changed from a test when an asset is acquired to a test determined according to the asset’s current use. This was changed because under the Income Tax Assessment Act 1936 definition of ‘trading stock’, some assets would always stay trading stock if they were first acquired for that purpose. Therefore, the meaning was changed to give effect to section 70-30 of the ITAA 1997.

Subsection 70-30(1) of the ITAA 1997 states:

If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:

(a) just before it became trading stock, you had sold the item to someone else (at arm's length) for whichever of these amounts you elect:

• its cost (as worked out under subsection (3) or (4));

• its market value just before it became trading stock; and

(b) you had immediately bought it back for the same amount.

When you must make the election

Subsection 70-30(2) of the ITAA 1997 states:

You must make the election by the time you lodge your *income tax return for the income year in which you start holding the item as *trading stock. (If you do not make the election by then because you do not realise until later that you started to hold the item as trading stock, you must make the election as soon as is reasonable after realising that.)

However, the Commissioner can allow you to make it later (in either case).

As you started to hold your land as trading stock in XXXX 20XX, you can elect to use the market value of the land at that time when you lodge your tax return for the 20XX income year or amend it if still during the review period. Subsequent conversions of land to trading stock will require you to make elections at the time you lodge tax returns for the relevant income years.

If you choose to adopt the market value for valuing the land then this will give rise to Capital Gains Tax Event K4 (CGT Event K4).

Application of CGT to your circumstances

Section 104-220 of the ITAA 1997 states:

104-220(1)

CGT event K4 happens if:

(a) you start holding as trading stock a CGT asset you already own but do not hold as trading stock;

(b) you elect under paragraph 70-30(1)(a) to be treated as having sold the asset for its market value

Note 1:

Paragraph 70-30(1)(a) allows you to elect the cost of the asset, or its market value, just before it became trading stock.

Note 2:

There is an exemption if you elect its cost: see section 118-25.

104-220(2)

The time of the event is when you start.

104-220(3)

You make a capital gain if the asset's market value (just before it became trading stock) is more than its cost base. You make a capital loss if that market value is less than its reduced cost base.

Exception

104-220(4)

A capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

Therefore, should you elect under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having sold the land for its market value then, as you purchased the land prior to 19XX, paragraph 104-220(4) of the ITAA 1997 will be applicable and any capital gain or loss you make from CGT event K4 will be disregarded.

Conclusion

Weighing all of the evidence together, on balance it is more likely than not that the sale of the subdivided property does not constitute a mere realisation of a CGT asset, and any profit made is assessable on revenue account.

The profit you make will be revenue in nature and considered ordinary income assessable under section 6-5 of the ITAA 1997.

Question 3

Is the subdivision and supply of the Land, a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes.

Summary

Your activities are in the course or furtherance of an enterprise that you carry on and as such will satisfy the definition of a taxable supply pursuant to section 9-5 of A New Tax System (Goods and Services Tax) Act 1999.

Detailed reasoning

In the reasoning unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

You, are an entity for the purposes of the GST Act.

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (Australia), and

(d) you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

You intend to subdivide the Land, into 95 residential lots over four stages. For the supply of your subdivided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

In this case, you will be selling vacant residential lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) are satisfied. Further, the supply of the lots in your situation will neither be GST-free or input taxed.

Accordingly, we must determine whether:

(a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

Enterprise

Section 9-20 provides that the term ‘enterprise’ includes, among other things, 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 phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 provides the ATO view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

You are not currently registered for GST. However, your partnership carried on a farming business since acquiring the Land (which contains your principle residence) and was registered for GST up until 31 December 2016. Your registration was cancelled as the farming operation had reduced significantly due to medical issues. You currently hold X steers and XX sheep on the Land.

In this case, it is necessary to consider whether your subdivision activities on the Land are in the form of a business or in the form of an adventure or concern in the nature of trade. In forming our view, we must consider whether the Land, previously used in your farming enterprise (excluding your home), has changed from a capital to a revenue asset as a result of your decision to undertake development activities on the Land.

Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to 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.

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’. In particular:

● 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.

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature.

Paragraph 260 of MT 2006/1 states that assets can change their character but cannot have a dual character at the same time. This means 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 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are ‘one-offs’ or isolated real property transactions.

Paragraph 263 provides that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

● 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.

Paragraph 266 of MT 2006/1 states further:

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

Paragraph 269 explains further that:

The Commissioner recognises that in some cases practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to an enterprise. The question is necessarily one of fact and degree. As outlined above, it requires a careful weighing of the various factors and exercising judgement in the light of decided case law and commercial experience…

Capital v Revenue

Paragraphs 31 and 33 of Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected turnover provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’ as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations.

Paragraph 34 of GSTR 2001/7 provides that ‘Capital assets’ are distinguished from ‘revenue assets’. A ‘revenue asset’ is an asset whose realisation is inherent in, or incidental to, the carrying on of a business.

If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction.

Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital.

An enterprise may consist of an isolated transaction or dealing with a single asset.

The following discussion is centred on applying the facts of this case to the indicators of a business and the factors used in determining whether activities are a business or an adventure or concern in the nature of trade (with reference to the indicators established in Statham and Casimaty in the context of real property transactions). In particular, the following factors (discussed below) are considered important in determining that your activities are a ‘one off property development that is an adventure or concern in the nature of trade and therefore an enterprise for GST purposes:

● A significant commercial activity.

● There is a change of purpose for which the land is held.

● Relevant knowledge and skill.

● There is a coherent plan for the subdivision of the land.

● Borrowed funds financed the acquisition or subdivision.

● The level of pre-planning and development activity on the land including that activity necessary to meet council requirements.

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

● The activities systematic, organised and carried on in a business-like and commercial manner.

● Size and scale, involvement and risk.

A significant commercial activity

You propose to subdivide the land into XX residential Lots. The subdivision will be undertaken in four stages.

The Development Consent endorsed by the Council in February 20XX outlines the conditions under which the consent has been granted and confirms the plans and documentation endorsed with consent.

It is clear from the contents of the document that the proposed development is a significant commercial activity. In particular:

1. New road names and plans of their complete proposed alignment must be presented to Council.

2. A sewer pump station must be designed and constructed in accordance with Council’s standard engineering drawing. The design shall incorporate approved pumps, telemetry, odour control and emergency bypass fittings and shall be designed and constructed at the developers cost.

3. You must consult with the relevant electricity, gas, water, sewerage and telecommunications carrier regarding requirements for the provision of services.

4. Stormwater drainage, water and sewerage reticulation and services must be designed and provided in accordance with Council’s Engineering Guidelines for Subdivision and Development.

5. A Stormwater drainage management plan is to be prepared (including a risk assessment)

6. A detailed Landscape Plan must be prepared and submitted to Council. The following must be addressed:

(a) Identification and accurate mapping of the vegetation proposed to be removed and retained.

(b) Details of the methods of tree protection during engineering works for trees identified to be retained, including the plotting of protection zones, for all vegetation identified to be retained.

(c) A street Tree Planting Plan detailing species, numbers and locations.

(d) Details of proposed plantings within the Local Recreational Park.

(e) Details of proposed plantings within the Table Top Road, road reserve.

…

(h) Surface treatments in nature strips, including grassed areas, all hard surfaces and their materials, garden beds and the like.

(i) Proposed landscaping of all open space areas, drainage reserves and watercourse environs, including any structures proposed.

(j) The locations and types of all fencing and their heights, materials and colour.

7. A soil erosion and sediment control plan must be designed in accordance with Councils Soil and Water Management Guidelines for Subdivisions.

There is a change of purpose for which the land is held:

In November 2015, you lodged a Development Application with the Council pertaining to the Land. The Development Application addressed the following matters:

● Description of proposal

● Matters for consideration:

● Local Environmental plans

● Subdivision – consent requirements (clause 2.6)

● Land use table (Part 2)

● Minimum subdivision lot size (clause 4.10)

● Tree preservation (clauses 5.9 &5.9AA)

● Heritage Conservation (clause 5.10)

● Urban release areas (Part 6)

● Water (clause 7.2)

● Flood Planning (clause 7.4)

● Essential services (clause 7.6)

● Airport operations (clauses 7.8 & 7.9)

● Development Control Plans

● Flooding (Part 6.2)

● Contaminated land (Part 6.3)

● Bushfire (part 6.4)

● Development in the Environmental Zones (Part 8)

● Development in Residential Zones (Part 10.3):

● Lot and road layout

● Lot and road orientation

● Public open space

● Utilities and infrastructure

● Street network

● Airport (Part 18)

● Urban Release Areas (Part 19)

● Statement of Environmental Effects

Further, in January 20XX you made an offer of land to the Council as part of the existing development application for the subdivision of the land already lodged with Council.

The land offered is within Lot 11 (the Land) and is in three contiguous parcels as shown in the staging plan and described as:

1. 1.6 hectares zoned R1 General Residential shown as a future park.

2. 1.713 hectares zoned R1 General Residential within the floodplain.

3. 1.1 hectares zoned E3 Environmental management also within the floodplain.

If Council agrees to the offer then the value assigned to the land can be offset against the development contributions required for the proposed subdivision.

Based on the documentation above, there has been a clear change in purpose for which the Land is held. That purpose is the subdivision of the subject property into XX residential lots and a residual parcel of land identified for local open space purposes.

The Development application comprehensively identifies and considers a number of aspects of the subdivision and extends that consideration to offering Council land in lieu of development contributions. This clearly evidences the applicants change in purpose and that the subject property has changed its character from capital to revenue in nature.

Relevant knowledge and skill, a coherent plan for the subdivision of the land and plans to borrow funds

You have extensive prior experience in the subdivision and sale of land. In particular you managed and undertook subdivisions of land in two occasions. Properties were acquired for subdivision and you appointed engineers, marketing agents and conveyancing solicitors. The sale of some blocks of land was undertaken through the family Real Estate Business whilst other blocks were sold using third party agents. You were responsible for approving the design and development and paying contractors once the works had reached satisfactory approval.

Similarly in this case, you have engaged advisors to prepare the necessary documentation (Development Application) and budgets (Estimated Development Summary) for further consideration. You have also had preliminary discussions with a Bank to discuss a loan application to be made in due course. You have had more recent discussions with the bank which will now begin preliminary work on a finance proposal. The terms of the loan will be determined in consultation with the bank, primarily driven by cash flow requirements of the proposed subdivision. You expect that the loan will be a short term loan to fund Stage 1.

It is clear, from the approach adopted above, that there is a coherent plan for the subdivision of the land. Further, you have prior knowledge relating to the subdivision of land and the requirements and work necessary to be undertaken in this regard. You will further borrow funds to undertake the subdivision and will therefore assume the entire business risk associated with the project.

The level of pre-planning and development activity on the land including that to meet council requirements and similar business activity

The following discussions and advice was sought by you in relation to the subdivision of the Property. In brief:

1. Your accountant provided a table of estimated costs and sales for the proposed subdivision. This information was based on estimates which you obtained from informal discussions with a local professional developer. You estimated sale prices by checking equivalent existing blocks for sale in the immediate area.

2. You engaged with town planning consultant firm to prepare a Development Application to be submitted to the Council (November 2015). The Development Application provides an extensive overview and consideration of all matters pertaining to the development and includes a subdivision plan, traffic impact assessment and consideration of bushfire protection measures. There is also a Statement of Environmental Effects which outlines any potential effects the development may have on the environment

The town planning consultant firm also prepared and submitted to the Council an offer of land under the Infrastructure Contributions Plan. This comprised a detailed response to prescribed matters for consideration and an Explanatory Note.

They are now seeking clarification on a certain condition of approval and once ascertained it is expected that this will be the end of their involvement.

3. The development consultants prepared plans for the Development Application that the town planning consultant firm lodged with the Council and have just completed the Development Summary of Stage 1 – a detailed estimate of Stage 1 costs associated with:

● Roads and Drainage Construction

● Water Reticulation

● Sewer Reticulation

● Miscellaneous

● Other Fees

● Consultant Fees

● Electricity Fees

● Gas Fees

● Telecommunication Fees

The development consultants are currently negotiating with Council on a new trunk water main that is required.

Assuming the projected sale prices and costs are acceptable, the decision is made by you to proceed and finance is approved (no formal application has been made yet), the following steps will then be undertaken by the development consultants:

● Complete a topographic survey of the site.

● Proceed with the engineering design of Stage 1. For example, roads, drainage, sewer and pump station, negotiate with Service Authorities.

● Upon the Stage 1 Final Design being approved by Council and Construction Certificate being issued, they will:

● Seek prices from civil engineering contractors and service providers for the proposed work.

● Prepare contracts with contractors and service providers.

● Upon work commencing, they will:

● Supervise all works along with Council inspections.

● Supervise all payments claims.

● Upon practical completion they will obtain sign-off by all relevant authorities.

● Upon a Subdivision Certificate being issued by Council, they will:

● Seek approval from the Mortgagee to proceed with the subdivision.

● Lodge titles with the titles office.

● The projected timeframe for all of the above to be completed is about 18 months.

As outlined above, in the Development Consent endorsed by the Council on XX XXXX 20XX, the development must be carried out in accordance with approved plans and the particulars and statements submitted with the development application.

The works proposed by you in the Development Application and those outlined in the Development Consent are extensive in nature and align with similar works which would be undertaken by any other property developer.

As the proposed development and requirements of Council are vital to the understanding of why we have made our decision in this matter, I outline below once again the extent and nature of the proposed development in accordance with both the Development Application and the Development Consent:

Development Application

1. You propose to subdivide the land into XX allotments/blocks/lots. The majority of these will be at an urban density for residential development (XX0sqm to X,XXXsqm) with a single larger lot at the eastern end for public open space consistent with the requirements of the Structure Plan. There are also seven larger lots ranging from X,000 sqm to X,0X0 sqm of which one contains the existing residence and the others extend into the flood plain.

2. The subdivision includes a new internal road network intersection.

3. All proposed residential lots will be provided with telecommunication services, reticulated water and overhead electricity services. The existing dwelling presently operates an on-site effluent disposal system, however, reticulated services are now available along the main road and these will be extended to service proposed allotments.

Development Consent

1. New Road Names and plans of their complete proposed alignment must be presented to Council.

2. The sewer pump station shall be designed and constructed in accordance with Council’s standard engineering drawing. The design shall incorporate approved pumps, telemetry, odour control and emergency bypass fittings and shall be designed and constructed at the developers cost.

3. You must consult with the relevant electricity, gas, sewerage and telecommunications carrier regarding requirements for the provision of services to the site.

4. Stormwater drainage, water and sewerage reticulation and services must be designed and provided in accordance with Council’s Engineering Guidelines for Subdivision and Development to cater for predicted infrastructure demand in the locality, and impact of development on Council’s assets.

5. A stormwater drainage management plan is to be prepared showing stormwater from the site area and development being collected and disposed of to a lawful point of adequate capacity so as to prevent contamination of receiving waters.

6. Provision of access for Council maintenance vehicles, shall be incorporated into the design of all stormwater facilities, water quality structures and watercourse channels. Where necessary, appropriate easements shall be created to ensure adequate access for maintenance vehicles.

7. You must submit a risk assessment of the proposed drainage system prior to issue of a Construction Certificate for Council approval which must include:

● Identification of the risks associated with site mainly the ‘water holding areas’.

● Public access and fencing.

● Proposals to minimise the identified risks, including batters not exceeding a 1:4 grade.

● Works to be carried out.

● Any landscaping of the system and landscaping maintenance program.

8. Maintenance of the drainage areas to include frequency of cleaning, weed management and erosion. Prior to the issue of any Construction Certificate, a detailed landscape Plan must be submitted to Council for approval that addresses the following. In summary:

● Identification and accurate mapping of the vegetation proposed to be removed and retained.

● A Street Tree Planting Plan detailing species, number and locations.

● Details of proposed plantings within the Local Recreation Park.

● Surface treatments.

● Proposed landscaping of all open space areas, drainage reserves and watercourse environs, including any structures proposed.

● The locations and types of all fencing and their heights, material and colour.

9. A soil erosion and sediment control plan must be designed in accordance with Council’s requirements.

10. You must also submit a plan prepared by a registered surveyor showing the location of water, sewer, gas, telecommunications, electricity and stormwater drainage in relation to boundaries and /or relevant easements.

Are the activities systematic, organised and carried on in a business-like and commercial manner

In considering the proposed development you:

● Have lodged a Development Application with the Council having engaged a number of professional entities to assist you in developing a plan which identifies both the financial viability and complexity of the project. Each step taken has been methodical and with due consideration to the proposed outcome and the requirements of Council and similar developments in the area.

● Have made an offer of land to the Council under the Infrastructure Contributions Plan and if the Council agrees to the offer then clause 3.20.2 enables the value assigned to the land to be offset against the development contributions required for the prosed subdivision.

● Will be funding the development personally and will pay contractors directly from your own line of credit arranged with a financial institution. As the funding for the development is significant and may impose unnecessary risk, you propose to undertake the development in four stages.

Based on the above information we consider that your activities have been systematic, organised and carried out in a business-like and in a commercial manner.

Size and scale, involvement and risk

You consider that your involvement in the subdivision will be minimal. You state that you will sign certain documentation as required, however this will be on the advice of your advisors. You will make payments upon being advised that work has been satisfactorily completed by the relevant contractors and service providers. Further, a local real estate agent will handle the marketing and sales of the subdivided land.

The phrase used in court cases of ‘undertaking only the development of the land required to secure council approval for subdivision’ must be taken in the context of the level of activity required for the relevant development and not simply based on the fact that the parties carried out what council required them to do.

Your level of involvement can be compared in some respects to the decision in Stevenson v FC of T (91 ATC 4477) wherein Jenkins J stated at paragraph 31:

As to the taxpayer’s personal involvement with the subdivision of the land, he was the sole decision-maker in respect of all matters of consequence in relation to it; he obtained professional advice but, except for the submission of the original planning application early in 1975, he chose for himself and directed the course of action to be followed. Thus at all times he fixed the price to be asked for the land. He sought and obtained finance and subsequently, having been refused further finance by that lender, he personally sought and obtained it from another source. He controlled the marketing of blocks after subdivision; he dealt personally with many prospective purchasers when they came to inspect the land.

Further, the level of development in your case can be contrasted with that undertaken in the cases of Statham & Anor v. Federal Commissioner of Taxation; (89 ATC 4070); (20 ATR 228) [Statham] and Casimaty v. FC of T; (1997) 151 ALR 242 [Casimaty]:

Statham

● The process by which the land was subdivided was relatively simple so far as the owners were concerned. All that was required of them was the making of applications to the Kingaroy Shire Council and the provision of a bond to it by way of a bank guarantee.

● The Council, after approval of the application, undertook all the necessary subdivisional work. This included roads, earthworks, sewerage and electrical works. Three subsequent applications were made to the Council in relation to stages 2, 3 and 4 of the subdivision.

● The owners sold the subdivided land simply by listing it with local real estate agents. The marketing of the land was attended to by the agents without participation by the owners.

● Although the owners obtained some professional advice from an engineering firm, they did not engage any contractors to carry out work, leaving that to the Kingaroy Shire Council.

Casimaty

● No coherent plan was conceived at the outset for the subdivision of the whole of the property, even in stages, to maximise the return from the aggregate of the individual lots.

● The taxpayer did not undertake any works on, or development of the land beyond what was necessary to secure the approval by the municipal authorities. Had he constructed internal fencing or other improvements, it would have been easier to impute an intention to carry on a business of land development and improvement.

In the course of his judgement in FC of T v Whitfords Beach Pty Ltd , Mason J acknowledged that merely because a sale of land is preceded by subdivision does not preclude it from being the realisation of a capital asset. However, his Honour pointed out that the surrounding circumstances of a subdivision may carry it across the line into the business of land development. His Honour concluded, at ATC 4047 – 4048; CLR 385:

… In this respect I do not agree with the proposition which appears to be founded on remarks in some judgements that sale of land which has been subdivided is necessarily no more than the realisation of an asset merely because it is an enterprising way of realising an asset to best advantage. That may be so in the case where an area of land is merely divided into allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvements of the land to such a marked degree that it is impossible to say that it is mere realisation of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Whether subdivisional activity is sufficiently extensive and systematic to amount to the conduct of a business is a question of fact.

Ryan J continued in Casimaty that in his view, the approach which has to be taken to the question of fact raised by cases of this kind has been illuminated by the following passage, at 330, from the dissenting judgment of Dean J in Whitfords Beach 79 ATC 4648; (1979) 44 FLR 312 which was approved on appeal by the Full High Court (82 ATC 4031; 150 CLR 355) [ATC 4665-4666]:

The determination of the question whether the proceeds of sale of an asset should properly be seen as representing profits made in the ordinary course of what is in truth a business will not infrequently require precise definition both of the relevant business and of those activities which are comprehended in its ordinary course…

Where a person who carries on a business sells an asset which had been held as a capital asset, one must, in each case, ask the question whether the asset was devoted to the particular business to such an extent that it can properly be said that the proceeds of sales represent profits made in the ordinary course of that business. In a case where the asset has been divided and the divided parts improved in the course of a business of dividing and improving such assets, it would be rare that one could say that the profits from sale of the individual improved items (after making allowance for the value of the original asset) represented part of the proceeds of mere realisation of a capital asset as distinct from profits made in the ordinary course of that business. Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds.

The size and scale of your development activities is significant. This has been explored and outlined in detail above. Your financial commitment is sizeable ($X,XXX,000 plus interest on borrowed funds) as is the risk associated with the development. This observation is supported by your own admission that the cost of undertaking the entire subdivision at once is too great for you and for this reason it will be completed in four stages. Each stage of the subdivision will commence once funding for that stage is available either from borrowed funds initially or from sales later on.

Your activities entail legal and financial control over a development which has a high degree of sophistication and complexity. Given your history of land sales and past developments, you have the necessary knowledge and experience to proceed with a project of this nature.

Conclusion

We consider that your activities amount to more than the ‘mere realisation’ of a capital asset and constitute the carrying on of an enterprise of land development in the nature of trade.

We acknowledge that one of the reasons for undertaking the development now is due to your age and ill health. While health is and can be a factor, we consider that this is not the determinative factor in your circumstances. This is underpinned by the fact that the Development Application was lodged with the Council in XXXXX 20XX, some months before you suffered the illness.

Requirement to register for GST

Section 23-5 requires you to be registered for GST if:

(a) You are carrying on an enterprise; and

(b) Your GST turnover meets or exceeds the registration turnover threshold. The current registration turnover threshold is $75,000.

Partnership

A Partnership under section 195-1 has the meaning given by section 995-1 of ITAA 1997.Section 995-1 of the ITAA defines a partnership as:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary oncome or statutory income jointly, or

(b) a limited partnership.

The first limb of paragraph (a) of the definition refers to an association of persons carrying on business as partners. This reflects the general law definition of a partnership, which is ‘the relation which subsists between persons carrying on a business in common with a view to profit’. We refer to this type of partnership as a general law partnership.

The second limb of paragraph (a) of the definition of partnership includes as a partnership an association of persons (other than a company or limited partnership) ‘in receipt of ordinary income or statutory income jointly’. This type of partnership is referred to as a tax law partnership.

In your case, you have commenced carrying on a business together with a view of profit. We therefore consider that you meet the definition of a partnership for GST purposes. We also consider that you are more closely aligned to a general law partnership as you have come together to carry on a business of property development.

Registration

The registration turnover threshold is currently $75,000.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

(b) your projected GST turnover is at or above the turnover threshold.

Section 188-20 provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than input taxed supplies.

Of relevance here is the projected turnover of the partnership. We have already established that the partnership will be carrying on an enterprise. In undertaking the sale of the subdivided blocks of land, the partnership will be required to be registered when its projected GST turnover is at or above $75 000, satisfying paragraph 9-5(d).

If the partnership proceeds with the sale of the subdivided land outlined above, the sales will satisfy all the requirements of a taxable supply under section 9-5 and will be subject to GST.

Conclusion

In summary, the subdivision and supply of the Land will be a taxable supply pursuant to section 9-5.

Where you meet the requirements of Division 75, you will be entitled to calculate the GST on your taxable supplies under the margin scheme.

Other references

ATO view documents

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST Turnover, including the effect of section 188-25 on projected GST turnover.

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’.

Supplementary Explanatory Memorandum for the Tax law Improvement Bill 1997.

Taxation Ruling: TR 92/3: Income Tax: whether profits on isolated transactions are income.

Taxation Determination TD 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock’?

Taxation Ruling TR 97/11: Income tax: am I carrying on a business of primary production?

Case law

Casimaty v Federal Commissioner of Taxation (1997)

Federal Commissioner of Taxation v Kurts Development Ltd 98 ATC 4877 at 4880-4881

Federal Commissioner of Taxation v St Hubert’s Island Pty Ltd (in liq) (1978) 138 CLR 210

Federal Commissioner of Taxation v Whitfords Beach Pty Ltd 82 ATC 4031

Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1983) 14 ATR 247, 253

Inglis v Federal Commissioner of Taxation 80 ATC 4001 at 4004-4005; (1979)

Stathan & Anor v. Federal Commissioner of Taxation; (89 ATC 4070); 20 ATR 228)

Stevenson v Commission of Taxation (1991) FCR 282

Stevenson v. FC of T (91 ATC 4477)

Thomas at ATC 4099 ATR 171.

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