Edited version of your written advice

Authorisation Number: 1051458999213

Date of advice: 6 December 2018

Ruling

Subject: Land subdivision

Question 1

Will the proceeds from the sale of the subdivided lots (the lots) be assessable as ordinary income?

Answer

No

Question 2

Will the proceeds from the sale of the lots be subject to the capital gain tax (CGT) provisions?

Answer

Yes

Question 3

Will the sale of the lots be a taxable supply?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away a number of years ago and probate was granted to her executors the same year.

The deceased owned a property mortgage free, with more than one dwelling. The size and value of the property has been provided.

Deceased acquired the property from her late spouse estate post-CGT. The property has been in the family for many years.

The deceased’s children were allowed to live on the property without charges.

A number of years ago, deceased was approached by a developer to enter a joint venture to subdivide the land. There was no external advice sought by the deceased in relation to this offer and only family discussions regarding the matter were held. The developer provided valuation information to the deceased.

Subsequently, the deceased signed a joint venture Deed with the developer. The deceased appointed the developer as their attorney for the purpose of the development.

As per the agreement, the developer was to:

● bear all costs associated with, and undertake all required works for, the joint venture

● provide monthly written reports on the status of the joint venture.

The planning permit was the granted.

The work undertaken by the developer was the necessary works required to gain approval from council and other authorities and includes works such as:

● clearing of heavy undergrowth with consideration of specific tree retention as required under the planning permit,

● soil rectification per council and regulations

● works per fire-proofing regulations.

The developer will independently conduct and fund other works deemed necessary to gain access to each block such as:

● construction of roads

● construction of footpaths

● construction of drainage

● preparation for the connection of utilities.

The size of each lot has been provided.

It is anticipated that the subdivision work will be completed in the coming years.

All the subdivided blocks are in the name of the Estate.

In relation to half of the lots assigned to the developer, the developer is to direct the Estate to enter into contracts with the purchasers that the developer has sourced. The developer will receive the proceeds from these sales.

In relation remaining lots, it is the intention of the executor to sell them.

One lot, on which the deceased’s child still currently resides, will be sold at a later date when alternative residence is found.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

There are three ways profits from property sales can be treated for taxation purposes:

1. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or

2. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose; or

3. As statutory income under the capital gains tax legislation.

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Ordinary income is defined as income according to ordinary concepts.

Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income.

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 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of Taxation Ruling 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 Taxation ruling 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.

CGT provisions

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss of those capital proceeds are less than the reduced cost base of the block.

Goods and Services Tax (GST)

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.

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 guidance on what activities will amount to an enterprise.

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.

MT 2006/1 at paragraph 262 explains that whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

The relevant intention or purpose of the taxpayer is not the subjective intention or purpose of the taxpayer but rather it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 178 of MT 2006/1 lists a number of indicators to consider when determining whether an activity or series of activities amount to a business and paragraph 265 of MT 2006/1 includes a list of factors from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) in relation to isolated transactions and sales of real property.

The following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction include;

● the nature of the entity undertaking the operation or transaction;

● the nature and scale of other activities undertaken by the taxpayer;

● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

● the nature, scale and complexity of the operation or transaction;

● the manner in which the operation or transaction was entered into or carried out;

● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

● if the transaction involves the acquisition and disposal of property, the nature of the property, and

● the timing of the transaction or the various steps in the transaction.

Application to the situation

In this case, you do not carry on a business of buying, selling or developing land. You had minimal involvement in the subdivision of the land and have not contributed any funds, expertise or been involved in the development plans or applications. You contend that your role is entirely passive and subdivision activities were initiated by the developer who is conducting the development activities and providing the funding.

On balance, the sale of the subdivided lots is considered to be a mere realisation of a capital asset. Profits from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997.The proceeds will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Additionally, it is considered that you are not carrying on an ‘enterprise’ as defined in section 9-20 of the GST Act and you are neither registered nor required to be registered for GST in regard to your activities relating to the sale of your properties. Therefore, the sale of the subdivided lots will not be taxable supplies.

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