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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051496827587

Date of advice: 20 March 2019

Ruling

Subject: Tax treatment of the sale and development of property

Question 1

Was there an assessable capital gain or capital loss realised by each of Owner 1, Owner 2 and Owner 3 when they entered into a Put and Call Option Agreement with Developer A in relation to the property?

Answer

No.

Question 2

Are each of Owner 1, Owner 2 and Owner 3 required to include any amount in assessable income when they entered into a Loan Agreement with Developer A?

Answer

No.

Question 3

If Owner 1, Owner 2 and Owner 3 continue to use the property in the farming business currently conducted under the share farming arrangement with Couple B until Company C exercises the option originally granted to Developer A:

Answer

a. Yes

b. Decline to rule.

c. Decline to rule.

Question 4

If:

will Owner 1, Owner 2 and Owner 3 be treated as carrying on a business of developing land for the purpose of deriving a profit from sale of the subdivided lots?

Answer

Yes.

Question 5

If the answer to question (4) is ‘yes’ – will that part of the property that forms the subject matter of the development agreement with Developer D be treated as trading stock of Owner 1, Owner 2 and Owner 3?

Answer

Yes.

Question 6

If the answer to question (5) is ‘yes’ – will Owner 1, Owner 2 and Owner 3 be treated as having commenced the business and to have commenced holding that part of the property that forms the subject matter of the development agreement with Developer D as trading stock on the date they executed the Development Agreement?

Answer

Yes.

Question 7

If the answer to question (5) is ‘yes’ but the answer to question (6) is ‘no’ – will Owner 1, Owner 2 and Owner 3 be treated as having commenced the business and to have commenced holding that part of the property that forms the subject matter of the development agreement with Developer D as trading stock when the conditions precedent in clause A of the Development Agreement are satisfied or the parties otherwise agree to proceed with the development of the balance of the Property?

Answer

Not applicable.

Question 8

If the answer to question (5) is ‘yes’ and if Owner 1, Owner 2 and Owner 3 elect under section 70-30(1)(a) of the ITAA 1997 to have sold that part of the Property that forms the subject matter of the development agreement with Developer D for its cost at the time it became trading stock – will the cost of that part of the property be an amount equal to the market value of that part of the property at the date that Owner 1, Owner 2 and Owner acquired the Property?

Answer

Yes.

Question 9

If the answer to question (5) is ‘yes’ and if Owner 1, Owner 2 and Owner 3 elect under section 70-30(1)(a) of the ITAA 1997 to have sold that part of the property that forms the subject matter of the development agreement with Developer D for its market value at the time it became trading stock – will there be a CGT event K4 under section 104-220 of the ITAA 1997 at that date?

Answer

Yes.

Question 10

If the answer to question (9) is ‘yes’:

Answer

a. Yes

b. Yes.

c. Yes.

Question 11

If the answer to question (9) is ‘yes’ – will Owner 1, Owner 2 and Owner 3 be required to include the assessable amount of any capital gain arising from the CGT event in their assessable income at the time they commenced the business of developing land?

Answer

Yes.

Question 12

If the answer to question (11) is ‘yes’ – is there any scope for Owner 1, Owner 2 and Owner 3 to defer payment of tax in respect of that capital gain until they sell the developed lots?

Answer

No.

Question 13

If the answer to question (11) is ‘yes’ – will the date that Owner 1, Owner 2 and Owner 3 acquired the property be:

Answer

The date of the previous owner’s death.

Question 14 and 15

Will each of Owner 1, Owner 2 and Owner 3 be required to register for goods and services tax (GST) under the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) in relation to the property development undertaken at the property?

Answer

Yes.

Question 16

If Owner 1, Owner 2 and Owner 3 are carrying on an enterprise and required to be registered for GST, will the partnership be able to apply the margin scheme under Division 75 of the GST Act in relation to the sale of each of the subdivided lots?

Answer

Yes.

Question 17

If the partnership is able to apply the margin scheme will the partnership be able to rely on section 75-11(3) of the GST Act to determine the margin on each of the supplies?

Answer

Yes.

Question 18

If the partnership is able to rely on section 75-11(3) of the GST Act will the date on which Owner 1, Owner 2 and Owner 3 inherited the property be the date of death of the previous owner?

Answer

Yes.

Question 19

If the partnership is able to rely on section 75-11(3) of the GST Act, will the first day on which the partnership is required to be registered for GST be:

Answer

The partnership is required to register for GST in a particular month when their projected GST turnover exceeds the GST registration threshold of $75,000.

This ruling applies for the following periods:

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Relevant legislative provisions

Income Tax:

Paragraph 357-110(1)(a) of the Taxation Administration Act 1953

Section 6-5 of the Income Tax Assessment Act 1997

Section 70-10 of the Income Tax Assessment Act 1997

Subsection 70-30(1) of the Income Tax Assessment Act 1997

Paragraph 70-30(1)(a) of the Income Tax Assessment Act 1997

Subsection 70-30(4) of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Subsection 104-220(1) of the Income Tax Assessment Act 1997

Subsection 104-220(2) of the Income Tax Assessment Act 1997

Subdivision 115-A of the Income Tax Assessment Act 1997

Subsection 115-30(6) of the Income Tax Assessment Act 1997

Subsection 128-15(2) of the Income Tax Assessment Act 1997

Subdivision 152-C of the Income Tax Assessment Act 1997

Subdivision 152-D of the Income Tax Assessment Act 1997

Section 152-10 of the Income Tax Assessment Act 1997

Subsection 152-35(1) of the Income Tax Assessment Act 1997

Subparagraph 152-40(1)(a)(i) of the Income Tax Assessment Act 1997

Subparagraph 152-40(1)(a)(iii) of the Income Tax Assessment Act 1997

Section 152-78 of the Income Tax Assessment Act 1997

Subsection 328-125(4) of the Income Tax Assessment Act 1997

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

GST:

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 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(3)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(ca)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(d)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(e)

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

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

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

Reasons for decision

Question 1

Summary

There was no assessable capital gain or capital loss realised because there was no CGT event D2 at the time of entering into the contract as the put and call options are not yet exercisable.

Detailed reasoning

Section 104-40 of the ITAA 1997 provides that CGT event D2 (granting an option) happens if you grant an option to an entity, or renew or extend an option you had granted and the time of the event is when you grant, renew or extend the option.

In addition, ATO Interpretative Decision ATO ID 2003/1190 Capital Gains Tax: business succession agreement – put and call options – CGT event D2 further clarifies that CGT event D2 does not occur at the time the agreement is entered into, but when the condition precedent to the grant occurs.

According to the Option Agreement, the call and put options can only be exercised during the Option Period which is the period commencing on the date by which the Condition Precedent is satisfied and ending on the earlier to occur of a number of days after satisfaction of the Condition Precedent and the date on which a party gives a notice. The Option Agreement also states that the Condition Precedent is deemed to be satisfied on the date that the Plan of Subdivision is registered.

Given that the date when the option may be exercised is dependent on when the relevant Plan of Subdivision is registered, and at the date of this ruling it is not known when the Plan of Subdivision will be registered or lodged at the responsible authority; there is no CGT event D2 at the time of entering into the contract. CGT event D2 will arise as soon as the Plan of Subdivision is registered and put and call options become exercisable.

Question 2

Summary

Monies received from loans are not considered assessable income under section 6-5 of the ITAA 1997, therefore Owner 1, Owner 2 and Owner 3 are not required to include the advances received in their assessable income.

Detailed reasoning

Under the terms of the Loan Agreement, the Owner 1, Owner 2 and Owner 3 have received an initial advance and a promise for further advances for subsequent years. The loan is not interest bearing and is repayable any time before the expiry date. The Loan Agreement also states that the loan repayment may also be applied towards the amount payable to Owner 1, Owner 2 and Owner 3 by Developer A if the options are exercised.

Monies received from loans are not considered assessable income under section 6-5 of the ITAA 1997 therefore the Owner 1, Owner 2 and Owner 3 are not required to include the advances received in their assessable income.

Question 3

Summary

Detailed reasoning

Question 4

Summary

The Owner 1, Owner 2 and Owner 3 are treated as carrying on a business of developing land as the planned subdivision is on a massive scale. The development involves:

These activities amount to a level of development and improvement of the land to such a marked degree that is it impossible to say that it is a mere realisation of an asset. Therefore proceeds are assessable under section 6-5 of the ITAA 1997 as income from carrying on a business of property development.

Detailed reasoning

The sale of the subdivided lots after Developer D has undertaken the subdivision work will be on revenue account therefore a discount capital gain does not apply. The sale will be on revenue account for the following reasons:

Taxation treatment of property sales

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

Income according to ordinary concepts 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 taxpayer’s 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 Property are either:

In circumstances where it is neither assessable income from carrying on a business of property development nor income from a profit-making undertaking or scheme, then the amount might be assessable as statutory income under the capital gains tax legislation as a result of the sale of a capital asset.

Mere Realisation vs disposal in the course of business or profit making undertaking

Generally, when you enter into an arrangement to develop and sell your land, the key question to be determined is whether the ultimate sale is a ‘mere realisation’, or whether it is a disposal either in the course of business or as part of a profit-making undertaking or scheme.

Where the sale is a ‘mere realisation’ the sale is on capital account to which the capital gains tax (CGT) rules will generally apply.1 These proceeds are not ordinary income.

A sale that is more than a ‘mere realisation’ will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit making undertaking or scheme.

The doctrine of ‘mere realisation’ was developed in the Full High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining), and has been relied upon by numerous cases since. The Full High Court in Scottish Australian Mining found that based on the facts of that case, the subdivision of the land was considered no more than a mere realisation of a capital asset, and its subdivision was merely an enterprising way to realise an asset to its best advantage. For many years it was felt that the doctrine of ‘mere realisation’ was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income.

However this all changed in 1982 when the landmark Full High Court case of FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach) was decided. In this case, Justice Mason said:

Therefore the decision in Whitfords Beach has severely narrowed the scope of the ‘mere realisation’ doctrine developed by Scottish Australian Mining, which so many of the preceding cases relied upon. The case highlights that while ‘mere realisation’ may still be possible where blocks are merely subdivided to several blocks with minimal activity, where the size and scale of the activity reaches such a level (such as constructing roads, the provision of parklands, services and other activities), this all amounts to a development and improvement of the land to such a marked degree that it is no longer possible to say it is a mere realisation of an asset. The decision in Whitfords Beach also highlights that the requirements of modern day residential subdivision, which involve much more development and improvement of land than was formerly the case, make it far more difficult for contemporary residential subdivisions to satisfy the ‘mere realisation’ doctrine.

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. The courts have developed a series of indicators that are applied to determine the matter on the facts.

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 1997 if the activities become a separate business operation. Paragraph 11 of Taxation Ruling TR 92/3 Income Tax: Whether profits on isolated transactions are income 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.

Paragraph 13 of TR 97/11 states that the following indicators are relevant as to whether or not a person is carrying on a business:

Paragraph 16 of TR 97/11 provides that no one indicator is decisive. The indicators must be considered in combination and as a whole, and whether a business is carried on depends on the large or general impression.

Application to the Property Owner’s circumstances:

Part of the Property covered by the Option agreement

We agree that the eventual sale of the part of the property to Company C is a mere realisation of an asset and its disposal will fall under CGT event A1.

Part of the Land covered by the Development Agreement with Developer D

The factors in TR 97/11 will now be applied to the Owner’s circumstances.

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 the activity, the repetition and regularity of the 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.

The Owners have engaged Developer D for the development of the property. Developer D is part of a large property development group. Developer D’s activities cover the development of residential land, housing and apartments, commercial, retail and industrial properties, investment property ownership and management, and property management.

Under the terms of the development agreement:

The Commissioner considers the Owners’ activities to engage a reputable and multi-national development manager to develop the property, to be involved in the business plan approval process and to have the first allocation of the development proceeds, capped at a percentage of the total proceeds, to have a significant commercial purpose and character.

Intention to engage in business

In Inglis v. FC of T (1979) 80 ATC 4001; 10 ATR 493, 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.

The Owners have stated that the entry into the Development Agreement with Developer D was prompted by the Owners’ concern that the farming activity on the property is no longer a viable economic use of the property given the rezoning, land costs and rates, and increased proximity of property development.

However, 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 v Commissioner of Taxation (1991) FCR 282 (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 the Owners committed the property to subdivision from the moment of entering into the Development Agreement with Developer D.

The date when the Owners executed the Development Agreement is when they committed themselves to the development. The date the Development Agreement was executed was also the date at which the Early Access Licence and Construction Licence was granted to Developer D. This allows Developer D from the date of the Development Agreement a non-exclusive license to access the property at any time for the purposes of the development, demonstrating the Owners’ change of intention from that point forward.

In addition, the Development Agreement has a condition that a favourable private binding ruling is to be sought. This condition happened after the Owners’ intention changed. According to the Development Agreement, if this condition is not met the parties will negotiate to vary the allocation of the proceeds. If the parties fail to agree on the variation, the parties must discuss any other matters to resolve the tax treatment to ‘allow the development to proceed substantially as contemplated’ under the Development Agreement, therefore showing the Owners’ clear intention of engaging in property development.

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

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

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

The Owners engaged Company J to provide services to assist them with various stages of the subdivision and sale of the property. Company J helped them with the process of evaluating various offers for dealing with the property and provided the recommendation to enter into a development agreement with Developer D as the preferred option to realise the asset.

Regarding the development profitability, the market value of the property is approximately $X according to the a previous valuation. The Owner’s expected share in the development proceeds, based on the distribution of the whole project proceeds under the Development Agreement, will be significantly higher.

This indicates that the market value of the property, if sold to developers as a development site, is $X as opposed to the estimated share in the development proceeds in selling the lots after subdivision. Therefore, the Owners agreed to Company J’s recommendation to develop the property with Developer D to maximise profits.

The Commissioner considers that the Owners have an intention to make profit from the property development, or a genuine belief that a profit will be made, well in excess of the property’s true value. The Owners have conducted research into their proposed activity, consulted experts and 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 property development.

Is there repetition and regularity in the activity?

There will be repetition and regularity of the activities given that there will be the marketing and sale of X lots in various stages, while the subdivision is a ‘one-off’ venture.

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.

In considering this, it is noted that the Owners’ estimated total development fee to be paid to Developer D is many times the property value. The Owners stated they will not be undertaking an active role in the subdivision. Rather, they have engaged Developer D to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging and managing contractors and marketing and selling the subdivided lots.

Although this may be the case, in engaging with Developer D and executing the Development Agreement, the Owners are carrying on a development activity with Developer D in a similar manner to that which is common in the industry, particularly with farmland subdivision and development.

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

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.

The Owners have engaged Developer D to undertake the planning approval stage, to manage and undertake the subdivision activities and to market and sell the lots.

The Owners stated that they have a minimal involvement in the subdivision. However, as the Owners of the property, you will be signing documentation and all things as required for the continued development and sale of the property. The Owners will also act on advice provided by Company J, who the Owners have engaged to liaise with Developer D and advise on the development.

It is also noted that a key condition of the Development Agreement is that the Owners grant Developer D a Power of Attorney. The Owners also enter into an Agency Agreement with Developer D to market and sell the subdivided lots. In this sense, the Owners have appointed Developer D as their agent. O’Loughlin J in Abeles and Anor v. Federal Commissioner of Taxation (1991) 91 ATC 4756 (Abeles) stated:

Therefore in your case, it is considered that Developer D is your agent, so ultimately Developer D’s conduct is the Owners’ conduct, and, through Developer D, the Owners have chosen to embark upon a businesslike program of property development and subdivision.

The Abeles case mentioned above that the parties entered into an arrangement that was in the nature of a joint venture. The term joint venture is not defined in the tax legislation; however, paragraph 11 of GSTR 2004/2 provides that a joint venture is an arrangement between two or more parties characterised by the following features:

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture.

Further, paragraphs 22 and 23 of GSTR 2004/2 provide that the term ‘joint venture’ is limited to arrangements where the participants are to share product or output rather than profits or sale proceeds. Thus, a feature of joint ventures is the sharing of the costs of the venture by the participants, commonly by way of individual participants contributing money, property or expertise.

In light of our view in GSTR 2004/2, it is considered that the Owners are engaged in a joint venture as:

In this sense, as the Owners have entered into a joint venture relationship with Developer D, the Owners are carrying on the development activity as part of this venture in a businesslike manner.

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

What is the size and 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, or a reasonable expectation of doing so, a business may be carried on despite the scale.

In Whitfords Beach, Mason J made the following comments:

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.

The Owners stated that they have decided to subdivide the property as they believe it is the most enterprising way to realise it. The Owners will subdivide the property into X blocks in various stages. The total cost of the subdivision will be borne by Developer D, and the Owners’ will receive a share of significant development proceeds.

The Commissioner contends that the scale of the activities and the improvements to the property go 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 property and the size and scale of the development is a positive indicator of carrying on a business of land development.

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

The Owners have not provided any argument to support a contention 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 applicable in the present case.

Conclusion

Having considered all of the above factors, Owner 1, Owner 2 and Owner 3 will be treated as carrying on a business of developing land for the purpose of deriving a profit from sale of the subdivided lots. The income will be assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development.

Quoted cases in the ruling applications

It is noted that the Owners relied on a number of court cases to support their contention that the sale of the subdivided lots is a mere realisation of a capital asset. For completeness, our view of the application of those cases will now be addressed.

Casimaty case

The Owners have noted the Full Federal Court case Casimaty v. FC of T (1997) 97 ATC 5135; 37 ATR 358 (Casimaty) where the Court ruled that sales from subdivision occurred as part of the mere realisation of a capital asset.

In Casimaty, the owner subdivided the land into 8 separate subdivisions over a period of 18 years (1975 to 1993) and the lots were sold as low density farming rural lots as opposed to the Owners’ development plan for several years and subdivision into higher density residential lots. It is also noted that in Casimaty, the taxpayer’s developmental activities never extended to the proposal or creation of public facilities nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities and enhance the presentation of individual allotments for sale as vacant blocks.

Ryan J considered the following factors in reaching this conclusion:

The Commissioner considers there are major differences between your case and the case of Casimaty that do not allow you to rely on it to support the conclusion that the sale of the subdivided lots is a mere realisation of a capital asset. Casimaty can be distinguished from your situation for the following reasons:

Due to the reasons highlighted above, we believe that Casimaty can be distinguished from the present case.

Statham case

The second case the Owners have noted was the Full Federal Court case Statham & Anor v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 (Statham) where the Court ruled that the mere realisation of an asset at a profit did not necessarily render the profit taxable.

In Statham, the deceased had acquired the subject land from his father in 1970. The land was acquired by the deceased so that he might raise his family in a rural environment and conduct some farming activity. In 1976 he sold off a 36 hectare portion of the property and some urban blocks. He also sold a further half share of 30 hectares, being most of the balance of the farming property to his sister’s company. Part of the property was retained by the deceased so that he might subdivide and sell it.

In 1976 the deceased and his sister’s company entered into a partnership to raise beef cattle on the property. However, this was not achieved for a variety of reasons, including that the deceased’s health deteriorated. A decision was made during 1979 to subdivide and sell the whole or part of the land.

There were four stages of subdivision involving 105 lots that were sold in total. The subdivision involved a relatively simple approval process. After the approval was obtained, the local council undertook all necessary work including road, earthworks, and sewerage work. The lots were sold through listing the properties with local agents.

The Full Federal Court noted that the mere magnitude of the realisation does not convert the activity into a business undertaking or scheme, although it is a relevant matter to take into account. The Court considered that the proceeds of sale were not income according to ordinary concepts nor did a profit arise from the carrying out of a profit making undertaking or scheme. The Court determined that what occurred was:

The Court considered the following factors were significant:

The Commissioner contrasts this to the present case:

Having considered the Statham and Casimaty cases, it is for the above reasons that the Commissioner considers that they can be distinguished from the present case and have no application to the Owners’ circumstances.

Question 5

Summary

The part of the property that forms the subject matter of the development agreement with Developer D is treated as trading stock of the Owners because they are considered carrying on a business of property development.

Detailed reasoning

The meaning of trading stock is given in section 70-10 of the ITAA 1997, and includes anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business.

Thus a thing can only be trading stock where it is capable of sale or exchange in the ordinary course of a business.

The decision of the High Court in Federal Commission of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 clearly established the principle that land can come within the definition of 'trading stock'. In that case, the High Court determined that land acquired for the purpose of development, subdivision and sale by a taxpayer carrying on a business of property development is trading stock.

The Commissioner’s view is set out in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'?. Paragraph 1 of TD 92/124 states that the land is treated as trading stock for income tax purposes:

Paragraphs 2 and 3 of TD 92/124 further explain:

Under subsection 70-30(1) of the ITAA 1997 if you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:

Given that the Owners are considered carrying on a business of property development as discussed above, and are holding the property for the purposes of resale, the property that forms the subject matter of the Development Agreement with Developer D is trading stock of the Owners.

Question 6

Summary

The Owners have commenced the business and to have commenced holding that part of the property that forms part of the subject matter of the Development Agreement with Developer D as trading stock on the date they executed that Development Agreement.

Detailed reasoning

The date that the Owners and Developer D executed that Development Agreement is the point in time when their intentions changed and they have committed themselves, and the relevant part of the Property, to be part of the property development business.

TD 92/124 states that land is treated as trading stock for income tax purposes if:

The date when the Owners and Developer D executed the Development Agreement is when they committed themselves to the development and when they embarked on a definite operation designed to lead to the sale of the property. The start of the continuous cycle of operations and business activities is evidenced by the Early Access Licence and Construction Licence granted to Developer D in the Development Agreement. This allows Developer D from the date of the Development Agreement a non-exclusive license to access the Property at any time for the purposes of the following:

The Owners have also executed a Power of Attorney on the date of the Development Agreement, appointing various subsidiaries of Developer D, jointly and severally as the true and lawful attorney of the Owners and in the name and on behalf of the Owners to do all those things described in the Power of Attorney including signing, sealing, delivering or otherwise executing documents related to the development of the property.

These activities and commitments demonstrate that the Owners have entered into a definite and continuous cycle of operations designed to lead to the sale of the land from the date of execution of the Development Agreement.

Question 7

Summary

This question is not applicable because answers to both questions 5 and 6 are yes.

Question 8

Summary

The cost of that part of the property that forms the subject matter of the Development Agreement with Developer D is its market value when the Owners last acquired it. This is the market value of the property at the time of the previous owner’s death.

Detailed reasoning

If the Owners elect under paragraph 70-30(1)(a) of the ITAA 1997 to have sold that part of the Property that forms the subject matter of the Development Agreement with Developer D for its cost at the time it became trading stock, CGT event K4 does not apply and any capital gain or capital loss is disregarded.

It must now be determined what the cost of the property is.

Law Administration Practice Statement PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust provides that the ATO’s practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will.

So, the cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased’s legal personal representative.

PS LA 2003/12 provides that if the deceased acquired the asset before 20 September 1985, the acquisition cost will be equal to the market value at the date of the deceased’s death.

This is relevant in the Owners’ case as the property was passed to them via a testamentary trust, established as part of the previous owner’s estate. The property then passed to the Owners as tenants-in-common. The ATO does not recognise a taxing point at this time.

So, the cost of that part of the property will be its market value on the date of the previous owner’s death.

Question 9

Summary

There is a CGT event K4 when the Owners elect to have sold that part of the property that forms the subject matter of the Development Agreement with Developer D for its market value at the time it became trading stock.

Detailed reasoning

Subsection 104-220(1) of the ITAA 1997 provides that CGT event K4 occurs if you start holding as trading stock a CGT asset you already own, but did not hold as trading stock, and you elect to be treated as having sold the asset for its market value.

Subsection 104-220(2) of the ITAA 1997 provides that the time of the event is when you start holding the asset as trading stock.

Therefore CGT event K4 occurs when the Owners started holding that part of the Property as trading stock.

As discussed above, the Owners began a definite and continuous cycle of operations designed to lead to the sale of the land from the date of execution of the Development Agreement. The Owners’ intention changed, from one of holding the land for the purposes of farming, to holding the land for the purposes of resale.

So, the time of CGT event K4 is the date when the Development Agreement with Developer D was executed.

The Owners make a capital gain from CGT event K4 if the market value of the asset just before it became trading stock is more than its cost base. If the market value of the asset is less than its reduced cost base, a capital loss is made.

Question 10

Summary

Detailed reasoning

You will be eligible for the discount capital gain under Subdivision 115-A of the ITAA 1997 where:

The discount percentage is 50%.

Small business CGT concessions

The basic eligibility conditions for the small business CGT concessions are contained in Subdivision 152-A of the ITAA 1997. The Owners’ suitability against the basic conditions will now be considered.

The Owners’ have met the basic conditions for small business CGT relief having considered the following factors:

The partnership is a small business entity as the date when the Owners start holding the property as trading stock because:

The property satisfies the active asset test under subsection 152-35(1) of the ITAA 1997 if the Owners have owned the asset for 15 years or less and the asset was an active asset of theirs for a total of at least half of the period between when they acquired the asset to when CGT event K4 happened.

Subsection 128-15(2) of the ITAA 1997 treats the Owners as having acquired the asset when the previous owner died.

The property is an active asset of a person provided it is used in a business carried on, whether alone or in partnership, by the person or an entity connected with the person.

For a total of XX days, the Trust F used the property in a business the Trust F conducted in accordance with the terms of the share farming agreement with Couple B. Also, Owner 1 transferred the property to Owner 1, Owner 2 and Owner 3 as tenants in common in equal shares.

Owner 1, Owner 2 and Owner 3 each should be treated as controlling the Trust F during that period.

In general, a person is treated as controlling the Trust F if the person received more than 40% of the income or capital of the trust in a year (subsection 328-125(4) of the ITAA 1997). Section 152-78 of the ITAA 1997 provides that for years in which a discretionary trust does not make any distributions of income or capital, the trustee may nominate up to four individuals as controllers of the trust for that year.

The Trust F made a loss for some years and did not make any distributions in those years. Company E as trustee for Trust F intends to nominate Owner 1, Owner 2 and Owner 3 as controllers of the Trust F for each of those years. Therefore, each of Owner 1, Owner 2 and Owner 3 should be treated as controlling the Trust F for the relevant period.

Owner 1 received all of the income of the Trust F for a specific year. Therefore, Owner 1 should be treated as controlling the Trust F for that year, which is a total of 365 days.

Owner 1, Owner 2 and Owner 3 each should be treated as controlling the Trust F for more than 50% of the relevant period. On that basis, the Trust F should be treated as a connected entity of each of Owner 1, Owner 2 and Owner 3 for more than half of that period.

The property was used in a business carried on by Trust F, in accordance with the terms of the share farming agreement with Couple B, during that period. Therefore, the property should be treated as an active asset of each of Owner 1, Owner 2 and Owner 3 for more than 50% of that period under subparagraph 152-40(1)(a)(iii) of the ITAA 1997.

Owner 1, Owner 2 and Owner 3 have used the property in a business they each have been carrying on in partnership with each other and in accordance with the terms of the share farming agreement with Couple B. Therefore, the property has been an active asset under subparagraph 152-40(1)(a)(i) of the ITAA 1997.

Therefore, the property should be treated as an active asset of each of Owner 1, Owner 2 and Owner 3 for more than 50% of the period they have owned the property.

On this basis the property satisfies the active asset test in section 152-35 of the ITAA 1997. Therefore, the property satisfies the basic conditions for the small business relief.

On the basis that the Owners satisfy the basic conditions for the small business CGT relief and the retirement concessions under Subdivision 152-D of the ITAA 1997, they will be eligible for the retirement concession.

If the Owners are 55 years old or older when they make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying super fund or retirement savings account, even though they may have been under 55 years old when they received the capital proceeds. The contribution is made at the later of when you made the choice and when you received the proceeds. An individuals’ CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual.

Question 11

Summary

The Owners are required to include the assessable amount of any capital gain from CGT event K4 in their assessable income by the time they lodge their income tax returns for the relevant income year because they started to hold the property as trading stock on the date of the Development Agreement.

Detailed reasoning

Subsection 70-30(2) of the ITAA 1997 provides that an election to treat trading stock as having been sold at its market value must be made by the time the taxpayer lodges their income tax return for the income year in which they start holding the item as trading stock.

Subsection 104-220(2) provides that the time of CGT event K4 is the time at which you start holding the item as trading stock.

Therefore the Owners are required to include the assessable amount of any capital gain from CGT event K4 in their assessable income by the time they lodge their income tax returns for the relevant income year because they started to hold the property as trading stock on the date of the Development Agreement.

Question 12

Summary

There is no specific legislative scope that allows for the deferral of payment.

Detailed reasoning

There is no specific legislative scope that allows for the deferral of payment. It is important to lodge on time, even if the Owners may be unable to pay the required amount of tax by the due date.

If the Owners experience difficulty paying their tax obligations on time, phone us on 13 11 42.

If contact is made with us early, we can help address the problem before it gets harder to manage.

In some circumstances, we may be able to offer assistance by arranging:

In addressing the Owners’ submission, it is noted that Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? does not apply as TD 94/89 is about land disposal under CGT event A1 and not CGT event K4.

Question 13

Summary

The Owners acquired the property on the date of the previous owner’s death.

Detailed reasoning

Under Item 6 in the table in subsection 115-30(1) of the ITAA 1997 a CGT asset is considered to have been acquired by someone at the time of a person’s death if the asset was both:

Under subsection 128-15(2) of ITAA 1997, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.

The previous owner acquired the property pre-CGT and the property has passed to Owner 1, Owner 2 and Owner 3 as the beneficiary of the previous owner’s estate therefore they are treated as having acquired the property at the time of the previous owner’s death.

Question 14 and 15

Summary

The Owners are required to register for GST as a partnership in relation to the property development undertaken at the property.

Detailed reasoning

The sale of part of the property by the Owners under the Put and Call Option will be considered as disposal of capital assets by the partnership. However, if the partnership is required to be registered for GST or registered for GST at the time of exercising the Put and Call Option, then the disposal of part of this property will be subject to GST. Disposal of capital assets used in the share farming enterprise will be taxable supply provided the partnership is registered or required to be registered for GST.

The property development activities undertaken by the Owners in relation to the remaining part of the property are considered as an enterprise of property development by the partnership. The GST turnover from the sale of subdivided lots of land by the partnership will require the partnership to register for GST. Please refer to the detailed reasoning section under question 17 for detailed rationale.

Question 16

Summary

Yes. Please refer to the detailed reasoning section under question 17 for detailed rationale.

Question 17

Detailed reasoning

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

Section 9-5 of the GST Act provides that you make a taxable supply if:

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

The Owners intend to subdivide their property into a number of lots of residential land for sale. For the supply of the subdivided land to be taxable, all of the requirements in section 9-5 of the GST Act must be satisfied.

The Owners will be selling the subdivided vacant land for consideration and the supply is connected with the indirect tax zone. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Furthermore, the supply of the subdivided lots will neither be GST-free nor input taxed.

Accordingly, it should be determined whether:

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 to include an activity, or series of activities, done:

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 at paragraph 154 provides:

The Owners are individually not registered for GST as their turnover from the share farming activities is less than $75, 000. However, after the property was transferred to the Owners as tenants in common they continue to engage in the share farming business in partnership with each other and in terms of the agreement with Couple B. This is the enterprise the Owners have been carrying on in partnership for GST purposes. The partnership is not registered for GST as their turnover from the share farming activity has not exceeded the GST turnover threshold of $75,000.

The Owners have entered into two separate transactions to dispose of their property. The sale of part of the Property consisting of X hectares (approximately) to Company C under the Put and Call Option including the Loan Agreement. The second transaction will be the agreements entered into with Company J and Developer D to subdivide the remaining part of the property for sale.

It is necessary to consider whether the agreements entered into by the Owners to dispose of the remaining part of the property would constitute carrying on of an enterprise by the Owners. It is relevant to consider whether these agreements are made in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of an adventure or concern in the nature of trade’ where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

Paragraph 237 of MT 2006/1 provides that the term ‘profit making undertaking or scheme’ like the term ‘an adventure or concern in the nature of trade’ concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a ‘business deal’.

Indicators of carrying on a business

Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are:

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.

Application of the indicators to the activities undertaken by the Owners

Further factors we have taken into consideration include:

Considering the activities undertaken by the Owners in relation to the subdivision of the remaining part of the property for sale, it is our view that the Owners are carrying on an enterprise.

Commencement of an enterprise

The term ‘carrying on’ an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Paragraphs 122 to 126 of MT 2006/1 explain the meaning of ‘commencement of an enterprise’. Activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

In the Commissioner’s view the term, ‘doing anything in the course of the commencement….of an enterprise’ describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor.

If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated.

In this case the issue of when the enterprise of property development will commence is dependent on the activities undertaken by the Owners in relation to the property development of the remaining part of the property.

Disposal of part of the property

The part of the property (X hectares) will be sold under the Put and Call Option when the option is exercised or comes to an end. The Owners contend that this is a separate transaction and should not be considered as an enterprise carried on by the Owners. Based on the facts provided in relation to the sale of this part of the property and the circumstances in which the Owners decided to sell this part of the property, it is our view that the sale of this part of the property will not be sold in carrying on an enterprise of property development.

The property has been used in the share farming enterprise carried out by the Owners jointly with Couple B. Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

The sale of the part of the property under Put and Call Option is considered as capital asset as it is used in the share farming enterprise to produce income. Although this part of the property was used in the income producing activities, the sale will be taxable provided the sale satisfies all of the requirements under section 9-5 of the GST Act. This means when this part of the property is sold and the Owners are required to be registered for GST as a partnership at the time of exercising the Option the sale will be subject to GST.

Partnership

The Owners have been carrying on an enterprise of share farming in partnership with each other. The partnership also entered into the Put and Call Option to dispose part of the property used in the share farming enterprise.

The same partnership will be carrying on an enterprise of property development as explained above, in relation to the subdivision and sale of the remaining part of the property.

A partnership is defined in section 195-1 of the GST Act as:

The first limb of paragraph (a) of the definition refers to ‘an association of persons………carrying on business as partners’. This reflects the common law definition of partnership, which is the relationship between parties carrying on a business in common with a view to profit. The second limb of paragraph (a) of the definition refers to the persons being ‘in receipt of ordinary income or statutory income jointly’. This second limb is often referred to as a tax law partnership, as it expands the common law definition of partnership to persons who are not necessarily carrying on a business in association.

From the information provided, we consider that the Owners will be disposing part of the property under the Put and Call Option as partners. They will be carrying on the enterprise of property development as partners.

Paragraph 14 of GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property acknowledges that the treatment of a tax law partnership as an entity for GST purposes and the views on how the GST laws apply to transactions involving a tax law partnership differ from the treatment of those transactions under general law or property law.

Registration

Section 23-5 of the GST Act provides that you are required to be registered for GST if:

The GST registration turnover threshold is currently $75,000.

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

You reach the GST registration turnover threshold if your:

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or likely to be made, by you by way of transfer of ownership of a capital assets of yours.

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.

Goods and Services Tax Ruling GSTR 2001/7 meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of a ‘capital asset’ at paragraphs 31 to 36.

We have considered section 188-25 of the GST Act in relation to the proposed subdivision and sale of the remaining part of the property and it is our view that this section does not apply as the sale of the subdivided lots has the character of a revenue asset, rather than realisation of a capital asset.

As the sale proceeds of these lots will exceed the GST registration turnover threshold, the Owners (the partnership) will be required to register for GST.

As explained above, the calculation of GST turnover threshold should be considered while the enterprise is carried on. This means after the commencement of the enterprise of property development by the Owners if the GST turnover is exceeded the threshold of $75,000 in any particular month, the Owners are required to be registered for GST in that month.

Margin scheme

Paragraph 75-5(3)(b) of the GST Act provides that a supply is ineligible for the margin scheme if you have acquired a thing by inheriting it from a deceased person and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme. In this case, the previous owner acquired the property before 1 July 2000 and therefore, the margin scheme may apply for the supply of subdivided lots by the Owners.

Application of subsection 75-11(3) of the GST Act

Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 explains how the margin scheme applies to a supply of a freehold interest, stratum unit or long-term lease on or after 1 December 2005 that was acquired or held before 1 July 2000.

Paragraph 50 of GSTR 2006/7 explains that if you supply real property that you inherit, and the deceased acquired it before 1 July 2000, then paragraph 75-11(3)(ca) of the GST Act allows you to choose to use the consideration for deceased’s acquisition of the real property when calculating the margin for the supply. However, you may use the consideration for deceased’s acquisition only if you know the amount of consideration paid by the deceased and you choose to use this amount.

If you do not know the consideration for the deceased’s acquisition then the margin is calculated under paragraphs 75-11(3)(d) or 75-11(3)(e).

Paragraph 53 of GSTR 2006/7 states that paragraphs 75-11(3)(d) applies if, immediately before the time that you inherited the real property, the deceased was neither registered or required to be registered. If under paragraphs 75-11(3)(d) applies, the margin for the supply is the amount by which the consideration for the supply exceeds an approved valuation of the real property as at the latest of:

If the deceased was registered or required to be registered immediately before the time that you inherited the real property then an approved valuation as at later of 1 July 2000 or the first day on which the deceased registered or required to be registered should be used to calculate the margin.

Paragraph 100 of Goods and Services Tax Ruling GSTR 2006/8 explains that the day on which you inherited the real property will ordinarily be the date of death of the deceased. Therefore, the Owners will be considered as inheriting the property on the date of death of the previous owner.

Conclusion:

Question 18

Detailed reasoning

Yes. Please refer to the detailed reasoning section under question 17 for detailed rationale.

Question 19

Detailed reasoning

The partnership is required to register for GST in a particular month when their projected GST turnover exceeds the GST registration threshold of $75,000. Please refer to the detailed reasoning section under question 17 for detailed rationale.

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