Edited version of your written advice

Authorisation Number: 1051503560624

Date of advice: 5 April 2019

Ruling

Subject: Income Tax - Capital gains tax - Capital vs Revenue

Question 1

Will the gains from the disposal of subdivided land be treated as a mere realisation of capital asset and taxable under section 102-5 and sections 6-10 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

If the answer to Question 1 is ‘No’ and it is found that the Trust is carrying on a business in relation to the disposal of the subdivided land, when did you start holding the XYZ sqm. lot as trading stock?

Answer

At the time development approval was granted.

Question 3

Will the subdivision constitute carrying out an enterprise for the purposes of sections 9-5 and 9-20 of A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes.

This ruling applies for the following periods:

1 July 2018 to 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust is a discretionary trust established. The Trust was formerly registered for GST.

Company A is the trustee company. B is the sole director of the trustee company. B is an Australian resident for tax purposes.

The Trust has owned 2 properties for many years in Australia. The Trust has never owned any other properties or undertaken any other activities.

Property 1 is leased to a third party.

Property 2, a vacant land, was acquired in the late 1980’s. A family dwelling and granny flat was constructed later on. Neither dwelling was ever used for income producing purposes.

Since then, the Trust has pursued strategies to divest itself of the surplus land, which is the portion of the land that it does not require or utilise, while still maintaining ownership of the residence and adjoining land. Over the years, the Trust has entered into development contracts or option for sale with different developers. However, the contracts did not go ahead, options were not exercised and no development activity took place.

In later years, the Trust entered into discussion with a developer regarding works for developing the surplus land.

Property 2 is intersected by a creek. The owner of the creek refused to give permission for a bridge temporarily erected over the creek to allow access between lands on both sides of the creek. Accordingly, the Trust had to conduct the subdivision and development in 2 stages.

The Trust engaged a professional for the lodgement of a development application, which approval for X residential lots was granted for the larger plot of land on one side of the creek (Stage 1). The development plan includes the following:

a. X residential lots.

b. Of the X lots approved, X lots covered the area on which the current residence and adjacent land sits (retained by the Trust).

c. In addition to the X lots, one larger lot on the other side of the creek was to be formed.

d. X public open space areas were provided for (on either side of the creek). Upon application, the taxpayer will be compensated for this space, by the local council.

e. Various access roads to service the subdivided blocks to be provided for.

The remaining plot of land on the other side of the creek was not included in that development approval. Subdivision of this parcel of land will be done at a later stage after the first X lots are finalised.

The Trust then applied and received development approval for the subdivision of the remaining plot of land to be divided to X lots (Stage 2), which approval was received. The development plan included:

● extensive earthworks, including the cutting and filling of the land to change the topography of the property

● sewerage/ sewer reticulation and pumping station.

● stormwater works including:

● drainage and junction pit

● X deep soak wells

● a specific X system, which is an underground modular storm water management system used to detain, infiltrate or harvest storm water run-off and also provides storm water treatment by utilising an internal gross pollutant and sediment trap

● underground power,

● irrigation ducts,

● telephone services,

● road networks,

● footpaths,

● pedestrian ramp,

● stairway

● retaining wall of significant length (exact dimensions not provided) to be topped by a fencing panel.

● brick fence with decorative capping of significant length (exact dimensions not provided)

● relevant network conduit.

In addition to the extensive earthworks, there was also a landscape plan for the development site and the adjoining road verges, a lighting plan and contribution towards development infrastructure provisions pursuant to local government scheme.

Later on, the Trust entered into an agreement with Developer A for the stage 2 subdivision developments. The cost of this subdivision will be borne by Developer A. Developer will recover the development costs by:

a. Upon sale and settlement of the blocks, costs of settlement and selling costs will be deducted to arrive at net proceeds.

b. The net proceeds would then be applied to the reduction of the Developer A development costs outstanding (recovery).

c. Developer A will receive X% for any proceeds received over the recovery.

The taxpayer has engaged the following specialists to undertake activities in relation to stage 2 subdivision developments:

a. Civil Construction to perform subdivision work

b. Consulting Engineers – Project Managers to apply for the subdivision approval

c. Local real estate agent for sales and marketing of the residential lots

The following documents were provided as support for the ruling application and used as basis of our decision:

a. Subdivision drafting and planning documents / drawing list

b. Planning development approval letter

c. Subdivision Work Contract with Developer A (Stage 2 development)

d. Letter to Developer A accepting the subdivision work contract

This ruling is in relation to stage 2 development.

Relevant legislative provisions

Income Tax:

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Subsection 995-1(1) 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

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

Reasons for decision

Question 1

Summary

The planned subdivision is on significantly involved project which includes laying out and construction of roads, provision of landscape and common space and improvement that amounts to development and improvement of the land to such a marked degree that it is impossible to say that the project is a mere realisation of an asset. Therefore, proceeds from sales of the resulting subdivided plots are assessable to the Trust under section 6-5 of the ITAA 1997 as income from carrying on a business of property development.

Detailed reasoning

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 surplus land are either:

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

● assessable ordinary income under section 6-5 of the ITAA 1997 as income from a profit-making undertaking or scheme.

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. 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:

37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect 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.

38. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development.

…

40. From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under s. 25(1).

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 (TR 92/3) 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 Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) states that the following indicators are relevant as to whether or not a person is carrying on a business:

● whether the activity has a significant commercial purpose or character

● whether the taxpayer has more than just an intention to engage in business

● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

● whether there is regularity and repetition of the activity

● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

● the size, scale and permanency of the activity, and

● whether the activity is better described as a hobby, a form of recreation, or sporting activity.

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.

The factors in TR 97/11 will now be applied to the Trust’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 Trust has engaged Developer A for the development of the property. Developer is a civil contractor that specialises in the construction of single stage and small to mid-sized residential subdivisions.

As documented in the Subdivision Work Contract and the planning/ drawing documents:

● The Trust has engaged Developer A to act as the developer.

● The Trust has engaged a consulting engineers and project managers.

● Developer A will undertake all work associated with the stage 2 development.

● From the net proceeds of the developed residential lots, the Trust must pay Developer A the development costs (recovery) and Developer A will also receive X% for any proceeds received over the recovery.

The Commissioner considers the Trust’s activities to engage a civil contractor that specialises in the construction of single stage and small to mid-sized residential subdivisions and has over 24 years’ experience within the civil construction industry, primarily in residential land development to develop the property and to engage an engineering company as project managers 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 Trust has stated that the entry into the Subdivision Work Contract was prompted by the unsuccessful attempts at selling the surplus land to a purchaser (as a whole) and the frustrations of time delays that had been experienced. However this was only in respect of the entail attempt to sell the entire stage 1 & 2 land. With many of the issues affecting the development being resolved once stage 1 was completed, the taxpayer has demonstrated no desire the sell the other plot of land (i.e. the stage 2 land) as a single sale as opposed to entering into this significant development to profit from the sale of X lots. This clearly distinguishes this case from the case of Statham & Anor v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC, where the court found it was always the taxpayers intent even during development to merely just sell the land as is.

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 Trust committed the property to subdivision from the moment the development approval was received from council demonstrating the Trust’s change of intention from that point forward.

The Trust then executed the Subdivision Work Contract with Developer A, allowing Developer A from the date of the contract to access the surplus land for the purposes of the 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 Trust have conducted research into the proposed activity, consulted experts or received advice on the running of the activity and the profitability of the development.

You have acknowledged during our discussion that you attempted to sell the surplus land however the sale did not eventuate and that you were not happy with the price the developers offered and wanted more.

The Commissioner regards that you have intentions to make profit from the property development significantly above which could be obtained by merely realising the land by selling the property on the market. 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.

Is there repetition and regularity in the activity?

There is repetition and regularity of the activities given that there were X lots developed and sold in stage 1 and there will be the development, marketing and sale of X lots in stage 2, 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.

Total development cost plus a percentage of any additional net proceeds received for the stage 2 developments which more than likely exceeds the land value without considering finance costs. The Commissioner refers you to the comments of Justice Mason in FC of T v Whitfords beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach)

“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. (at p385)

As inferred by Justice Mason in Whitfords Beach the very fact Council may have imposed these requirements in modern high density residential subdivision, does not alter the fact the land has been developed to such a marked, that it is no longer possible to say it is the mere realisation of an asset.

You stated that you have committed to obtain modest borrowings to complete the subdivision.

You stated you will not be undertaking an active role in the subdivision. Rather, you have engaged external professional to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging / managing contractors and marketing / selling. So your level of involvement is arguably greater than the level of involvement of the entity in Whitfords Beach who subcontracted out all its activities.

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.

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), an agent to market and sell the lots and engaged civil engineers/ project managers to manage and undertake the subdivision activities and the Trust have a minimal involvement in the subdivision.

As the Trust is the owner of the property and it is the Trust undertaking the subdivision, on advice provided by your advisers; authorised representatives of the Trust will be signing documentation as required. However Commissioner notes that you engaged the services of professionals for planning the subdivision, carrying out civil works and marketing of allotments for sale. Secondly, even if instead the project manager or the developer engaged these experts on your behalf, in respect of this claim the Commissioner would like to refer you to case of Abeles and Anor v. Federal Commissioner of Taxation (1991) 91 ATC 4756 (Abeles) and the following statement from Justice O’Loughlin:

“In the application of these principles to the facts of this case, I have concluded that the taxpayers exceeded the bounds of the mere realisation of their land in an enterprising way. No doubt they were aided by Mr. Markham in making their decisions; perhaps, arguably, he induced them, first to agree to subdivide and then to participate in the larger plan that involved the six blocks and the four groups of owners. But, in these particular circumstances, they cannot hide behind Mr. Markham. He was their agent and his conduct was their conduct. Through Mr. Markham, the brothers went beyond a mere simple subdivision and sale of their 10 acres; they entered into an arrangement that was in the nature of a joint venture, sharing costs and expenses rateably; they even participated in variations to the boundaries of their land in order to present, and participate in, the best plan of subdivision. Their financing commitment was heavy; their established line of credit was $90,000 more than they paid for the land five years earlier; they allowed for the subdivision being a lengthy project and arranged with the finance company to accrue interest on the borrowed moneys. Although the size of a project is not a conclusive factor, it is one of numerous matters that are to be weighed in the balance. In this case, the readiness of the brothers to involve themselves with the other owners was more consistent with a business enterprise than a private realisation. The taxpayers, through their agent, Mr. Markham, chose to embark upon a business-like and efficient program of subdivision.”

Therefore you can’t merely hide behind the project manager, developer and other professionals to claim you are not in the business of subdivision and sale of the property. The project manager, developer and other professionals are your agent, so ultimately their conduct is your conduct, and you have through them chosen to embark upon a business-like efficient program of subdivision.

The Commissioner considers that this is a positive indicator of carrying on a business of land 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 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 the Trust applied and received development approval for the subdivision of the remaining plot of land to be divided to X lots (Stage 2). The development plan included extensive earthworks, to develop the sewerage/ sewer reticulation, stormwater works, underground power, irrigation ducts, drainage and junction pit, telephone services, road networks, footpaths, pedestrian ramp, retaining wall and NBN network conduit. In addition to the extensive earthworks, there was also a landscape plan for the development site and the adjoining road verges, a lighting plan and contribution towards development infrastructure provisions pursuant to local government scheme. These significant scales of activities are similar to what has been described by Justice Mason above.

The Commissioner contends that the scale of the activities and the improvements to the property 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 both properties and this 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 Trust has 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, the Trust 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 Trust 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 Trust has 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:

a. As the taxpayer acquired and continued to hold the property for use as a residence and the conduct of a business of primary production, there is nothing to suggest a change in the purpose or object with which the property was held (distinguishing Whitfords Beach).

b. The taxpayer did not acquire other land to be added to the original land.

c. The taxpayer had previously carried on farming and fencing business in partnership with his wife and son respectively, but did not attempt to bring the property to account as a partnership asset and did not seek to claim as a business expense the interest on moneys borrowed for the subdivision.

d. The subdivision was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health, and no coherent plan was conceived at the outset for the development, even in stages, to maximise the return from the aggregate of each lots.

e. The taxpayer did not undertake any development or works beyond that necessary to secure the council approval for the subdivisions and enhance the presentation of the various lots and his developmental activities never extended to the proposal or creation of public facilities.

f. The taxpayer did not set up his own sales organisation or advertised or conducted sales himself.

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:

● The development is carried on in a businesslike manner. The Trust has entered into a Subdivision Work Contract to develop the surplus land into residential units.

● In Casimaty there were 8 entirely separate subdivisions, each with a separate planning process, done in a piecemeal manner. No coherent plan for subdivision existed. In the present case, there is a coherent plan of subdivision for the entire development.

● In Casimaty a total of 81 large lots (sizes ranged up to 5 hectares) were sold over the 8 stages. In the present case, the development encompasses X residential lots in various stages and requires significantly more activities as opposed to the level of activity conducted in subdividing land in Casimaty. Notably had Casimaty undertaken a development of similar density to your development, on one of the single 5 hectares lots, Casimaty could have developed approximately 171 lots in that same area. Had the scale of the improvement of land reached that sort of level across all lots in Casimaty’s case, then Commissioner believes the decision of the court would have more than likely been vastly different.

● In Casimaty, only minimal works were conducted, such as providing fencing, minimal road works and mains water, which one would associate with large rural/farmland style lots. This contrasts to the present case, which includes extensive earthworks, to develop the sewerage/ sewer reticulation, stormwater works, underground power, irrigation ducts, drainage and junction pit, telephone services, road networks, footpaths, pedestrian ramp, retaining wall and NBN network conduit landscape plan for the development site and the adjoining road verges, a lighting plan and contribution towards development infrastructure provisions pursuant to local government scheme as highlighted in the subdivision drafting and planning documents and drawing list, that would ordinarily be associated with higher density residential subdivision. The scale of the development activities in the present case is more akin to the development activities in Whitfords Beach than the minimal works undertaken in Casimaty.

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

McCorkell case

The other case the Trust has noted was the Administrative Appeals Tribunal case McCorkell v. FC of T (1998) 98 ATC 2199 (McCorkell) where the Tribunal held that the taxpayer did not carry on a business of subdividing and selling land.

Now in respect of McCorkell, we note that this is an Administrative Appeals Tribunal case, therefore the components of the decision in this case cannot be used as precedent for other cases. The decisions of a Tribunal do not create legal precedent like a court case would, but rather merely represent a decision on the unique facts of the particular case in question. Therefore we question why reliance is placed on only a tribunal case, when there is in fact a myriad of other cases that went through the rigour of the court system that touch on broad arce subdivision, including hiring the services of another entity to conduct the development activities on your behalf (such as Whitfords Beach and Abeles ).

While McCorkell, is only a Tribunal case and therefore merely represents a decision on a unique set of facts, the Commissioner nevertheless feels it important to highlight the facts in your case are in fact vastly different to the facts in McCorkell. In particular we’d like to refer you to the nature of the development and improvement to your land as opposed to the McCorkell.

In McCorkell they developed 37 lots on 8 hectares of land (i.e. 80,000 square metres) while in your case you are seeking to develop X lots on only XX square metres of land. As you can see your development is a significantly different development, of extremely high density, with the nature of the land needing to be changed so significantly with extensive earthworks, sewerage works, stormwater works, underground power, irrigation ducts, drainage and junction pit, telephone services, road networks, footpaths, pedestrian ramp, retaining wall, fences and NBN network conduit, and landscaping etc (which is in the realms of improvement encountered in Whitfords Beach )that in reality it would not be appropriate to compare your case to the case of McCorkell which due to its low density had minimal earthworks, excavating and construction activity in comparison. So even if McCorkell created a legal precedent (i.e. if it was a court case as opposed to only being a Tribunal case), to which the Commissioner could follow, due to the reasons highlighted above, we believe that McCorkell would be readily distinguished from your case.

Having considered the Casimaty, McCorkell and Statham 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 Trust’s circumstances.

Question 2

Summary

The Trust started to hold the remaining lot as trading stock at the time the development approval for stage 2 developments was granted. Capital Gains Tax (CGT) event K4 happens when the Trust started holding the surplus land as 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.

The reality is that the Trust began a definite and continuous cycle of operations designed to lead to the sale of the surplus land from the date they commenced works on developing stage 1, however the Commissioner is bound by the previous under 357-60 of the Taxation Administration Act 1953 where the Commissioner ruled the taxpayer had not commenced a business of property development at that time.

During the period of this previous ruling the land encompassing stage 2 was subdivided from the initial title creating a separate asset. Now that the previous ruling has expired, the Commissioner has been asked to make a determination of when the separate item of land encompassing stage 2 was ventured into the business of development for sale, for CGT event K4 purposes.

As discussed above, the Trust began a definite and continuous cycle of operations designed to lead to the sale of the surplus land from the date of development approval for stage 2 development was granted. The Trust’s intention changed, from one of holding the land for the purposes of personal use and enjoyment, to holding the land for the purposes of resale.

So, the time of CGT event K4 the date when the development approval for stage 2 was granted.

The Trust makes 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 3

Summary

The property development activities undertaken by the Trust in relation to the surplus land are considered as carrying on an enterprise of property development by the Trust.

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:

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; and

d) you are registered or required to be registered.

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

The Trust intends to subdivide the surplus land 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 Trust 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:

a) the sale of the subdivided lots are in the course or furtherance of an enterprise that the Trust is carrying on

b) if so, whether the Trust is required to be registered for GST.

Enterprise

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

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

● in the form of a business

● in the form of an adventure or concern in the nature of trade

● on a regular or continuous basis, in the form of a lease, license or other grant of interest in property.

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).

MT 2006/1 at paragraph 154 provides:

154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise.

The Trust has entered into an agreement with Developer A to subdivide the surplus land for sale.

It is necessary to consider whether the agreement entered into by the Trust to dispose of the surplus land would constitute carrying on of an enterprise by the Trust. It is relevant to consider whether the agreement is 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:

● 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

● the entity has relevant knowledge or skill.

● In addition it is relevant to consider:

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

● the personal involvement in the development activity.

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 Trust

● The Trust is undertaking commercial activities in relation to the property development by entering into an agreement with Developer A to develop the surplus land for sale. These are significant commercial activities engaged by the Trust.

● The value of the property has risen in value due to the changes made to the City urban boundary and the zoning of the property by the State Government. The decision taken to develop the surplus land for sale indicates that there is a clear intention of making profit by engaging in business deals.

● The scale of activities carried out by the Trust in relation to the property development indicates stronger evidence that the Trust will be making profit.

● The Trust is be carrying on the property development in a similar manner to that of other businesses in the same or similar trade. The Trust has taken systematic steps in planning the subdivision by engaging a project manager to apply for subdivision approval, a developer to develop the property on behalf of the Trust and local real estate agents to market and sell the developed residential lots. These are the types of activities routinely undertaken by owners or their service providers engaged in property development.

● Although the size or scale of the activity is not the only determinative factor the other facts and commitments combined with the intention of profit making need consideration. In this case, it is our view that the subdivision of land into a number of lots for sale by the Trust is in a businessman-like manner.

Further factors we have taken into consideration include:

● The Trust is engaged in the development of the surplus land as they have entered in to agreement with a property developer and a service provider to manage the property development. This indicates that the intention of the Trust is not just to dispose of the property in its entirety but rather to engage in a similar manner an entity would carry on an enterprise of property development.

● The financial risk in relation to the project rests with the Trust as they will be borrowing funds in relation to the property development. Although the property developer will be funding the development costs, the Trust is required to pay the property developer the recovery plus X% of proceeds after the recovery when the lots are sold.

● We acknowledge that the Trust may not have relevant knowledge or skill in property development activities. Because they do not have the necessary expertise in carrying on such a scale of property development, they have engaged relevant professionals to ensure the whole project is undertaken in a businesslike manner.

Considering the activities undertaken by the Trust in relation to the subdivision of the surplus land for sale, it is our view that the Trust is carrying on an enterprise.

Considering the factors presented above, we are of the view that the Trust’s subdivision of land is not a mere realisation of its capital asset. The Trust is carrying on an enterprise for the purposes of sections 9-5 and 9-20 of the GST Act.

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