Edited version of private advice

Authorisation Number: 1051565148777

Date of advice: 23 August 2019

Ruling

Subject: Sale of residential property with development authority approval for subdivision

Question 1

Will the proceeds made on the disposal of your ownership interest in the property be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proceeds made on the disposal of your ownership interest in Lot A be assessable under Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes, however any capital gain made on the disposal of the property will be disregarded as the property is a pre-CGT asset.

Question 3

Is the sale of your residential property with a development consent but prior to it being developed, a supply of new residential premises under section 40-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the sale of your residential property with a development consent but prior to it being developed is an input taxed supply of residential premises.

Question 4

Is the provision of consent for a residential development application, a taxable supply under section 9-5 of the GST Act?

Answer

No. The provision of consent for a residential development application does not have any GST consequences.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the owners of a residential property.

You are a partnership and are not registered for GST.

The residential property was purchased by you pre-CGT.

The only capital works you have undertaken on the residential property was the construction of a fence approximately X years ago for $X.

The residential property has been tenanted by you during the period of ownership and continues to be tenanted.

You have received a proposal from a purchaser (the developer) to purchase the residential property from you.

One of the partners (A) was going through personal matters and the sale of the property would lead to funds becoming available.

The proposed purchase price is $X, made up of an option price (to be negotiated) and a final settlement price.

The option allows the developer to purchase the residential property over a X month period.

You have no put option to force the developer to purchase the residential property.

The developer will be making an application with the relevant local authority for development consent and will pay all costs associated with the application.

The contract for the option requires you to sign an "owners' consent" to facilitate the developers' application for the development consent.

If the council approves the development consent, the developer intends to exercise the option and enter into a sale contract to purchase the residential property from you.

The developer retains the right to pull out of the sale whether the development consent is granted or not.

You submit that the current market price is difficult to gauge given the downturn in the property market. However, a sale for a similar property (with less land and no views) in the area achieved a price of $X.

Neither you nor any of your partners individually will take any part in the development of the residential property by the developer. You will be selling the residential property as it is to the developer prior to any development work being undertaken on the residential property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-70(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

Reasons for decision

Income Tax

Question 1 & 2

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

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

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

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

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

·         those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

·         those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

·         your intention or purpose in entering into the transaction was to make a profit or gain, and

·         the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Application to your situation

In your case, you do not carry on a business of buying, selling or developing land. You have held the property for substantial period of time, during which time is has been used for rental activities. You are not involved in the DA application or any development activities in relation to the property.

Based on the facts, it is not viewed that you are carrying on a business or that the activities will be an isolated transaction. Any gain made on the sale of the Property will not be assessable as ordinary income from carrying on a business or an isolated business transaction under section 6-5 of the ITAA 1997.

On balance, the proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

CGT provisions

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

Subsection 104-10(5) of the ITAA 1997, however, contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985.

In your case, you acquired the property prior to 20 September 1985. Therefore, any capital gain or capital loss you make will be disregarded for CGT purposes.

Goods and Services Tax

Question 3

Section 9-5 of the GST Act sets out the requirements that must be satisfied for a supply to be a taxable supply. It further provides that a supply is not a taxable supply to the extent that it is GST-free or input taxed.

Section 40-65 of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Section 195 of the GST Act defines residential premises to mean land or a building that:

·         is occupied as a residence or for residential accommodation; or

·         is intended to be occupied, and is capable of being occupied as a residence or for residential accommodation.

Subsection 40-70(2) of the GST Act provides that the sale of residential premises is not input taxed to the extent that the residential premises are:

·         commercial residential premises; or

·         new residential premises.

Section 195 of the GST Act defines 'commercial residential premises' and Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises (GSTR 2012/6), sets out the ATO view on how GST applies to supplies of commercial residential premises.

Your residential property will not fall within the definition of 'commercial residential property' but will meet the definition of 'residential premises' as set out in the GST Act. Given that you are not developing the property, that is, your supply of the residential property will be in its original state, the sale of the residential property is an input taxed supply in accordance with section 40-65 of the GST Act.

It therefore remains to be determined if the supply of your residential property with a development consent falls within the meaning of new residential premises as defined in section 40-75 of the GST Act and therefore be a taxable supply.

ATO Interpretative Decision ATO ID 2004/403 addresses the issue of GST and supply of residential premises together with assignment of development consent.

ATO ID 2004/403 states:

Before determining whether a taxable supply is being made in relation to the development consent, the substance of the supply or supplies must be established. That is, in relation to the formal assignment of the development consent, it must be determined whether the entity is making a separate supply from its input taxed supply of the residential premises.

The development consent is attached to the land belonging to the residential premises and runs with that land. Upon sale of the residential premises, the development consent is automatically transferred to the purchaser as a natural consequence of the sale. The transfer takes place regardless of the formal assignment in the sale contract. The entity's assignment of the development consent does not result in anything being transferred to the purchaser that would not result naturally from the transfer of the land itself.

Therefore, the entity is not supplying the purchaser with anything more than the residential premises. The formal assignment of the development consent does not amount to a separate supply because it does not effect the transfer of anything that was not already transferred to the purchaser as a direct and natural consequence of the sale of the premises.

As such, you are not making a separate taxable supply under section 9-5 of the GST Act when under a contract of sale, a development consent is provided with your residential property. You are making a single input taxed supply of the residential property which includes the development consent.

Question 4

As discussed in question 4, the supply of a residential property with development consent does not constitute two separate supplies under the GST Act.

Similarly, at the point of provision of consent to the developer to make an application for a development approval by signing the 'owners' consent', you are not making any separate supply to the developer from the underlying residential property. You are merely giving permission to the developer to apply for development consent on your behalf. The provision of consent to the developer to make the development application on your behalf does not have any GST consequences.

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