Edited version of private advice

Authorisation Number: 1051764079666

Date of advice: 8 October 2020

Ruling

Subject: Capital gains tax - am I in business - mere realisation and GST - subdivision

Question 1

Will the profit from the sale of subdivided blocks of land be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of you and your spouse carrying on a business of property development?

Answer 1

No. It is the Commissioner's view that your activities are not those of an entity carrying on a business of developing and selling land.

Therefore, any gain made on the disposal of the subdivided lots will not be assessable as ordinary income from the carrying on of a business.

Question 2

Will the profit from sale of subdivided blocks of land be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character?

Answer 2

No. It is the Commissioner's view that the subdivision of the properties and sale of the subdivided lots will be a mere realisation of a capital asset and that you are merely realising long-held privately-owned properties.

Therefore, any profit arising from the sale of the subdivided lots will be accounted for under the capital gains tax provisions in Part 3-1.

Question 3

Will the profit from the sale of subdivided blocks of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer 3

Yes. While CGT event A1 will occur when the subdivided lots are sold, as the subdivided lots are viewed as having been acquired before 20 September 1985, being pre-CGT, any capital gain or capital loss you and your spouse make on the disposal of each subdivided block will be disregarded for CGT purposes.

Question 4

Will you make a supply that is 'in the course or furtherance of an enterprise' and will you be making a taxable supply when you sell the subdivided lots?

Answer 4

No.

The sale of the subdivided lots is a taxable supply if the supply satisfies all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). To be a taxable supply paragraph 9-5(b) of the GST Act requires that the supply is made in the course or furtherance of an enterprise that you carry on.

The sale of the subdivided lots is not made in the course or furtherance of an enterprise that you carry on because:

§  your activities of developing and selling the subdivided lots are not those of an entity carrying on a business of developing land and

§  the sale of the subdivided lots is the mere realization of a capital asset and is not in the form of an adventure or concern in the nature of trade.

Therefore, as you do not satisfy all the requirements of section 9-5 of the GST Act, the sale of the subdivided lots is not a taxable supply.

This ruling applies for the following periods

Year ended 30 June 20XX.

Year ended 30 June 20XX.

Year ended 30 June 20XX.

Year ended 30 June 20XX.

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You jointly purchased the property (the property) before 20 September 1985.

You purchased the property with the intention of it becoming your family home following your marriage.

You obtained a loan from to finance the purchase of the property.

You moved into a caravan located on the property, after a shed had been constructed on the property under which the caravan was positioned.

You resided in the caravan for several years until the loan had been paid off.

You obtained additional finance to purchase a kit home, which was constructed on the property.

The construction of the kit home (the house) was completed before 20 September 1985.

You operated a primary production business on the property before 20 September 1985.

The primary production business was carried on for a substantial amount of time.

After the end of the primary production business you used the property as a hobby farm.

You are not registered for Goods and Services Tax (GST).

When you ceased the primary production business you subdivided the property into two lots:

§  Lot A and

§  Lot B.

The property had been subdivided with the specific aim that your relatives, would build a residence on Lot B in which they would reside (the residence).

You retained the ownership of Lot B and your relatives occupied the residence built on Lot B until they passed away.

The residence located on Lot B was then occupied by your child and their family.

A substantial period of time after the property had been subdivided, substantial mining activities have been undertaken in the immediate area and underneath Lot A and Lot B.

This has led to significant damage to the land and properties resulting in you submitting claims to the Mines Subsidence Board (MSB) resulting in compensation being received.

As a result of the problems arising from the mining activities below Lot A and Lot B, and the changes to the Council Zoning which enables landowners to subdivide their land into one acre lots, you have decided to sell the properties and move to a new location closer to family members.

You contracted Company A to oversee the subdivision and manage the project.

Company A has funded the subdivision and sale of the subdivided lots.

Company A will receive an arm's length Development fee of $XX,000 paid from the proceeds of all of the subdivided lots.

Company A is allowed a fee of $X,XXX per month for X months and then a portion of final profit.

Company A has completed the requirements of Council, with the view to expediting the time frame of getting the lots on the market and to reduce your costs

Under the terms of your contract with Company A, Company A will undertake the following activities in relation to the subdivision:

§  carry out feasibility study, seek feedback from financiers and undertake discussion with local valuers

§  engage development consultants to:

-       survey the land

-       design the lot layout to maximise the number of lots and sale prices

-       undertake flora and fauna investigations

-       achieve mine subsidence clearance

-       produce an on-site effluent report

-       produce a salinity report

-       drainage concept

-       road concept; and

-       statement of environmental effects

§  submit developmental approval

§  when required, negotiate with the council and supervise the application through council

§  achieve development approval and negotiate any adverse conditions imposed

§  tender for and engage a selling agent

§  draft sales contracts and generate 88B instrument

§  engage design consultants to produce construction documents based on development approval conditions

§  negotiate and guide consultants to develop the best cost benefit design to produce a result consistent with the target buyer group expectations

§  apply for construction certificate

§  tender for construction works

§  review tenders for compliance and competency/capacity to undertake the scope of works

§  once costs are known, and construction contract signed, set construction finance

§  commence work in respect of the required:

-       environmental protection survey

-       road works

-       storm water

-       potable water

-       communication infrastructure

-       power; and

-       fencing and landscaping

§  conduct the final survey, gain subdivision certificates and linen plan; and

§  effect settlement with contracted purchasers

You have received an advance loan from Company A, which is interest free, and which will be repaid out of any proceeds from the sale of the subdivided lots to which you are entitled, until the loan is repaid in full; and you will receive:

§  the current value of Lot A and Lot B which will be determined by valuation

§  Notional interest calculated at 10% per annum

§  Any Goods and Services Tax (GST) benefit; and

§  A percentage of the development profit, being any revenue derived from the demolition and removal of existing improvements erected on the properties plus the total sale proceeds of al subdivided lots forming part of the properties less all development costs,, sales and marketing costs, holding costs, GST incurred on the sale of the subdivided lots, interest incurred on the Developer loan, the land payment and the landowner's Notional interest.

Nearly four decades after you purchased the property the Mine Subsidence Board approved the subdivision.

At the same time the Development Application (DA) was submitted to Council.

For approximately 12 months several DA adjustments were issued by the Council and completed.

After just over 12 months of negotiations the DA was approved by the Council.

You demolished the house located on Lot A.

The residence located on Lot B will not be demolished but will be sold on a reduced amount of land.

After the DA was approved several plans were prepared and reviewed by the Council for widening of the road. This process was done in order to obtain Council agreement to the design of the road.

The Construction Certificate (CC) application was submitted to Council after the above consultations.

A few months later the Council provided its first response to the CC plans.

Council required amendments and a second review of the CC application was completed.

The Electrical Reticulation Plan was Certified by Endeavour Energy.

Six months after you submitted the CC application the CC was issued by Council.

For three months Tender of works were advertised and negotiated.

An agreement was reached between Electrical A and Company A for the supply and instulation of electrical reticulation totalling $XXX,XXX.

An agreement was reached between Earthmoving A and Company A for the civil works totalling $X,XXX,XXX.

A short time later the Water Authority stamped plan issued for construction of water main and a water main contractor was appointed.

Over the next 12 months Civil Works, Electrical Works, Landscape works and fencing and Water Main works were carried out for the subdivision.

Over the next few months Company A had correspondence with the Department of Planning regarding planning agreement, arrange payment of contributions and removal of Voluntary Planning Agreement from title.

A loan for $X,XXX,XXX was taken out by Company A with the lender being Lender A.

Approval was issued by Water Authority.

Approximately four years after the submission of the DA to Council the subdivision certificate application was submitted to Council.

Three months later the first request for additional information for subdivision certificate application was received from Council.

A second request for additional information for subdivision certificate application was received from Council.

For approximately three months Company A was responding to Council requirements for subdivision certificate. This required substantial works to be done relating to landscaping and weed eradication and changes to an effluent disposal area.

Approximately six months after the first application for subdivision certificate was made a second application for subdivision certificate was made to the Council.

You will not have any direct involvement in the subdivision project or sale process.

You have never undertaken any property development.

You do not have a business plan.

You will not retain any of the subdivided lots.

You will reside at a different location during the subdivision process.

The lots are being sold by Real Estate Agent A. Company A negotiated the Real Estate Agent fees and associated charges and then made the recommendation to you.

Total revenue from sale of the lots will be approximately $XX,XXX,XXX.

We issued you a private binding ruling for the income periods ending 30 June 20XX, 30 June 20XX and 30 June 20XX outlining that the profit from the subdivision and sale of the property was statutory income under the capital gains tax provisions.

The delay in finalising the sale of the subdivided lots has been caused by Council requirements and has also been impacted significantly by drought, catastrophic local bushfires, floods and the COVID 19 pandemic.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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