Edited version of private advice

Authorisation Number: 1051821368811

Date of advice: 30 March 2021

Ruling

Subject: Property subdivision

Question 1

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

Answer

No.

Question 2

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

Answer

No.

Question 3

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

Answer

Yes.

Based on the information provided, the proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either:

•         the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or

•         a profit-making or commercial transaction in accordance with Taxation Ruling TR 92/3.

Therefore, any proceeds received on the disposal of the subdivided lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Question 4:

Will the sale of the Lots be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999?

Answer 4:

No.

You must pay the GST payable on any taxable supply you make. The requirements of a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) include that you are registered or required to be registered for GST.

Under section 23-5 of the GST Act you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

We do not consider your activities in relation to the subdivision and sale of the vacant lots of land amount to an enterprise.

Therefore, your sales of the vacant lots will not be taxable supplies and will not be subject to GST.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You, being Person A and Person B, are not registered for GST.

You purchased land (the Property) after 20 September 1985 as joint tenants. The Property is two hectares in size.

Your intention was to build your main residence on the Property. You built a house and moved in as soon as it was completed. The house has been used as your main residence from this date. A swimming pool, shed, carport and landscaping were added later.

You had not contemplated subdividing the Property and at the time of purchase it was not possible to subdivide the Property due to its zoning.

The location for the house was chosen because it was on a slight 'rise' and considered the best location.

A few years after you purchased it, the Council rezoned the Property and it was able to be subdivided into small acreage lots (subject to development approvals and each lot having a minimum size of 2,000 square metres).

You did not seek rezoning of the Property and were unaware of any possible change until you received a notice from the Council advising rezoning had occurred.

Following the rezoning, you received a number of letters from developers offering to purchase your Property. You did not pursue any of these opportunities because they were to acquire the whole of the Property, and you wished to remain living in your home until retirement.

Around this time Person B became ill. Person B then found it hard to maintain the entire Property.

You investigated whether it would be possible to subdivide the Property and sell some of the subdivided lots in order to downsize and reduce your debt, whilst remaining living in your home.

You took out a personal loan, to fund the initial costs of the subdivision.

You engaged the services of a consultant who in lodged an initial development application for six lots with the Council. The cost of the consulting work was $X. Due to your financial situation the project did not proceed at that stage and was put on hold.

A couple of years later you took out a second bank loan for the subdivision activities.

You also engaged the services of a project manager of the subdivision.

The following year the subdivision was reconsidered and put on hold due to your personal financial situation.

You decided to subdivide the Property into seven lots. Five vacant lots would be sold, and you would retain the lot with your main residence and the vacant lot between your residence and the road. This lot may be used to build another residence in the future.

The following year you engaged the services of another consultant for a second development application to subdivide the property into seven lots as follows:

•         Lot 1 to be retained by you to possibly build a new main residence in the future.

•         Lot 2 with your existing home to be retained as your main residence.

•         Lot 3, 4, 5, 6 and 7 will be vacant lots of land.

Development approval was delayed until additional council requirements relating to stormwater drainage were rectified. The cost of the DTS services was $X.

The appointed project manager will arrange subcontractors to undertake the subdivision activities. You will not conduct any activities.

Additional costs of the subdivision will include:

•         $X for Council fees for the operation of works approval

•         $X tree removal

•         $X loan establishment fees

•         $X road construction

•         $X Bushfire management plan

•         $X loan fees

•         $X electrical planning.

The project manager will tender the following works to contractors:

•         road building

•         earthworks

•         water systems

•         landscaping

•         NBN installation

•         electrical

•         plumbing

•         lighting.

Neither you nor any related parties to you are involved in property development. You have no history of buying and selling land and do not plan to undertake such activities again in the future. Person A's occupation is kitchen hand and Person B's occupation is sales representative.

You owned a rental property over 10 years ago which has been sold. This is the only time that you have owned a property other than a main residence.

The Property could have been subdivided into eight rather than seven lots had the residence not been placed where it was. The placement of the house on the rise meant there was no way to maximise the number of lots on the Property without demolishing the house, which you had no intention of doing.

The value of the Property before subdivision is estimated to be $X based on the offers made by developers to purchase the entire Property. The estimated total cost of subdivision is approximately $X excluding the cost of the Property. This includes the costs of obtaining subdivision approval, project manager costs, council costs, road construction, interest on borrowed funds and other costs necessary to subdivide the Property.

No buildings will be erected on Lot 3, 4, 5, 6 or 7.

The funds to carry out the subdivision have been borrowed.

There were many delays from your initial contact with the town planner in July 20XX until subdivision activities commenced in January 20XX. Delays occurred due to a lack of or an inability to access funding, and your general disorganisation and lack of skill in completing a subdivision.

The subdivision is expected to be complete in the first half of 20XX.

Real estate agents were engaged in late 20XX and four of the five available lots have conditional contracts at a sale price of $X. Settlements for the four contracted lots are expected to occur during the period of the ruling. The sale price for the fifth lot is also estimated to be $X.

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 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

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