Edited version of private advice

Authorisation Number: 1051826842950

Date of advice: 27 April 2021

Ruling

Subject: CGT - land subdivision

Question 1

Will the profits or gains from the sale of the subdivided land be assessable under section 6-5 of the Income Tax Assessment Act 1997(ITAA 1997), rather than under the capital gains tax provisions in Part 3-1 of the ITAA 1997?

Answer

Yes

Question 2

Will the sale of the subdivided land be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

This ruling applies for the following periods:

Income Year Ending 30 June 20XX

Income Year Ending 30 June 20XX

Income Year Ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayers purchased a block of land (the Block), zoned as rural. The taxpayers advise that at the time of purchase they intended to build a house and live on the Block.

The block was re-zoned as low density residential one year following the purchase. The taxpayers advise they were not aware of the re-zoning and did not advocate for it with the Council.

The taxpayers advise they did not apply for a building approval with the Council at that time, as the current zoning already allowed to build a house on the Block.

Information provided on the Council website indicates that a building approval is required when building a new dwelling.

The details of the Block available on the Council website include only one development application, which is the subdivision application.

About three years after the Block was purchased, the taxpayers sold their residential property.

In the same year they purchased a new residential property. The taxpayer has explained that this was done for in order to raise some finance and to get a place to live while building on the Block, due to shortage of vacant rental properties in the area

The taxpayers advise that prior to subdivision they placed the Block on the market in its entirety but did not receive any offers.

The taxpayers maintain that the decision to sell the Block and to move out of the area was made due to personal circumstances.

Real estate listing information provides that the Block was also advertised for sale during two other periods shortly after its purchase.

The taxpayers were advised that, due to the rezoning, the Block could potentially be sold to a developer for a substantial profit to them, if subdivided.

Following consultation with the real estate agent, the taxpayers arranged a meeting with the Council. The taxpayers advise that the Council gave a preliminary approval for subdividing the Block into smaller blocks.

The taxpayers' real estate agent advised the taxpayers that the blocks could be sold at a profit.

The taxpayers advise that the third-party involvement in the development will be minimal. The taxpayers have engaged an Engineer, Surveyor, Town Planner and for Excavation works. The taxpayers have not engaged any other parties as they are still waiting for the required conditions from the council.

The taxpayers advise that they have obtained finance and are using savings to pay for the works associated with the subdivision.

The taxpayers also advise that the project will require driveways, no sewerage and minimal electrical works. The taxpayers are not aware of the requirements for water connection yet. The area has an NBN wireless connection. The taxpayers have provided preliminary estimation of costs for the development.

From the time the Block was purchased and until it was placed on the market, the Block remained vacant, with no activities conducted on it. A friend kept a small number of livestock on the property free of charge to keep the grass low.

The taxpayers advise that they have no history of buying and profitably selling land.

The taxpayers are not registered for GST.

The subdivision application which was lodged by a town planner describes the subdivision.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 104-10 of the ITAA 1997

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act 1999)

Section 9-20 of the GST Act 1999

Reasons for decision

Question 1

Summary

The taxpayers are operating as property developers in carrying out a business or an isolated commercial transaction. Their intention to use the block of land for private purposes could not be established from the evidence available to us. The taxpayers are conducting the development in a commercial or business-like manner. Therefore, any profits or gains from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

The proceeds from the sale of land can be treated as:

•         a realisation, often referred to as a 'mere realisation', of a capital asset, assessable as capital proceeds under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997);

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

•         income from an isolated commercial transaction with a view to a profit, assessable as ordinary income under section 6-5 of the ITAA 1997.

The two leading court cases exploring the notion of 'mere realisation' are Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining) and Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach). It has been determined by the courts that all the facts and circumstances taken as a whole must be weighed up in order to distinguish between a mere realisation of a capital asset and a transaction performed in carrying on a business or a commercial transaction.

For a business of property development and resale, the repetitive buying and selling of property is not necessary to establish that a business is being carried on. A single acquisition of property for the purpose of development, subdivision and sale will be sufficient to constitute a business activity (Taxation Determination 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock'?).

As explained in Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3), under certain circumstances, profits from an isolated transaction can be ordinary income. Paragraph 35 of TR 92/3 states that profits on isolated transactions may be ordinary income if:

•         the intention or purpose of a taxpayer 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 on a business operation or commercial transaction.

If the transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property (paragraph 9 of TR 92/3). However, that is not always the case. As explained in the example at paragraph 41 of TR 92/3, if a taxpayer acquires an asset for personal use, but later disposes of it in a business or commercial manner, the profit from the sale of asset will be income according to ordinary concepts.

Paragraph 49 of TR 92/3 provides a number of factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

The courts have established a number of factors in determining whether proceeds from the sale of subdivided land was income from carrying on a business or carrying out an isolated commercial transaction, or was from the mere realisation of a capital asset:

•         whether the landowner held the land for a considerable period of time prior to any subdivision and sale;

•         the purposes for acquiring the property, and whether it was used for any other purposes prior to sale;

•         whether the landowner conducted farming or other activities on the land prior to beginning the process of developing and selling the land;

•         whether the landowner originally acquired the property as an investment, such as long-term capital appreciation or to derive income;

•         whether the land was originally acquired near the urban fringe of a major city or town;

•         if the property has been rezoned, whether the landowners actively sought that rezoning;

•         whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement;

•         whether the landowners had tried to sell the land without subdivision;

•         whether the landowner had any history of buying and profitably selling developed land or land for development;

•         the extent to which the development goes further than that required to obtain council approval;

•         whether the operations will be planned, organised and carried on in a business-like manner;

•         the scope, scale, duration and degree of complexity of the proposed development;

•         the reasons for selling the land;

•         the level of involvement that the taxpayer had in the development, marketing and sale of the property;

•         the level of legal and financial control maintained by the landowners in the proposed or final development agreement;

•         whether any finance must be obtained in order to fund the development activities; and

•         the level of financial risk borne by the landowner in acquiring, holding and/or developing the land.

In applying the above principles to the taxpayers' situation, we provide the following analysis:

•         The taxpayers have held the property for a relatively short time years prior to commencing the subdivision activities. During this period the taxpayers have made two attempts to sell the property prior to the subdivision.

•         The taxpayers have informed us that the purpose for acquiring the block was to build a residential home. However, no evidence has been provided to support this assertion, other than the flood level report from the local council. The taxpayers did not lodge any building permit applications with the local council for construction of a residential dwelling. The taxpayers' assertion that no building application would have been required to construct a residential house is contrary to the information on the local government's website.

•         While in possession of the block the taxpayers sold their residential property and purchased a new residential property. While the taxpayers have asserted they did this to free up some finance to start building on the property, there is no evidence to suggest they commenced the building process.

•         No activities were conducted on the block during the period of ownership, other than allowing a friend to graze a few head of livestock to keep the grass low.

•         The Block was initially acquired on the urban fringe. The taxpayers have informed us that they were unaware of the upcoming rezoning and did not actively seek the rezoning.

•         No potential buyers made any offers to them prior to commencement of the subdivision activities. The Block remained on the market for just under 4 months. The taxpayers decided to subdivide the Block based on the advice of their real estate agent.

•         Based on the evidence provided by the taxpayer and the subdivision application with the local council, the development is not going any further than required to receive council approval. The scope, scale and complexity of the proposed development is relatively low. The taxpayers are going to carry out the organising and management roles themselves, with the minimal third-party involvement. The taxpayers will retain legal and financial control in the proposed development.

•         The financial risk involved in the project rests directly with the taxpayers: they propose to draw back on their residential mortgage and to use their personal savings to fund the development. In the event the development fails, they will be subject to losses or resulting liabilities. Ultimately, they will bear significant profit and loss risk in relation the development of the Block.

•         According to the taxpayers, they have no history of buying and profitably selling land. The decision to sell the block of land was made based on personal and family circumstances.

Conclusion

Based on all the facts and circumstances of the case, we consider that the taxpayers will be operating as property developers in carrying out a business or an isolated commercial transaction.

Firstly, despite the taxpayers' statement that the Block of land was initially acquired for private use, they have failed to provide enough evidence in support of this assertion. Alternatively, we consider the taxpayers' intention changed to a profit-making one either at the point when they attempted to sell the block after the re-zoning, or at the point when they sold their residential dwelling and purchased another residence and did not commence building a new residential dwelling on the Block.

Secondly, we consider that the taxpayers will be disposing of the Block in a business or commercial manner. While the scale of the development is relatively small, the taxpayers are approaching it in a businesslike manner:

•         they retain a high level of managerial control over the development,

•         they retain the legal control of the Block,

•         they retain financial control of the project,

•         they bear a high level of financial risks.

Therefore, any profits or gains from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997.

Question 2

Summary

The taxpayers will be carrying on a business as property developers. As they satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), they will be making taxable supplies and will be liable to remit GST.

Detailed reasoning

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) you make the supply in the course or furtherance of an

*enterprise that you *carry on; and

(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.

(*Denotes a term defined in section 195-1 of the GST Act)

The indirect tax zone includes mainland Australia and Tasmania and certain other areas.

In your case, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. That is:

•         you will supply the subdivided lots for consideration (the prices of the lots) (paragraph 9-5(a) of the GST Act); and

•         the sale of the lots will be connected with the indirect tax zone as the lots will be situated in the indirect tax zone (paragraph 9-5(c) of the GST Act).

Therefore, what remains to be determined is whether your sale of the subdivided lots will be made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

Whether the sale will be made in the course or furtherance of an enterprise that the taxpayers carry on

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things:

•         an activity or series of activities done in the form of a business (paragraph 9-20(1)(a))

•         or done in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

As we need to take into account the same factors and guidance outlined in our response to Question 1 for determining whether the taxpayers are carrying on an enterprise for GST purposes, our analysis in our response to Question 1 applies here. We consider that the taxpayers will be selling the subdivided blocks in the course or furtherance of an enterprise that they are carrying.

Are you required to register for GST?

An entity is required to be registered for GST if they are carrying on an enterprise and they meet the $75,000 compulsory GST registration threshold.

An entity meets the $75,000 threshold if their current GST turnover or projected GST turnover is at or above $75,000.

However, if current GST turnover is above $75,000, but projected GST turnover is under $75,000, the entity is not required to be registered for GST.

Based on the estimated sale price for each of the subdivided blocks, the taxpayers' GST turnover will exceed the GST registration threshold even if one block is sold in a year. Therefore, the taxpayers will be required to register for GST.

Conclusion

As the taxpayers satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), they will be making taxable supplies and will be liable to remit GST.

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