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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1052064761488

Date of advice: 10 May 2023

Ruling

Subject: Capital gains tax

Issue 1 - Income Tax

Question 1

Will the proceeds from the sale of the subdivided lots be subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does the cost base of the subdivided property include an apportioned amount of the cost base of the property, in accordance with section 112-25 of the ITAA 1997?

Answer

Yes.

Question 3

Will you be eligible for the main residence exemption following the subdivision and sale of the land?

Answer

No.

Question 4

Will there be any tax liability for the acquisition of land from Council?

Answer

Yes.

Issue 2 - Goods and Services Tax

Question 5

Is the transfer or vesting of part of the Property to Council, referred to as the Road land in an agreement under sections 173 and 177 of the Planning and Environment Act 1987 (173 Agreement), a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 5

No.

Question 6

Will the supply (sale) of each of the proposed subdivided lots on the remaining Property be a taxable supply under section 9-5 of the GST Act?

Answer

No.

Question 7

If the supplies of the proposed subdivided lots are a taxable supply and withholding on settlement applies, will you have to include the supply in an assessment (activity statement)?

Answer 7

No.

This ruling applies for the following periods:

Period ended 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Acquisition of Property

On DD MM YYYY you jointly acquired a X,XXX square metre (sqm) vacant single parcel of land for approximately $XXX,XXX.

In MM YYYY you had a residential dwelling built on the land for approximately $XXX,XXX which you occupied as your home after its completion in MM YYYY. In MM YYYY, after moving into the residential dwelling, you put up a shed to store personal items.

You submit that your sole purpose in acquiring the Property was to make it your home because of its country feel with enough room for your children to play. At the time you acquired the Land it was surrounded by large blocks in an urban growth zone.

You have since only used the Property for private uses as your main residence. You have not operated a business from the Property, nor have you leased the Property or any part of the Property as part of a business or to derive income. The Property is not recorded in the books of an enterprise as an asset.

Section 173 Agreement

After being approached by the XXXX Council, you entered, on DD MM YYYY, an agreement with Council titled 'sections 173 and 177 of the Planning and Environment Act 1987 in relation to the subject land.

The Background which forms part of the 173 Agreement explains that:

  1. Council is the responsible authority for the Planning Scheme.
  2. The Owner is or is entitled to be the registered proprietor of the Subject Land.
  3. The Development Contributions Plan applies to the Subject Land.
  4. The Development Contributions Plan contemplates that Council will purchase part of the Subject Land from the Owner to construct a new street between XXXX and XXXX.
  5. Council and the Owner have agreed that:

E.1 the Owner will transfer or vest the Road in Council instead of making a cash payment as a Development Contribution Levy;

E.2 the agreed Land Value of the Road exceeds the Development Contributions Levy for the subject land; and

E.3 Council will reimburse the Owner the amount of the Over Provision on the terms and conditions of this Agreement.

  1. An Agreement under section 173 of the Act was recorded on the Certificate of Title for the Subject Land on DD MM YYYY
  2. Council and the Owner have agreed that the Agreement has ended and will be removed from the Certificate of Title for the Subject Land upon the registration of this Agreement.
  3. As at the date of this Agreement, the Subject Land is encumbered by a mortgage in favour of the Mortgagee. The Mortgagee consents to the Owner entering into this Agreement.
  4. The Parties enter into this Agreement:

I.1 to record the terms and conditions on which the Road will be transferred to or vested in Council;

I.2 to ensure that appropriate arrangements are made for the connection of the Subject Land to the Reticulated Sewerage System;

1.3 to end the XXXX Agreement in accordance with section 177 of the Act; and

1.4 to achieve and advance the objectives of planning in Victoria and the objectives of the Planning Scheme in respect of the Subject Land.

The 'Subject Land' is defined in clause 1 to the 173 Agreement as the land situated at ADDRESS being the land referred to in Certificate of Title Volume XXXX Folio XXX and ... includes any lot created by the subdivision of the Subject Land or any part of it.

The 'Road' is defined in clause 1 to the 173 Agreement as that part of the Subject Land shown as 'Land required for future road' on the plan attached as Annexure 1 to this Agreement (Road land).

Clause X to the 173 Agreement under the heading 'Owner's Specific Obligations' you agreed:

Under clause X.X to the 173 Agreement the Road must be transferred or vested in Council free of all encumbrances and charges upon the earlier of:

A Section 35 plan is defined as a plan prepared pursuant to section 35 of the Subdivision Act 1988 which subdivides the Road from the Subject Land and vests the Road in Council.

At clause X.X to the 173 Agreement, you as the Owner accept the terms of the Agreement in full and final settlement of the Owner's claims and entitlement relating to the transfer of the Road to Council...and absolutely releases Council from and against such claims.

Under clauses X.X.X and X.X.X to the 173 Agreement the transfer of the Road in accordance with clause X.X is in full and final satisfaction of your obligation to pay the Development Contribution Levy for the Subject Land and the Council will reimburse you as the Owner the amount of the Over Provision in accordance with clause X.X to the 173 Agreement.

The 'Over Provision' is defined as the amount of $XXX,XXX plus indexation, being the amount by which the Agreed Land Value of the Road exceeds the liability to pay the Development Contribution Levy in respect of the Subject Land. The Development Contribution Levy means the levy payable per developable hectare at the rate specified in the Development Contribution Plan for the Subject Land.

When you acquired the Land in YYYY the contract of sale (a copy of which you have provided) referred to a 173 Agreement recorded on the title of the Property with the previous owner. You knew then of the restrictions and other conditions of use imposed by a 173 Agreement and that part of the Property in relation to the Road (Road land) would at some time be transferred to Council.

There was no proposal for the Property to be rezoned or developed when you purchased the Property in YYYY. You did not apply for rezoning as your Land being inside the urban growth boundaries had been rezoned in MM YYYY by Amendment XXXX from Farming Zone to the Urban Growth Zone. On DD MM YYYY, Amendment XXXX introduced the Officer Precinct Structure Plan and associated Schedule to the Urban Growth Zone.

Sometime in MM YYYY your neighbour approached you about his plan to develop and subdivide his X,XXX sqm property and proposed a subdivision of both the adjoining Property and your Property. Your neighbour proceeded to introduce you to a planner who would apply for a planning permit.

Subdividing remaining Property

The residential dwelling was located on the X,XXX sqm part of the Property that was not to be transferred to Council as Road land (remaining Property).

You submit that notwithstanding the future transfer of the Road land to Council your intention was to continue to reside on the remaining Property as your main residence. However, loss of the country feel of the Property with development taking place in the surrounding areas, a recent break in into your shed in MM YYYY and your neighbour's proposal to develop prompted you to consider developing the remaining Property.

In MM YYYY you made enquiries with a local real estate agent in relation to selling the remaining Property as one parcel. The real estate agent advised that the remaining Property would only have appeal to a developer who would not pay market value and would try and get the property at a budget price as its size would not appeal to non developer buyers in your area. The real estate agent provided you with an estimated verbal market valuation of the remaining Property of $X million.

At no time did you offer the remaining Property for sale as one parcel. You obtained a bank valuation of the remaining Property valuing it at approximately $X million.

Sometime in YYYY, after the advice from the real estate agent and the approach by your neighbour for a joint development, you decided to develop the remaining Property. As the remaining Property is a battle axe to the neighbours adjoining Property it made sense to work with your neighbour to do the development.

Application for Planning Permit

In MM YYYY an application for a joint planning permit prepared by BUSINESS was lodged with the Council as the responsible authority.

Transfer of Road land to Council

In MM YYYY, X,XXX sqm (Road land) of the X,XXX sqm Property was transferred to and vested in Council in accordance with the 173 Agreement (calculated as $XX per square meters totalling $XXX,XXX). On transfer of the Road land you were paid $XXX,XXX by Council.

The difference between (X,XXXsqm x $XX) $XXX,XXX and $XXX,XXX (appr $XX,XXX) was withheld by the Council as an offset for any developer contribution you may incur that may arise from development.

The vesting/transfer of the Road land to Council was as a result of an acquisition by Council. No notice of compulsory acquisition or gazettal notice was provided and you took no action to cause the legal interest in the Road to be vested/transferred to Council, nor did you enter into negotiations that resulted in you transferring the Road land under a standard land contract.

The timing of the transfer of the Road land to Council was the result of a 3rd party developer's development of land nearby your Property whereby that developer needed your Road land to start the construction of a road to access the development.

In correspondence dated DD MM YYYY Council advised that the vesting of the Road land in Council was under section 35 of the Subdivision Act 1988 (section 35 plan of subdivision XXXX created on DD MM YYYY). The vesting of the Road to Council was not required to be publicly advertised or exhibited as it is in accordance with the incorporated Officer Precinct Structure Plan and Officer Developer Contributions Plan.

You indicated that you did not incur any obligation to do something or refrain from doing something or tolerate an act or situation in relation to the transfer of the Road to Council.

However, clause X to the 173 Agreement sets out the owner's further obligations as:

•         doing all things necessary to give effect to the Agreement

•         consenting to Council applying to the registrar of titles to record the Agreement on the Certificate of Title of the Subject Land in accordance with section 181 of the Act and

•         doing all things necessary to enable Council to do so, including:

o   signing any further agreement, acknowledgement or document; and

o   obtaining all necessary consents to enable the recording to be made.

Planning Permit Granted

On DD MM YYYY planning permit XXXX was granted allowing subdivision of land and removal of restrictive covenant, generally in accordance with the approved plans.

You provided a copy of planning permit XXXX (planning permit) which identifies two parcels of land the subject of the permit:

The planning permit is issued in respect of a joint development (you and your neighbour) and sets out conditions that apply to the permit including that before the plan of subdivision is certified under the Subdivision Act 1988, amended plans to the satisfaction of the Responsible Authority must be submitted to and approved by the Responsible Authority.

Conditions under the planning permit include the owner entering into an agreement with a telecommunication network or service provider for the provision of telecommunication, provision of land for XXXX Road, construction of XXXX Road, infrastructure works that will need to be undertaken, enter agreements with XXXX Pty Ltd, enter agreements with XXXX Water and XXXX Water.

Joint Subdivision

You have an informal agreement with your neighbour in relation to the development of the subdivided lots organised through XXXX (project manager) the project manager for the development. You and your neighbour each have a separate agreement with the project manager who will manage the whole of the development from start to finish including obtaining the relevant approvals for the development and engaging the various contractors to undertake the development work on a fee for service basis.

A plan of subdivision involving both your remaining Property and your neighbour's adjoining Property is being prepared by the project manager to be submitted to Council early in YYYY.

The 'preliminary high level development cost estimate' dated DD MM YYYY, shows the development of XX lots. More advanced costings are being completed by the project manager who is waiting for quotes from various contractors.

You estimate your share of the subdivision costs will be approximately $XXX,XXX to $XXX,XXX. The extract from the preliminary estimate of costs below shows your share of the sub total development costs as $XXX,XXX and that of your neighbour's as $X,XXX,XXX totalling $X,XXX,XXX. The apportionment of costs between you and your neighbour is based on the percentage of the land owned by each of you and your neighbour as calculated by the project manager.

Notwithstanding, the subdivisional activities will involve sharing of subdivisional costs there will be no variation to the boundaries of your remaining Property and your neighbour's adjoining Property.

The subdivisional works should start in MM or MM YYYY, pending approvals going through as expected and the subdivided lots are expected to be completed and registered by early YYYY.

The size and nature of the development will be relatively straightforward to be undertaken in a single stage. The development works will involve demolishing your residential dwelling and shed, building a road, earthworks, drainage, the provision of connections to a supply of water, sewerage system, drainage, gas, power and other utilities. The development will not involve other contributions to Council, such as open spaces or other infrastructure (other than building the Road).

You intend to continue residing in the residential dwelling on the remaining Property until MM YYYY when you will vacate the residential dwelling prior to its demolition.

The development of the remaining Property will result in XX subdivided lots ranging in area from XXXsqm to XXXsqm per lot. The development of your neighbour's adjoining Property will result in XX subdivided lots with a total of XX subdivided lots in the development, as indicated in the 'preliminary estimate of costs' (which was also provided).

With little or no experience in the development of property, you anticipate having little involvement in the day-to-day activities of the development having engaged the project manager to undertake the development process on your behalf. The project manager will maintain business records as you and your wife are full time employees with limited time to devote to the development.

The small scale of the development means there will be no site office, with the project manager being on site when required. You will not employ people related to the development or register a business name for the development.

Borrowing funds

You have borrowed funds to finance your share of the development activities of approximately $XXX,XXX to $XXX,XXX with variations. You will be funding your share of the development project separately from your neighbour.

You have assessed current market values by looking at realestate.com website to look at recent sales of blocks of land in your area to work out whether this project is worth undertaking. You have not developed a business plan and you will not proceed with the subdivision if there is not enough 'profit' to buy another home.

Sale of lots

You intend to sell the proposed six subdivided lots sometime in YYYY for an estimated $XXX,XXX per lot totalling $X million, subject to market conditions. You do not propose selling any of the subdivided lots by presale.

The subdivided lots will be sold as vacant residential lots through a local real estate agent. You and your neighbour will each be separately engaging a real estate agent to deal with each of your respective subdivided lots.

You will be the registered owner of the XX proposed subdivided lots created from the subdivision of the remaining Property and your neighbour will be the registered owner of the proposed XX subdivided lots created from the subdivision of the neighbour's adjoining Property.

Neither of you have been, either together or separately, or any related or associated entity of either of yours have been involved in the ownership of land or any aspect of the development of land and the sale of subdivided lots of land. Neither of you nor a related entity or associate have experience in developing and subdividing land. You do not plan on undertaking future developments.

You have not claimed any income tax deductions associated with the ownership of the Property.

You are currently not registered for goods and service tax (GST) with XXX being employed as a XXXX and XXXX being a XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Parts 3-1 and 3-3

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 6-5

Taxation Administration Act 1953 section 14-250

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-250

Income Tax Assessment Act 1997 subsection 118-250(1)

Income Tax Assessment Act 1997 subsection 118-250(1)(b)

Income Tax Assessment Act 1997 subsection 118-250(2)(b)

Income tax Assessment Act 1997 subsection 118-250(3)(b)

Land Acquisition and Compensation Act 1986 (Vic) subsection 172(3)

Land Acquisition and Compensation Act 1986 (Vic) section 4

Land Acquisition and Compensation Act 1986 (Vic) Part 2

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

Reasons for decision

Issue 1 - Income Tax

Question 1

The sale of the subdivided lots will be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

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 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 you did not consider its development and was used for domestic purposes. You will have minimal involvement in the subdivision of the land and have engaged other entities to complete the works on your behalf and contend that your role is passive.

Although there are some elements of the subdivision works which indicate a profit making undertaking, on balance, the sale of the subdivided lots is considered to be a mere realisation of a capital asset. The proceeds will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Profits from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Taxation Determination TD 97/3 provides that if you subdivide a block of land into separate blocks, each of those blocks becomes a new asset. As such the cost base or reduced cost base relating to subdivision should be apportioned to all new assets.

You work out the cost base of each new asset as follows:

•         work out each element of the cost base of the original asset at the time of the subdivision apportion in a reasonable way the costs to each new asset.

•         A reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case.

 

Taxation Determination TD 10 outlines what are acceptable valuations for CGT purposes. It states that where the market value of an asset needs to be determined, you can choose to:

•         obtain a detailed valuation from a qualified valuer, or

•         compute their own valuation based on reasonably objective and supportable data.

Subdivision costs

The costs of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as surveying, legal fees and application fees associated with the subdivision should be apportioned in accordance with the relative market values of the two blocks.

However, any cost solely related to one block should be attributed solely to that block.

In your case, you created new blocks as a result of a subdivision. You will sell all of these blocks. The costs you have incurred in regard to this subdivision such as survey fees, development application fees and title registration fees are considered to be incidental costs covered by the second element of the cost base. The demolition of the dwelling, creation of easements, installation of required utility services, roads, public open spaces, the installation of trees within the streetscape, stormwater works and other infrastructure relate to capital expenditure covered under the fourth element of the cost base.

In relation to the incidental costs (survey fees, development application fees, and title registration fees), it is considered that these costs have been incurred in creating all of your new assets, and as such should be apportioned and included in the cost base of all new assets.

The costs you have incurred in the demolition of the dwelling, creation of easements, installation of required utility services, roads, public open spaces, the installation of trees within the streetscape, stormwater works and other infrastructure are costs incurred that will preserve or increase the value of all new assets. Accordingly, they should also be apportioned and included in the cost base of all assets.

Question 3

A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded under section 118-110 of the ITAA 1997 if the dwelling was the taxpayer's main residence throughout the period it was owned.

The main residence exemption can apply to up to two hectares of land adjacent to a dwelling if the land was used primarily for private or domestic purposes in association with the dwelling (section 118-120 of the ITAA 1997).

However, section 118-165 of the ITAA 1997 provides that the main residence exemption does not apply to a CGT event that happens in relation to land, to which the exemption can extend under section 118-120 of the ITAA 1997 if that CGT event does not also happen to the dwelling.

In your case, a CGT event A1 happened when the block of land was sold, but this CGT event did not happen to the dwelling. A CGT event C1 (about loss or destruction) had already happened to the dwelling when it was demolished.

Therefore, section 118-165 of the ITAA 1997 applies to deny you the main residence exemption on the capital gain made on the disposal of the blocks of land.

Question 4

Under subsection 118-250(1) ITAA 1997, the main residence exemption applies to a CGT event and the exempt land if the CGT event involves, the compulsory acquisition of the exempt land by an Australian government agency or a non-government entity authorised to do so under a power conferred by Australian laws

Alternatively, section 118-250 of the ITAA 1997 states that the section applies to a CGT event and the exempt land if the compulsory acquisition (or similar arrangement) involves the taxpayer disposing of exempt land to an entity an event that meets all the (similar) conditions found in subsection 118-250(1)(b), subsection 118-250(2)(b) and subsection 118-250(3)(b).

Firstly, the disposal occurs after a notice was served by, or on behalf, of an entity, including an Australian government agency, inviting negotiations with a view to the entity acquiring the adjacent land by agreement.

Secondly, the notice needs to inform the recipient that if the negotiations are unsuccessful, the adjacent land would be compulsorily acquired, or compulsorily subject to the similar arrangement, by the entity. Informally, this will be called the " notice and compulsion " method for the purposes of this discussion. It is also a requirement that the compulsory acquisition or similar arrangement would have been under a power of compulsory acquisition or ability to enforce a similar arrangement conferred by an Australian law.

In your situation, as only adjacent land was subject to the CGT event, and not the dwelling itself, the exemption specified in section 118-120(1) does not apply.

This exemption applies to a dwelling's adjacent land if the same CGT event happens to that land and your ownership interest in it as if it were a dwelling. In your situation, the same event has not occurred, as your dwelling was not sold, so this exemption does not apply.

Acquisitions of adjacent land may be CGT exempt where they are deemed compulsory acquisitions.

There are also powers in the Planning and Environment Act 1987 that allow for compulsory acquisitions. Subsection 172(3) incorporates the Land Acquisition and Compensation Act 1986 (Vic) that governs compulsory acquisitions into the Planning and Environment Act 1987.

Section 4 of the Land Acquisition and Compensation Act states that an authority which is empowered under a special Act to acquire an interest in land by compulsory process must not acquire that interest by compulsory process or by agreement except in accordance with this Part. Subsection 172(3) of the Planning and Environment Act states that this Act is a special Act for the purpose of the Land Acquisitions and Compensation Act 1986.

In your situation, you inherited a restriction on the land that was contained in a section 173 Agreement completed under the Planning and Environment Act 1987 (Vic).

The vesting of the Road to Council was not required to be publicly advertised or exhibited as it is in accordance with the incorporated Officer Precinct Structure Plan and Officer Development Contributions Plan.

The authority in your case has not adhered to the notice requirements found in Part 2 of the Land Acquisition and Compensation Act or section 118-250 of the ITAA 1997. The authority has also not mentioned that the acquisition was a compulsory one anywhere within the section 173 Agreement. This would seemingly be intentional as they did not consider it a compulsory acquisition. Without the notice requirements being adhered to, the acquisition would not qualify as a compulsory acquisition and therefore any capital gain on the sale of the lots cannot be disregarded.

Issue 2 - Goods and Services Tax

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make. You make a taxable supply under section 9-5 of the GST Act if:

( )    you make the supply for consideration

(a)  the supply is made in the course or furtherance of an enterprise that you carry on

(b)  the supply is connected with the indirect tax zone, and

(c)   you are registered or required to be registered for GST.

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

Transfer of the Road land to Council

As noted above one of the essential requirements of a taxable supply is that there is a supply for consideration. You submit that the transfer of the Road land to Council was effected by a compulsory acquisition of the Road land by Council.

In Goods and services Tax Ruling GSTR 2006/9 Goods and services tax: supplies the Commissioner gives examples of circumstances where a compulsory acquisition does not give rise to an owner making a supply (see the extract below).

Vesting in the government authority

82. The effect of the gazettal notice is that the legal ownership of the land, described in the notice, is vested in the authority acquiring the land, and that the land becomes freed from any other interests. The entity's interest in the land, whether legal or equitable, is extinguished. When land vests in an authority in consequence of a gazettal notice, it is necessary to examine the relevant facts and circumstances to determine whether or not the owner makes a supply of the land to the authority. In cases where land vests in the authority as a result of the authority seeking to acquire the land, and initiating the compulsory acquisition process pursuant to its statutory right, then the owner does not make a supply. This is because the owner does not provide anything to the authority. It takes no action to cause its legal interest to be transferred or surrendered to the authority. It has no obligation to do anything, to refrain from doing something or to tolerate an act or situation.

The circumstances described in paragraphs 81 and 82 of GSTR 2006/9 contrast with circumstances where an owner may provide something that constitutes a supply under an agreement (see paragraph 82A and 91 of GSTR 2006/9.

On the facts provided, the Road land does not vest in Council in consequence of a gazettal notice that satisfy the requirements of a compulsory acquisition (see question 4 above).

If that is the case the requirements in paragraphs (a) and (c) of section 9-5 of the GST Act will be satisfied in that:

Further, the supply of the Road land and the supply of each of the proposed subdivided lots will not come within the GST-free provisions in Division 38 of the GST Act or input taxed provisions in Division 40 of the GST Act respectively.

As you are not currently registered for GST, the issue, is whether you are required to be registered for GST (paragraphs 9-5(d) of the GST Act) and if so whether the supply of the Road land and the supply of each of the proposed subdivided lots are made in the course of an enterprise you carry on (paragraphs 9-5 (b) of the GST Act).

Are you required to be registered for GST?

Section 23-5 of the GST Act provides that you are required to be registered for GST if you are

GST turnover

Currently the registrationturnover threshold is $75,000. Although an entity who is carrying on an enterprise can register for GST, registration for GST is required only where the entity is carrying on an enterprise and their turnover for GST purposes meets the registration turnover threshold.

Under subsection 188-10(2) of the GST Act an entity has a current GST turnover that meets a turnover threshold if:

The term 'GST turnover' includes both current GST turnover and projected GST turnover. Current GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the previous 11 months. Projected GST turnover is the value of all supplies (not just taxable supplies) made, or likely to be made during the current month plus the next 11 months.

Paragraph 188-15(1)(c) of the GST Act excludes from your current GST turnover supplies that are not made in connection with an enterprise that you carry on.

Section 188-25 of the GST Act specifically excludes from the calculation of projected GST turnover:

The Commissioner's view on the application of section 188-25 of the GST Act is contained in Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.

This means that where the transfer or the Road land to Council and the sale of the proposed subdivided lots are regarded as the mere realisation of a capital asset and not made in connection with an enterprise, your turnover is likely to be less than the registration threshold.

In the income tax context, the capital/revenue distinction is discussed in question 1 and 4 above and is a different issue to the role played in the characterisation of the supply as an asset as a transfer of ownership of a capital asset in section 188-25 of the GST Act. For GST purposes the application of section 188-25 of the GST Act will only arise for consideration where the supply under consideration is or will be made in the course of an enterprise.

Carrying on an enterprise

The term 'enterprise' is relevantly defined in subsection 9-20(1) of the GST Act to include, among other things, an activity or series of activities, done:

In addition, paragraph 9-20(2)(b) of the GST Act excludes from the meaning of 'enterprise' an activity or series of activities, done by an individual or a partnership without a reasonable expectation of profit or gain.

The Commissioner's view of what constitutes an enterprise is set out in Miscellaneous Taxation Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1). Goods and Services Tax Determination GSTD 2006/6states that the principles contained in MT 2006/1 apply equally to the terms 'entity' and 'enterprise' and can be relied on for GST purposes.

In the form of a business

An activity or a series of activities constitutes an enterprise if they are in the form of a business. The term business is further defined in the GST Act as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The indicators of a business established by case law such as profit-making purposes, scale, repetition and regularity, the amount of capital invested, and organisation of activities in a business-like way with books and records which, which along with the nature of the activities may assist in determining whether particular activities are in the form of a business (see paragraph 178 of MT 2006/1).

In the form of an adventure in the nature of trade

A profit-making objective is central to the concept of an adventure or concern in the nature of trade, but an isolated commercial transaction may have the requisite character. As Edmonds J noted in Professional Admin Service Centres Pty Ltd v Commissioner of Taxation (2013) 94 ATR [445]

"The word "business" is defined in s 195-1 of the GST Act in an inclusive and non-inclusive way, but is of little or no assistance in the present context. Australian income tax law jurisprudence emphasises the existence of a profit-making purpose, repetition and regularity, the conduct of activities using business - like methods, the volume of activity and the existence of a significant commercial purpose as relevant indicia to a finding that the activity or activities constitute a business. But paragraph (b) of s 9-20(1) makes it clear that an "enterprise" can also include an isolated commercial venture in the nature of trade which implies that it be entered into for a commercial purpose, including the purpose of profit making ..."

An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal having strong similarities to the term 'profit making undertaking or scheme (paragraph 237 and 244 of MT 2006/1).

The badges of trade have also been referred to by the High Court in FCT v. Myer Emporium Ltd (1987) 61 ALJR 270; and later by the Full Federal Court in the decision in Puzey v. Federal Commissioner of Taxation (2003) 131 FCR 244, 257 [48].

In discussing the badges of trade MT 2006/1 indicates that if the property provides income or personal enjoyment to the owner it is likely to be an investment than a trading asset. Assets purchased with the intention of holding them for a reasonable period of time to be held for the pleasure or enjoyment of the person is more likely not to be purchased for trading purposes. The greater the frequency of similar transactions the greater the likelihood of trade.

Isolated transaction and sales of real property

The question of whether an entity is carrying on an enterprise often arises where there is a one-off or isolated real property transactions (paragraph 262 of the MT 2006/1). The issue to be decided in isolated transactions is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset (paragraph 263 of MT 2006/1).

MT 2006/1 sets out (paragraph 265) the following factors where if several are present may indicate that a business or an adventure in the nature of trade is being carried on:

•         there is a change of purpose for which the land is held;

•         additional land is acquired to be added to the original parcel of land;

•         the parcel of land is brought into account as a business asset;

•         there is a coherent plan for the subdivision of the land;

•         there is a business organisation - for example a manager, office and letterhead;

•         borrowed funds financed the acquisition or subdivision;

•         interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•         there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•         buildings have been erected on the land.

Other than the factors outlined above, other relevant factors may 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.

Question 5

You knew at the time of acquiring the Land that a part of it (Road land) was subject to conditions which would see it transferred to Council at some point, but until that time you used the Road land for your personal enjoyment. The approach by Council to enter into a section 173 Agreement for the eventual transfer of the Road land to it does not support the view that you transferred the Road land with the intention of profiting from the supply.

Having had regards to the facts, matters and circumstances and indicators of a business or profit making undertaking the better view is that the simple subdivision of the Road land and transfer to Council amounts to a mere realisation of part of your Property and falls short of an activity in the form of a business or trade or profit making scheme.

As the supply of the Road land to Council itself does not amount to an enterprise but a mere realisation of a capital asset you will not be making the supply in the course of an enterprise that will require you to register for GST. This is the case unless the activity of transferring the Road land to Council forms part of a wider arrangement where the activities of subdividing and selling the proposed subdivided lots amounts to an enterprise in the course of which the transfer of the Road land is made.

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