Edited version of private advice

Authorisation Number: 1052115630429

Date of advice: 8 May 2023

Ruling

Subject: GST - property development

Question 1

Is the potential sale of the units at the property, taken into account in working out an amount of ordinary income that is derived by you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the receipt of the Land Owner Fee taken into account in working out an amount of ordinary income that is derived by you under section 6-5 ITAA 1997 or statutory income?

Answer

Yes.

Question 3

Will CGT event C1 under subsection 104-20(1) happen when your main residence is demolished or destroyed?

Answer

Yes.

Question 4

Will any CGT gain or loss from this event happening (C1) be disregarded?

Answer

Yes.

Question 5

Is the potential sale of the units at the property, statutory income as a capital gain (section 10-5 and 102-5 of the ITAA 1997) to the extent that it is not assessed as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 6

Does the property development activity of building a number of residential units and an underground car park carried out at the property, and the sale of a number of new residential units, constitute carrying on an enterprise of property development for Goods and Services Tax (GST) purposes and therefore require you to be registered for GST?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20WW

Year ending 30 June 20XX

Year ending 30 June 20YY

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20VV

Relevant facts and circumstances

You (you and your spouse) own a property (the property).

The property was purchased in many years ago for specified amount of money.

Since the purchase, the property has been used as your main residence and has not been used to produce income.

The property is less than two hectares in size andhas not been re-zoned during your ownership

You have been approached by a developer (the developer) with an offer to demolish the existing dwelling on the property and build a number of units on the land.

You have provided an estimate of the property's market value at the time negotiations commenced.

Recently, you signed a development agreement with the developer.

More recently, you have provided the statutory value of the unimproved land.

You have provided details of a valuation was obtained through another entity by you and the developer for the purposes of securing development finance which valued the property.

Under the development agreement you will receive as consideration for your main residence, one lot being the penthouse unit and carparking bays in the completed development of a number of units.

Under the development agreement, when the developer gives you notice of the anticipated construction commencement date for the demolition of your main residence, you will receive a Land Owner fee of a specified amount on the Payment Date. On the Payment Date you will also grant the developer a lease for a maximum period of a number of years which will be registered on the property title.

You intend to use this penthouse unit as your main residence as soon as practicable after completion.

There is no transfer of the property title from you to the developer. However, under the development agreement, the provision of funding by the developer to undertake the development of the units, will be secured by a registered first mortgage over your property.

The titles of the completed units not retained by you will be transferred directly from you to the unit purchasers.

The sale proceeds of the other units will be paid directly to you in your name and will be paid to the developer as a development fee.

You have no ultimate entitlement to any amounts from the sale proceeds of the other units that are to be sold.

You have not undertaken any development or similar contract in the past or expecting to in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 118-110

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Question 1

Summary

We do not consider that you are carrying on a business of property development. However, it is considered that your activities involved an isolated commercial transaction being undertaken. Therefore, you should include in your assessable income any profit from the transaction.

Detailed reasoning

Generally, the profits from a land subdivision and sale can be treated for taxation purposes as ordinary income under section 6-5 of the ITAA 1997, if:

•         as a result of carrying on a business of property development, involving the sale of land as trading stock;

•         it is a gain from a result of an isolated commercial transaction entered into by taxpayer, (inside or outside the ordinary course of business of a taxpayer carrying on a business, where the property was acquired or subsequently held for the purpose of profit making (see TR 92/3);

Alternatively, the profits can be treated as statutory income under section 10-5 and section 102-5 of the ITAA 1997 to the extent that the amount is not assessed as ordinary income under section 6-5 of the ITAA 1997, being a mere realisation of a capital asset.

The ATO view about whether property development activities constitute the carrying of a business or an isolated transaction that is of a revenue nature or is a mere realisation of a capital asset is based on principles, factors and indicators that have been established by decisions of the Courts.

Carrying on a business

'Business' is defined by subsection 995-1(1) of the ITAA 1997. This defines business to include 'any profession, trade, employment, vocation or calling', but excludes 'occupation as an employee'.

Taxation Ruling TR 2019/1 (TR 2019/1) considers what amounts to a business and references Federal Commissioner of Taxation v Murry where Gaudron, McHugh, Gummow and Hayne JJ observed '...A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions'.

Taxation Ruling TR 97/11 (TR 97/11) identifies the indicators of carrying on a business. Paragraph 13 of TR 97/11 identifies what the Courts have observed as the characteristics of a business:

•         whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (see paragraphs 28 to 38);

•         whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46);

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54);

•         whether there is repetition and regularity of the activity (see paragraphs 55 to 62);

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (see paragraphs 63 to 67);

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (see paragraphs 68 to 76);

•         the size, scale and permanency of the activity (see paragraphs 77 to 85);

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93).

Application to your circumstances

On weighing all of these factors, it is concluded that you are not carrying on a business of property development.

Profit from an isolated transaction Taxation Ruling TR 92/3 (TR 92/3) identifies whether profits from isolated transactions are ordinary income. TR 92/3 considers the principles outlined in the Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 case and provides guidance in determining whether profits from isolated transactions are income and therefore assessable under subsection 25(1) of the ITAA 1936.

Where a taxpayer is not carrying on a business, a profit from an isolated transaction will nonetheless generally be income when both of the following elements are present (paragraph 6 of TR 92/3):

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

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose of the taxpayer for entering into the transaction. It is sufficient if profit-making is a significant purpose (paragraph 8 of TR 92/3).

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (paragraph 12 of TR 92/3).

Paragraph 13 of TR 92/3 sets out some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

a)    the nature of the entity undertaking the operation or transaction

b)    the nature and scale of other activities undertaken by the taxpayer;

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

d)    the nature, scale and complexity of the operation or transaction;

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

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

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

h)    the timing of the transaction or the various steps in the transaction

Paragraphs 41 and 42 of TR 92/3 considers the purpose of profit-making for the sale of property:

41. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation 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. However, as the High Court decisions in White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and Whitfords Beach demonstrate, that is not always the case. (See also Menzies J in FC of T v. N.F. Williams (1972) 127 CLR 226 at 245; 72 ATC 4188 at 4192-4193; 3 ATR 283 at 289 and Whitfords Beach Pty Ltd v. FC of T (F.C.) 79 ATC 4648 at 4659; 10 ATR 549 at 567).

42. For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

a)    as the capital of a business; or

b)    into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit making at the time of acquiring the asset.

Application to your circumstances

On application of the principles set out above to your circumstances, it is considered that undertaking the property development represented an isolated commercial transaction.

You should include in your assessable income the profit from undertaking the transaction in accordance with the principles contained in TR 92/3, which provides that the amount is assessable as ordinary income under section 6-5 of the ITAA 1997.

The calculation of your profit from an isolated transaction includes both the money and any other thing received under the transaction. In your circumstances this will include:

•         any net sale proceeds from the sale of the units, after taking into account your obligations under the development agreement to pay the developer a development fee, and

•         the money value of the of the penthouse unit.

Question 2

You will receive a Land Owner Fee as part of the project. The Land Owner Fee is paid in consideration for your appointment of the developer to perform specified duties and works.

As discussed in Question 1, as the Land Owner Fee forms part of the proceeds for the isolated transaction, this amount will be part of any calculation of profits that will be assessable as ordinary income under section 6-5 of the ITAA. To the extent that an amount is not assessed as ordinary income, it can be assessed as statutory income.

Question 3

CGT event C1 happens if a CGT asset you own is destroyed (ITAA 1997 section 104-20). Your home is a CGT asset.

CGT event C1 will happen when a CGT asset is demolished or destroyed (subsection 104-20(1) of the ITAA 1997). The time of the event is when the destruction occurs. Paragraph 4 of Taxation Determination TD 1999/79 Income tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to: (a) a voluntary 'loss' or 'destruction'? (b) intangible assets?, confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property.

CGT event C1 will happen upon the demolition of the original dwelling on the property.

Question 4

Subsection 104-20(3) of the ITAA 1997 provides that you make a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1.

In your case, the capital proceeds for CGT event C1 happening include the Land Owner Fee and the retained penthouse. However, as you are individuals, the dwelling was your main residence since you purchased it many years ago and was not used at any time for income producing purposes, any capital gain or capital loss arising from the CGT event will be disregarded.

Question 5

The sales of the other units will each represent a CGT event A1 (section 104-10 of the ITAA 1997). CGT event A1 will happen when you will dispose of your ownership interest in the CGT asset, being each unit, to another entity.

A CGT event arises at the time you enter into contracts for the disposal of the units under section 104-10 of the ITAA 1997.

The capital gain for sale of each unit is worked out by taking the proceeds of each sale reduced by their cost base.

Once the capital gain is worked out, section 118-20 of the ITAA 1997 reduces the capital gain assessable by the profit already reported as assessable income under section 6-5 of the ITAA 1997 for the profit from an isolated transaction.

Question 6

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act states that you make a taxable supply if:

(a) you make a supply for consideration;

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

(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.

To be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

You make the supply of a number of new residential units for consideration. The property developer will be selling these new units on your behalf as per the development agreement and the supply of the those units is connected with Australia. Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act will be satisfied.

The supply of the new residential units will neither be GST-free or input taxed.

The issues to be considered in this case are:

•         whether the sale of the new residential units is being made in the course or furtherance of an enterprise that you carry on, and

•         as you are currently not registered for GST, whether you are required to be registered for GST.

Enterprise

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

•         in the form of a business, or

•         in the form of an adventure or concern in the nature of trade; or

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

The ATO view on the meaning of the term 'enterprise' is explained in detail in the Miscellaneous Taxation Ruling MT 2006/1 'The New Tax System; the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number' (MT 2006/1).

MT 2006/1 at paragraph 154 states:

154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entitled to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise.

You are not currently registered for GST, however it is necessary to determine whether the arrangements made with the property developer to develop the property for sale would constitute the carrying on of an enterprise. Under the development agreement the property developer is undertaking development activities on behalf of you. Therefore, it should be determined whether the activities such as demolition of the dwelling, building a multi-storey residential units and the underground car park are done in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated one-off transaction may fall into the category of an 'adventure or concern in the nature of trade' where the activities being undertaken do not amount to a business but are commercial in nature and have characteristics of a business deal.

Paragraph 237 of MT 2006/1 states that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms required the features of a 'business deal.'

Indicators of carrying on a business

Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are:

•         a significant commercial activity

•         a purpose and intention of the taxpayer to engage in commercial activity

•         an intention to make a profit from the activity

•         the activity is or will be profitable

•         the recurrent or regular nature of the activity

•         the activity is carried on in a similar manner to that of other business in the same or similar trade

•         activity is systematic, organised and carried on in a businesslike manner and records are kept

•         the activities are of a reasonable size and scale

•         a business plan exists

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

In addition, it is relevant to consider the length of time the property has been held and to what purpose it had been put to in that time and personal involvement in the development activity.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whether a business is being carried on is generally the result of a process of weighing all the relevant indicators.

Application of the facts to your situation

In the context of considering the above indicators and factors when determining whether the development of the property and the sale of new residential units would be viewed as an adventure or concern in the nature of trade, the following general observations have been made:

•         You will be engaged in significant commercial activities to allow for the construction of a multi-storey building and an underground carpark. You will enter into any agreements necessary to facilitate the development agreement and have authorised the demolition of your current dwelling in order to develop the property and build a multi-storey building with a number of residential units and an underground parking lot.

•         Whilst you contend that you have no involvement in any aspect of the development activities, that is not the only determinative factor that should be considered. You will be engaged in this venture in a commercial and business-like manner by entering into all the agreements necessary to enable the property developer to carry out the development activities on your behalf. This clearly demonstrates your purpose and intention to engage in commercial activities.

•         There is an intention to profit from the development of the property to provide additional funds for retirement and to reduce maintenance of the property. The fact that you have agreed to wash any gain through the payment of net proceeds to the property developer does not detract from the view that you have a dual purpose of improving the amenity of your residential property and generating retirement income and a surplus to pay the property developer for their services.

•         You will be carrying on property development in a similar manner to that of other businesses in the same or similar trade. You will be taking systematic steps in planning the development by engaging the property developer. You have some control of what is being built as you will retain ownership of the penthouse unit and a lift will be installed in the property. Therefore, it cannot be said that the property developer has full control of all development activities.

•         There is no clear evidence of a documented plan for the development, but you have taken a series of coherent and systematic steps to plan and execute the development agreement by engaging the property developer.

•         You will be relying on the property developers for knowledge and advice in relation to the property development.

Paragraphs 264 to 266 of MT 2006/1 discuss judicial decisions that have established a number of factors in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

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

•         additional land in acquired to be added to the original parcel of land

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

•         there is a coherent plan for subdivision of land

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

•         borrowed funds financed the acquisition of subdivision

•         interest on money borrowed to defray subdivisional costs was claimed as business expenses

•         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.

If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. In applying the above indicators to the activities, you have undertaken, it is noted that:

•         there is a change of purpose for which the land is held as you have decided to demolish the existing dwelling and construct a new building.

•         you have taken a series of coherent and systematic steps to plan and execute the development agreement by engaging a property developer.

•         although you are not borrowing funds or making any contribution to the development, you have put your land at risk by facilitating finance of the land development through permitting a mortgage over the land.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion that the property development activities amount to an adventure or concern in the nature of trade as you have planned to maximise proceeds through the negotiation of the Land Owner Fee, retainment of the penthouse unit and reduction of the property development fees. You have considered demolishing and rebuilding units as the best course of action. Although you do not have any previous property development experience, you have engaged a property developer to complete these activities on your behalf.

Upon weighing up these factors, it is considered that you are carrying on an enterprise of property development based on a number of activities have been undertaken. You will be carrying on an enterprise of property development and satisfy the requirements of paragraph 9-5(b) of the GST Act.

Required to be registered for GST

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

(a)  you are carrying on an enterprise; and

(b)  your registration turnover meets the registration turnover threshold (the current registration turnover threshold is $75,000).

Your GST turnover does not include the supply of capital assets as per subsection 188-25 of the GST Act.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses the meaning of a 'capital asset' at paragraphs 31 to 36.

Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

Furthermore, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

We have considered section 188-25 of the GST Act and this section does not apply to the sale of the new residential units. The developed units will have the character of a revenue asset, rather than a realisation of a capital asset.

As the sale proceeds from the sale of the new residential units exceeds the registration turnover threshold, you will be required to register for GST. The sale of the new residential units will be a taxable supply as the supply will satisfy all the requirements of section 9-5 of the GST Act. Therefore, you are required to report the sale in your business activity statement and remit the GST to the Australian Tax Office.

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