1052231302302 | Legal database

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Edited version of private advice

Authorisation Number: 1052231302302

Date of advice: 21 March 2024

Ruling

Subject:CGT and GST - property development

Issue 1

Question

In determining the 'net income' of The Trust pursuant to subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), will the trustee be required to include income from the sale of the subdivided Residential Lots in calculating its assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

In determining the 'net income' of The Trust pursuant to subsection 95(1) of the ITAA 1936, will the trustee be required to include income from the sale of the subdivided Residential Lots in calculating its assessable income, pursuant to section 102-5 of the ITAA 1997 as a gain from the mere realisation of a capital asset in accordance with section 104-10 of the ITAA 1997?

Answer

Issue 2

Question 1

Will the trustee of The Trust make a taxable supply in relation to the sale of the subdivided Residential Lots pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

Year ending 30 June 20XX

Relevant facts and circumstances

The Trust

1. XX Trust (The Trust) is an Australian discretionary trust established by deed executed on DDMMYY (The Trust Deed).

2. The trustee of The Trust is XX Pty Ltd (the Trustee Company).

3. The Trust Deed lists Mr X as the Beneficiary of The Trust.

The Trustee Company

4. The Trustee Company is an Australian Private Company registered on DDMMYY.

5. The sole director and shareholder of The Trustee Company is Mr X.

The arrangement

6. On DDMMYY a contract of sale was signed for the purchase of the property (the Land).

7. The Land is described in the contract of sale as Volume X Folio Y and the title plan included in the contract of sale lists the land size as XX.

8. The contract of sale lists 'Company A (a company that is not the Trustee Company) and/or Nominee' as the purchaser and is signed by Mr X where the nature of authority to sign was as the sole director and secretary of Company A.

9. The purchase price listed in the contact of sale is $X.

10. A 'Sale of real estate nomination form' dated DDMMYY was signed by Mr X in his capacity as director of The Trustee Company as trustee for The Trust, which provided that, in accordance with the contract of sale listing Company A and/or nominee as purchaser, The Trustee Company, as trustee for The Trust, was nominated as substituted purchaser to take a transfer of conveyance in lieu of Company A.

11. The Trust intends to subdivide The Land into two allotments (Allotment A and Allotment B).

12.Allotment A will be used to develop commercial buildings for The Trust to offer for lease and Allotment B will be further subdivided into residential lots (the Residential Lots).

13.The trustee of The Trust estimates that there will be approximately X and Y Residential Lots offered for sale. The trustee of The Trust is currently negotiating with the relevant council regarding council approval about what percentage of the land will be used for residential purposes and what percentage for commercial purposes, which will affect the number of residential lots that will be subdivided from Allotment B.

14. The trustee of The Trust plans to sell the Residential Lots in order to fund the development of the commercial buildings on Allotment A.

15. The decision to subdivide Allotment B into the Residential Lots was made because Mr X considers it easier to sell residential land with more incentive and better investment.

16.The Residential Lots will be sold as vacant land only.

17.The Trust has been established solely for the purpose of undertaking this arrangement.

18.The initial purchase of the land has been funded by private finance as well as Mr X personally.

19.In addition to being the shareholder and director of the Trustee Company, Mr X is a shareholder and director of multiple companies whose interests include conducting real-estate services, holding long-term residential and commercial investments, and building and construction.

20.Mr X has extensive experience and history buying and selling properties, property development and construction.

21.Mr X has an association with a real-estate business that he anticipates he will use to market the sale of the land if necessary.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999, section 9-40

Income Tax Assessment Act 1936 subsection 95(1)

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 102-5

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, section 118-20

Income Tax Assessment Act 1997, section 118-25

Income Tax Assessment Act 1997, subsection 995-(1)

Reasons for decision

Issue 1

All legislative references in Issue 1 are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Question 1

Summary

The trustee of The Trust is carrying on a business of property development, the land will be sold as part of the business activities and the Residential Lots are trading stock. In accordance with subsection 95(1) of the ITAA 1936, the Trustee Company is required to calculate its assessable income as if it is a residential taxpayer and therefore the trustee will be required to include income from the sale of the subdivided Residential Lots in calculating its assessable income pursuant to section 6-5

Detailed reasoning

22. Subsection 95(1) of the ITAA 1936 defines "net income" as:

"net income", in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions...

23. That is, for the purpose of determining the net income of a trust estate, the trustee is deemed to be a resident taxpayer and its assessable income is calculated as if the trustee is a resident taxpayer. Therefore, in order to determine the 'net income' of The Trust it must be established whether the income from the sale of the Residential Lots is assessable income.

24. Subsection 6-1(1) states that assessable income consists of both ordinary income and statutory income.

25. Subsection 995(1) defines ordinary income to have the meaning given by section 6-5.

26. Subsection 6-5(1) defines ordinary income as income according to ordinary concepts. Ordinary income has generally been held to include three categories: income from rendering personal services, income from property and, income from carrying on a business.

27. Statutory income is income that is not ordinary income, but income that is included as assessable income by way of a specific legislative provision. Capital gains are statutory income included as assessable income under section 102-5.

28. For income tax purposes, proceeds from the sale of the Residential Lots will be taxed one of the following ways:

• as ordinary income under section 6-5 where the land is held as trading stock and the taxpayer is carrying on a business of property development and the land is sold as part of the business,

• as ordinary income under section 6-5, where land is not trading stock and the land is sold as part of an isolated commercial transaction entered into with a profit-making intention, or

• as statutory income under section 102-5 of the ITAA 1997 where the proceeds of a sale are a mere realisation of a capital asset.

Ordinary Income - Carrying on a business of property development

29. Section 995-1 of the ITAA 1997 states that the term 'business' incudes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

30. Taxation Ruling TR 97/11 Am I Carrying on a Business of Primary Production (TR 97/11) provides the indicators the Commissioner considers relevant in establishing whether a taxpayer is carrying on a business. While TR 97/11 relates specifically to carrying on a business of primary production, it states at paragraph 11 that the indicators set out are no different in principle from the indicators as to whether activities in any other area constitute the carrying on of a business. Paragraph 13 of TR 97/11 lists the following indicators as having emerged from case law as relevant when considering whether a taxpayer is carrying on a business:

• whether the activity has a significant commercial purpose or character

• whether the taxpayer has more than just intention to engage in business

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

• whether there is repetition and regularity of the activity

• 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

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

• the size, scale and permanency of the activity

• whether the activity is better described as a hobby.

31. Paragraphs 14 to 16 of TR 97/11 emphasise that no single indicator is decisive, that there is often a significant overlap of the indicators, and that the indicators must be considered in combination and as a whole.

32. Specifically, TR 97/11 states:

15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.

16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

33. Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock? (TD 92/124) provides the Commissioner's opinion on when land is treated as trading stock and states:

1. Land is treated as trading stock for income tax purposes if:

• it is held for the purpose of resale; and

• A business activity which involves dealing in land has commenced.

2. Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

34. Particularly relevant, TD 92/124 continues at paragraph 3:

3. It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purposes of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

Ordinary income - Isolated commercial transaction entered into with a profit-making intention

35. Profits obtained from an isolated business or commercial transaction entered into with the intention or purpose of making a profit are assessable as ordinary income under section 6-5 of the ITAA 1997 (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)).

36. Taxation Ruling TR 92/3: Income tax: Whether Profits on Isolated Transactions Are Income (TR 92/3) discusses the application of the principles outlined in Myer Emporium and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5.

37. Paragraph 1 of TR 92/3 defines 'isolated transactions' for the purposes of the ruling:

1. ... In this Ruling, the term 'isolated transactions' refers to:

(a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

(b) those transactions entered into by non-business taxpayers.

38. TR 92/3 then provides the following guidance:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) 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.

7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

39. Further guidance between the mere realisation of a capital asset and receipts made from a profit making intention can be found in Myer Emporium, wherethe Full High Court stated at 4369:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

Application to this arrangement

40. The trustee of The Trust has purchased a large block of land with the intention of subdividing the land into two allotments, retaining Allotment A to develop commercial buildings which will be offered for lease, and further subdividing Allotment B into approximately X-Y residential lots (subject to council consent) which will be offered for sale to the public.

41. The trustee of The Trust intends and expects to make a profit from the sale of the Residential Lots and to use this profit to fund the development of the commercial buildings on Allotment A. The Trust was established specifically for the purpose of undertaking this arrangement.

42. The decision to subdivide Allotment B into the Residential Lots was made because Mr X considers it easier to sell residential land with more incentive and better investment.

43. Considering TR 97/11, TD 92/124 and TR 92/3, the arrangement and the intentions and decisions surrounding the arrangement, indicate that the trustee of The Trust is carrying on a business of property development, the land will be sold as part of the business activities and the Residential Lots are trading stock: business:

• The arrangement has a significant commercial purpose. The land was purchased with the intention of subdivision and resale of the Residential Lots where the anticipated profit from the sale will be used to fund the development of the commercial buildings on the other portion of the land.

• The actions of the trustee of The Trust demonstrate more than just an intention to engage in business. The Trust was established for the purpose of undertaking this arrangement, it has now completed the purchase of the land and is in negotiations with the council regarding how they can subdivide Allotment B.

• The trustee of The Trust has planned, organised and carried out the arrangement to this point in a businesslike manner directed at making a profit and intends and expects to make a profit from the sale of the Residential Lots. It is intended by The Trust that the profit from the sale of the Residential Lots will be used to fund the development the commercial development on Allotment A.

• Subject to council consent, the trustee of The Trust intends to subdivide Allotment B into X-Y Residential Lots. The title plan included in the contract of sale lists the land size as XX and The Trust purchased the Land for $X. These facts demonstrate that the activity is of significant size and scale.

• Mr X, the shareholder and director of the Trustee Company, is also a shareholder and director of multiple companies whose interests include conducting real-estate services, holding long-term residential and commercial investments, and building and construction. Mr X has extensive experience and history buying and selling properties, property development and construction. Mr X's experience, the size and scale of the arrangement and the commercial purpose and intention of profit indicates that the activity is not a hobby.

44. As discussed above, TD 92/124 confirms that for land to be considered as trading stock it is not necessary that the acquisition of land be repetitive and that a that a single acquisition of land for the purposes of development, subdivision and sale by a business commenced for that purpose, can lead to the land being treated as trading stock.

45. In summary, the Commissioner considers that the trustee of The Trust is carrying on a business of property development, the land will be sold as part of the business activities and the Residential Lots are trading stock. In accordance with subsection 95(1) of the ITAA 1936, the Trustee Company is required to calculate its assessable income as if it is a residential taxpayer and the trustee will be required to include income from the sale of the subdivided Residential Lots in calculating its assessable income pursuant to section 6-5.

Issue 1

Question 2

Summary

As concluded in question 1 above, the Residential Lots are trading stock and as such, in accordance with section 118-25, the profit from the sale of the Residential Lots is not assessable as statutory income under section 102-5 as the capital gain is disregarded.

Detailed reasoning

46. Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes their net capital gain for the income year. Section 102-5 sets out how to calculate a taxpayer's net capital gain.

47. The definition of CGT asset provided by section 108-5 states that a CGT asset includes any kind of property.

48. Section 104-10 of the ITAA 1997 sets out when CGT event A1 occurs and states:

Disposal of a CGT asset: CGT event A1

(1) CGT event A1 happens if you dispose of * CGT asset.

(2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

49. Where a CGT asset is disposed of, a taxpayer will make a capital gain if the capital proceeds from the disposal of the land is more than the cost base of the land. A taxpayer will make a capital loss if the capital proceeds from the disposal is less than the reduced cost base.

50. Section 118-20 contains anti-overlap provisions which provide that a capital gain that a taxpayer makes from a CGT event is reduced by any amounts which are included in its assessable income under any provision of the ITAA 1997 outside of those in Part 3-1. Section 118-20 provides the following example of the operation of the anti-overlap provisions:

Example: Liz bought some land in 990, as part of a profit-making scheme. In December 1998 she sells it.

Her profit from the sale is $40,000 and is included in her assessable income under section 6-5 (about ordinary income).

Suppose she made a capital gain from the sale of $30,000. It is reduced to zero because it does not exceed the amount included.

51. Where land is treated as trading stock, section 118-25 specifically disregards any capital gain or loss made at the time of the CGT event:

Trading stock

(1) A *capital gain or *capital loss you make from a *CGT asset is disregarded if, at the time of the CGT event, the asset is:

(a) your *trading stock; or

(b) ...

52. As concluded in question 1 above, the trustee of The Trustis carrying on a business of property development, the land will be sold as part of the business activities, the Residential Lots are trading stock and the trustee will be required to include income from the sale of the subdivided Residential Lots in calculating its assessable income pursuant to section 6-5. As the residential lots will be trading stock and any capital gain or loss made at the time of the sale of the land will be disregarded under subsection 118-25(1).

Issue 2

All legislative references in Issue 2 are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise indicated.

Question 1

Summary

As all the requirements of section 9-5 will be met, The Trust will be making a taxable supply pursuant to section 9-5 in relation to the sale of the subdivided Residential Lots.

Detailed reasoning

53. Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supplies that it makes.

54. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

(a) the entity makes the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(d) the entity is 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.

55. QC 23640 Subdividing Land states in reference to GST obligations:

You may have GST obligations and entitlements if you subdivide and sell land:

• with the intention of making a profit

• in the course of carrying on a business

• as a business or commercial transaction.

...

Even with a one-off transaction, you may still be required to register for GST because your transaction may have the characteristics of a business deal.

56. An entity will be making taxable supplies where it sells land if the sales will meet all the requirements of section 9-5 of the GST Act as follows:

• the residential lots will be sold for consideration

• the sales of the residential lots will be in the course of a property development enterprise that the entity will carry on

• the sales will be connected with Australia as the land is situated in Australia

• pursuant to section 23-5 of the GST Act, the entity will be required to register for GST as its turnover will be over $75,000

• the sales of the residential lots will not be GST-free under a provision of the GST Act or a provision of another Act, and

• the sales of the residential lots will not be input taxed under a provision of the GST Act or a provision of another Act.

57. Based on the information provided, the trustee of The Trust will be making a taxable supply pursuant to section 9-5 in relation to the sale of the subdivided Residential Lots.

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