Edited version of private advice

Authorisation Number: 1052318165343

Date of advice: 10 April 2025

Ruling

Subject: Am I in business - property development

Question 1

Is the sale of the rooming accommodation located (the property) a taxable supply under section 9-5 of A New Tax System (Goods and Services) Act of 1999 (GST Act)?

Answer

Yes, the sale of the property is a taxable supply under section 9-5 of the GST Act.

Question 2

Is the sale of the property ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development?

Answer

No.

Question 3

Is the sale of the property ordinary income under section 6-5 of the ITAA 1997 as a result of an isolated transaction carried out for profit and commercial in character?

Answer

Yes.

Question 4

Is the sale of the property statutory income under the capital gains tax (CGT) provisions in Part 3-1 and Part 3-3 of the ITAA 1997 as a result of a realisation of a capital asset?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20YY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background and relevant entities

Person 1 (P1) and Person 2 (P2) are a couple. P1 is related to Person 3 (P3) and Person 4 (P4).

P1, P2 and P4 are directors and equal shareholders of the corporate trustee of the Trust (the Trust, or you). You have an Australian Business Number (ABN) and your business is residential property leasing. You have not made a family trust election.

P3 is a joint shareholder and director of the corporate trustee for the discretionary Other Trust 1 (OT1). OT1 has an ABN, and its business is residential property leasing.

Person 5 (P5) is the sole director, secretary and shareholder of the corporate trustee for the discretionary Other Trust 2 (OT2). OT2 has an ABN, and its business is property development.

Collectively you, OT1 and OT2 are referred to as joint venture one (JV1).

P3 signed up to a professional program and recommended it to P1 and P2 who later signed up for the course. P3 had previously built rooming houses and discussed this activity, and its returns, with P1 and P2, who expressed interest in doing something similar.

Formation of the Joint Venture between the three trusts for Property Investment (JV1)

In 20XX, P3 contacted P1 to advise of prospective returns on property, and that they had some upcoming development projects. P1 and P2 expressed interest.

P3 contacted P1 and P2 with a development investment opportunity (the property). At this time, the land had a tenanted dwelling on it.

The development was for a rooming house. It was presented as a long-term, high-yield, positively geared investment with projected returns of x% based on interest rates at that time. P3 already owned rooming houses and provided feasibility calculations of expected rental returns to P1 and P2.

P1 and P2 intended to proceed on this basis. P1 approached P4 to join them and co-fund the investment.

Later in 20XX, P1, P2 and P4 established the Trust and registered its corporate trustee. P1, P2, and P4 are directors, each holding an equal number and proportion of shares in the trust and the trustee.

To facilitate the investment in the property project with P3, you entered a joint venture with OT1 and OT2, being JV1. JV1 acquired two parcels of land.

The purpose of JV1 was to purchase these parcels of land, obtain a development agreement, and subsequently subdivide them into three lots, one for each trust. Once subdivision completed, JV1 was to be dissolved and each trust would acquire a parcel of land for development purposes via a deed of partition.

Each of JV1's participants paid approximately 1/3 each of the acquisition costs, and shared equally the subdivision costs and the later demolition costs once the existing rental property was demolished the following year in 20XX.

There was no mortgage taken out by you for the subdivision.

The rent from an existing residential property lease on the land was also divided equally amongst the JV participants. The rental term commenced in 20XX and concluded in 20XX.

P3 assisted with the handling of the subdivision. The JV1 participants in the land acquisition took a lot each, and a deed of partition drafted was enacted in 20XX. You acquired one lot.

JV1 was dissolved once the land parcels were conveyed through the partition deed to each of the three trusts participating in JV1.

Contract for building the rooming accommodation

Late in 20XX, you entered into an agreement to construct rooming accommodation on the property. You nominated P3 as your agent in that agreement. P3 recommended the builder. A bank loan was taken out against P1 and P2's residence to fund the construction. Construction was due to be completed by late 20XX.

The construction of the rooming accommodation was completed on XX Month of 20XX.

Events leading to the formation of a second joint venture (JV2)

To enhance their knowledge of property investment, P1 and P2 enrolled in a one-year professional program for $X in 20XX.

P1 and P2 started meeting with a property coach, who advised of disadvantages in having a long-term investment in a discretionary trust with P4. Concerns included:

•         succession and estate planning;

•         P4's ability to service the building loan if his financial situation changed; or

•         if P4 decided to exit the JV, P1 and P2 would likely be unable to refinance to buy P4 out.

P1 and P2 became nervous about their financial situation and entanglement with P4, whom they did not know well. P1 did not have a close relationship with P4 prior to establishing the Trust together. P1 and P2 realised that their agreement with P4 should be documented. P1 and P2 approached legal advisors to prepare a joint venture (JV) development agreement.

Joint Venture between the Trust members and Development Agreement

In 20XX, a preliminary JV development agreement to form a second joint venture (JV2) was drafted between P1, P2 and P4 (the JV participants). For clarity, JV2 only consists of beneficiaries of the Trust.

The JV Agreement was never intended to operate as a tax Joint Venture. It was a way of documenting the parties' understanding of profit distributions, funding requirements and how to handle any party's wish to exit or change their mind about development.

The JV2 agreement outlines how major and minor decision-making will be handled by the JV partners. The JV partners are equal partners for serviceability and equity. The JV agreement states an intention to generate rental income, with an intention to hold the property for at least 2 years. The partners will revisit intention every 2 years and they can sell the property outright (on mutual agreement) or one partner can be bought out by the others.

The JV2 agreement states that decisions will be made by the majority and that the JV partners agree to hold the property for at least 2 years from completion of build and to reassess intent as to whether to hold or sell.

In late 20XX, the development agreement was executed for the purpose of developing and managing a rooming house.

The development agreement appointed you as development manager, with P1 taking that role if other directors are unable to do so. Management of the rooming house was be contracted to a third party. A property management agency was engaged for the ongoing management and leasing of the property.

The agreement states that the objectives of the Trust are to carry on the Business and not to carry on any other business without prior written consent. The business in the definition is to undertake the project which consists of acquiring land, construction of premises and then renting and sale of the property. It also refers to any further details in the schedule which only discuss the purchase, building and rental of property.

Decision-making process and change of intention

In late 20XX, P1 and P2 considered long-term options as they became anxious about being in their JV with no clear exit strategies and its potential to affect obtaining future loans. They couldn't afford to buy P4 out of their share; and information from the professional program made them believe that refinancing was not an option either.

A fellow member of the professional program advised them that if they sold, they would yield a higher profit than the earlier feasibility figures projected, and the completed property's value would be higher too, based on demand for this property type.

P1, P2, and P4 discussed selling the property at a premium, rather than holding and renting it out.

P2 commenced speaking with real estate agents to discuss the advice they had received from the property education group.

P1 and P2 discussed this with P4, who was in favour of selling the property.

After researching and consultation with real estate agents, P1, P2 and P4 agreed to sell the property once completed.

In MM 20XX, property managers and agents were appointed, and the property was listed for rent and sale.

P2 was provided with some further advice from the sale agent and upon review they decided that the advice was not correct and felt that the potential financial risk was worth not pursuing, and they agreed to proceed with the sale of the property.

The property was marketed for sale online and via real estate databases through the property manager's agency.

The JV partners received an offer of $X million and sold the property. The property was fully tenanted when it sold.

In MM 20YY, the property settled.

Your tax returns were prepared on the basis that the property was held on capital account. No regular accounting or accounting software was used.

You sought legal professional services for your establishment, your trust deed, the development agreement and the joint venture agreement between P2, P1 and P4. You obtained a builder to understate the construction of the build. No other professional advice was sought prior to acquisition of the property. You own no other real property and do not intend to be involved in any other subdivision or development activity in the future. You, P1, P2 and P4 had not previously undertaken any property transactions.

Goods and Services Tax (GST)

In 20XX, P1 and P2's accountant advised them that GST would apply to the property sale and that they should register for GST, backdated to the date of land acquisition. P1 and P2 spoke to their property coach who suggested they seek a second opinion on this GST advice.

In 20XX, your tax agent registered you for GST effective from DD MM 20XX.

P1 and P2 then engaged a separate tax agent for advice in 20XX. Discussions were had about doubts that GST should apply in these circumstances.

Your GST role was later cancelled on the second tax agent's request on the basis that you were mistakenly registered for GST.

You did not lodge any business activity statements.

Sale of the rooming accommodation

On X Month in 20XX, you entered a sale contract to sell the property for $X. The previous sale agent was appointed as the selling agent.

In the sale contract, the buyers stated they were not registered for GST and were not acquiring the land for a creditable purpose. However, in the contract, it was agreed by the parties to the sale that, as per paragraph 14-255(1)(a) of the Taxation Administration Act 1953 (TAA), Schedule 1, section 14-250 (Withholding Law), you as the seller are required to notify the buyer to withhold GST and make a payment under section 14-250 of the Withholding Law.

In the sale contract, both parties agreed to apply the 'Margin Scheme' under Division 75 of the GST Act to calculate the GST payable on the sale price of the property.

The buyers' solicitor contacted your solicitors and questioned why there was a GST withholding requirement when the seller wasn't registered.

Your solicitors responded that this clause should not apply and that they were giving notice that it did not apply.

The buyers' solicitor responded that they were concerned that the original contract had the GST withholding clause and reference to the margin scheme. They stated they would terminate the contract if you wouldn't proceed under this condition.

The contract for sale contained the following attachments for the buyers' records:

•                     State land title reference and registration confirmation statement

•                     Tenancy schedule

•                     List of inclusions and inventory included in the accommodation for the use of tenants

The property settled in MM 20YY. Our records show that GST withholding process was followed.

The contract of sale indicates the sale included chattels to operate a rooming house.

Your contentions

You contend that the property sale was not a taxable supply and that GST advice previously provided to you by your former accountant was incorrect. You stated that due to timing issues around settlement of the property and the issuing of this decision, you and the buyer agreed that the margin scheme would apply, in the event of the Commissioner issuing a decision stating that GST applies to the transaction. In addition, the buyer was worried about their liability if they did not remit GST and it was later found that GST applied. Due to the large fines that can apply to a purchaser not remitting GST, they would not proceed with the contract unless it was on this basis.

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 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 9-25

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-1

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

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

Income Tax Assessment Act 1997 section 6-5

Taxation Administration Act 1953, Schedule 1, section 14-250

Reasons for decision

Question 1

Is the sale of the rooming accommodation (the property) a taxable supply under section 9-5 of A New Tax System (Goods and Services) Act of 1999 (GST Act)?

Summary

Yes, the sale of the property is a taxable supply under section 9-5 of the GST Act.

Detailed reasoning

In this answer to Question 1, any references to legislation are references to the GST Act unless otherwise stated. Any word preceded with an asterisk are defined terms under the GST Act.

Taxable Supply

Section 9-5 provides that you make a taxable supply if:

(a)          you make the supply for consideration; and

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

(c)          the supply is connected with the indirect tax zone; and

(d)          you are registered, or required to be registered.

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

At the outset, it is important to identify who is the 'you' referred to in section 9-5.

The facts indicate a number of entities were involved, including an initial joint venture (JV1) which dealt with the partition prior to construction and a subsequent joint venture (JV2) was entered into by the beneficiaries of the Trust. JV2 was not a true joint venture as they did not share product and is only described as such in the facts to indicate the steps taken. The entity of relevance (the 'you' referred to above) is the Trust as it the entity that maintained the ownership and completed the sale of the property.

If you meet the criteria set out above, the supply of the property was a taxable supply. The application of these provisions is set out in turn below.

Supply for consideration and connected with the indirect tax zone

You are a corporate trustee acting on behalf of the Trust in the development, rental and subsequent sale of the newly constructed property in 20XX.

The facts indicate that on DD MM 20XX, you entered into a contract to sell the property for $X. The contract was settled on DD MM 20XX. On this basis, you made an arms' length supply of the property for the consideration stipulated and in doing so satisfied paragraph 9-5(a).

You are an entity domiciled in Australia and sold the property in Australia. Subsection 9-25(4) states that "A supply of real property is connected with Australia if the real property is in Australia". Therefore, you satisfy paragraph 9-5(c) as the sale is connected to the indirect tax zone (Australia).

Supply in the course of your enterprise

Under subsection 9-20(1), an enterprise is an activity, or series of activities, done:

(a)          in the form of a business; or

(b)          in the form of an adventure or concern in the nature of trade; or

(c)          on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

Subsection 9-20(2) specifies what is not an enterprise but none of those exemptions apply here.

By definition, the activities of licencing real property amount to the carrying on of an enterprise under paragraph 9-20(1)(c).

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) states in paragraph 159 that whether or not an activity, or series of activities amount to an enterprise is a 'question of fact and degree having regard to all of the circumstances of the case'.

A one-off project

There is a second head of enterprise that may apply as we consider that there is evidence that you were conducting an adventure in the nature of trade or as a one-off activity as a profit-making undertaking or scheme under paragraph 9-20(1)(b).

MT 2006/1 discusses adventures in the nature of trade from paragraph 233.

This can apply in circumstances where the activities are intended to be a one-off. It is not a defined term but is a result of the development of case law over time.

MT 2006/1 describes it in this way at paragraph 237:

237.       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 require the features of a business deal, see McClelland v. Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

MT 2006/1 at paragraph 244 adds that:

An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

As adventures or concerns in the nature of trade involve trade, it is necessary to consider the meaning of trade.

Paragraph 252 of MT 2006/1 states that improving a property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

Paragraphs 262 to 302 of MT 2006/1 deal with isolated transactions and sales of real property. The ruling provides that often the question of whether an entity is carrying on an enterprise arises where there is a one-off activity or isolated real property transaction. The issue to be decided in such cases is whether the one-off activity is of a revenue nature (an enterprise) or a mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 provides guidance for determining whether activities involving the sale of real estate are a business or an adventure or concern in the nature of trade as opposed to a mere realisation of a capital asset. It states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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. These factors are as follows:

•                    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.

MT 2006/1 also provides that in determining whether activities relating to an isolated transaction are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of the particular case. In addition to the factors outlined above, there may be other relevant factors that need to be considered in 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.

A trading asset is generally dealt with or traded within a short time after acquisition. However, assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

It is important to note that the nature of an asset can change from being a private or capital asset to that of trade and vice versa. Where a property that was not acquired for resale at a profit later becomes the subject of substantial renovations for sale or demolished to construct purpose-built structures such as yours, it is necessary to consider if the activities have a commercial flavour and whether the nature of the asset changes to one of trade. The following facts are relevant to a finding that this was more than a mere realisation but instead is more likely an adventure in the nature of trade.

•                    You changed the purpose of the use of the land from a lower density to a higher density yield.

•                    There was no additional land added, however, it is just as significant that the property was two adjoining lots you purchased in a joint venture with two other trusts. Your possession of the property came via a deed of partition with those 2 other trusts. This is activity going beyond that of a mere capital transaction.

•                    Based on the advice you received, it is clear that you had a coherent plan for the subdivision built on higher returns yet, despite the higher returns, you decided to sell the property after a very short time interval (i.e. the same month you entered agreements with residents, you marketed for sale).

•                    You did not borrow to fund the subdivision but you did borrow to fund the construction of the property.

•                    You erected a building on the land in the form of a X bedroom residence designed in a way that allows X people to reside in a rooming house style of accommodation rather than a standard residence format.

There are some factors pointing away from the premises as a trade asset:

•                    You did not bring the asset to account as a business asset and you did not claim interest as a deduction.

•                    You did not have a letterhead, an office or logos.

On balancing these factors, we consider the activities you undertook amount to trade rather than the sale of a capital asset. Originally, the property may have been capital in nature but your intention changed sometime between the demolition of the old house and completion of construction.

There are additional relevant factors pointing away from a capital sale. You engaged the services of a number of professionals including real estate agents, you attended property seminars and you obtained the services of legal professionals to draw up the trust deed, the joint venture agreement and development agreement. Further, the experts were engaged to guide you through the project. In Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation [2022] AATA 628 (Collins), SM Olding stated at paragraph 63:

That the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land is, I would have thought, a hallmark of modern subdivision projects. While that may mean Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work.

Collins is relevant to your circumstances. It indicates that smaller but complex developments can be more than mere realisations and can amount to an enterprise. It also indicates that entities with little experience but who have access to the right professional advice can operate in the form of trade or, as is more likely in your case, adventure in the nature of trade given that the facts indicate that this is a one-off activity for you.

Your stated reason for not holding the property long term was that you felt exposed by the potential that one of the beneficiaries of the Trust, P4, could leave at any time forcing you to sell. The facts indicate that two beneficiaries entered into a development agreement with that party and joint venture agreement to ameliorate that risk but, despite taking those steps, you put the property up for sale in the same period you obtained X licensees to reside in the property. You presented no evidence that the beneficiary who might have left the arrangement ever intended to leave the arrangement.

On this basis, we consider that even if your original intention was to hold the property long term, you changed your intention and chose to sell. For GST purposes, as discussed below, the Collins decision leads to the conclusion that the assessment of your intention is relevant at time of supply rather than when you acquired it.

Your activities, viewed as a whole, indicate that you meet both paragraphs 9-20(1)(b) and (c) of the enterprise definition as you were engaged in licencing real property and your activities were also conducted as a one-off venture conducted in a business-like way. The significance of a finding under paragraph 9-20(1)(b) is discussed later in determining whether you are required to be registered.

Section 195-1 defines 'carrying on an enterprise' to include:

doing anything in the course of the commencement or termination of the enterprise. When you sell the property, you also do that in the course of your enterprise.

Input taxed or GST-free supply?

The definition of a taxable supply in section 9-5 has a final test of whether the supply is input taxed or GST-free. There is no GST-free supply that can apply as the sale was not a going concern for GST purposes. However, there is a question of whether the supply of the property is input taxed or taxable. A supply of property can only be taxable as either new residential premises or as the sale of commercial residential premises.

The definition of 'residential premises' in section 195-1 refers to land or a building that is occupied as a residence or for residential accommodation, or is intended to be occupied, and is capable of being occupied as a residence or for residential accommodation (regardless of the term of occupation or intended occupation).

Section 40-65 sets out that the sale of residential premises will be input taxed unless they are new residential premises.

Section 40-75 defines 'new residential premises':

When premises are new residential premises

(1)          *Residential premises are new residential premises if they:

(a)         have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

(b)         have been created through *substantial renovations of a building; or

(c)         have been built, or contain a building that has been built, to replace demolished premises on the same land.

Paragraphs (b) and (c) have effect subject to paragraph (a).

Note 1:

For example, residential premises will be new residential premises if they are created as described in paragraph (b) or (c) to replace earlier premises that had ceased to be new residential premises because of paragraph (a).

(2)          However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

(a)         if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies) - the premises first became residential premises; or

(b)         if paragraph (1)(b) applies - the premises were last *substantially renovated; or

(c)         if paragraph (1)(c) applies - the premises were last built;

the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

In your case, the premises are new residential premises under paragraph 40-75(1)(c) as you demolished existing premises and it has not been more than five years since the buildings were constructed. Nor have the premises been leased for a five-year continuous period. Unless the premises are commercial residential premises they are new residential premises.

As the end result is the same whether they are new residential premises or commercial residential premises, consideration of commercial residential premises has been omitted.

The final issue to be determined is whether you are required to be registered for GST from the date of the sale.

Paragraph 9-5 (d): Required to be registered for GST

You advised that you were registered for GST but you considered this an error and, as a result, you backdated the cancellation of your deregistration. We need to examine whether you should have been registered for GST when you sold the property given that the inclusion of the sale of the property in your turnover calculation will exceed the threshold.

Section 23-5 states that an entity is required to be registered if:

(a)          it is carrying on an enterprise: and

(b)          its annual turnover meets the registration turnover threshold

If your GST turnover is below $75,000, your turnover is below the registration turnover threshold referred to in paragraph 23-5(b).

Division 188 is, amongst other things, about how the GST turnover threshold is calculated.

Paragraphs 188-15(1)(a) and 188-20(1)(a) of the GST Act provide that input taxed supplies are disregarded when calculating your current and projected GST turnover.

In our view, your supply of rental premises through the rooming accommodation was an input taxed supply as it was not commercial residential premises. As such, rental proceeds from the rental of the property are not included in the calculation of your GST turnover. Even if this is incorrect and you are engaged in a taxable activity of creating commercial residential premises licencing, the rents received would be under the GST turnover threshold. The sale of the premises exceeded the projected GST turnover threshold for the reasons discussed below.

Under s 188-10(1), an entity has a GST turnover that meets a turnover threshold if:

(a)          your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

(b)          your projected GST turnover is at or above the turnover threshold.

Under s 188-10(2), an entity has a GST turnover that does not exceed a turnover threshold if:

(a)          your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

(b)          your projected GST turnover is at or below the turnover threshold.

Section 188-25 provides:

In working out your * projected GST turnover, disregard:

(a)          any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)          any supply made, or likely to be made, by you solely as a consequence of:

(i)         ceasing to carry on an * enterprise; or

(ii)         substantially and permanently reducing the size or scale of an enterprise.

Section 188-25 of the GST Act provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours. Since we have also established that the sale of the rooming accommodation was not a mere realisation of capital asset and will not be assessed for capital gains tax calculation under section 100-40 of the Income Tax Assessment Act 1997 (ITAA 1997), it will not be excluded from the GST threshold for projected turnover under paragraph 188-25(1)(a) as a capital sale.

The next stage of our analysis is whether subparagraph 188-25(1)(b)(i)(ii) applies to exclude the sale from turnover calculations.

In Collins, this provision was considered and the purpose was explained in this way at paragraph 69:

It is self-evident that the purpose of the registration turnover threshold is to allow small enterprises to choose to remain out of the GST regime. Against that background, inferentially the purpose of s 188-25(b) is to exclude from consideration the value of projected supplies that are outside the usual run of transactions and, if included, would distort an assessment of the scale of an entity's enterprise.

And at paragraph 72 he added:

I am, with respect, quite unable to see how it could be said that the Sales would be made solely as a consequence of ceasing to carry on the land development enterprise. That enterprise did not cease before the last of the Sales were completed.

There is additional elaboration at paragraphs 73, and 75 to 78:

73. More to the point, in my view the applicant's characterisation of the Sales or even the final sale as made as a consequence of ceasing to carry on the land development, let alone solely as a consequence of the ceasing of that enterprise, is not reasonably open. A land development venture may be said to cease as a consequence of the sale of the subject lands or perhaps the final sale. But that is the inverse of what s 188-25(b)(i) requires. It would in my view be quite artificial to say such sales occur in consequence of the business ceasing. The sale of lands is the central objective of a land development enterprise and occurs as part and parcel of - as a consequence of - the ongoing conduct of the enterprise. The sales do not occur as a consequence of the enterprise ceasing.

...

75. The land development venture broadly comprised the subdivision and sale of the subdivided lots. That was the applicant's enterprise throughout the course of its relevant activities. That enterprise did not change until, at the earliest, the sale of the final lot.

76. It might be said that the scale of that enterprise substantially and permanently reduced as a consequence of the Sales. But, as with the applicant's s 188-25(b)(i) argument, that is the inverse of what s 188-25(b)(ii) requires - that the supplies are solely as a consequence of a substantial and permanent reduction in the size or scale of an enterprise.

77. In my view the characterisation of the Sales or even the final sale as made in consequence of a substantial and permanent reduction in the size or scale of the applicant's land development enterprise is not reasonably open. The Sales were made in the course of and as a consequence of carrying on the enterprise, not as a consequence of a reduction in its size or scale.

78. Additionally, the applicant's approach under either limb of s 188-25(b) would mean land developers could escape GST on the footing that land sales transacted in the ordinary course of their businesses are made solely in consequence of ceasing or substantially and permanently reducing the size or scale of their enterprise. A construction with such outcomes for a substantial sector of the economy, which the GST Act plainly contemplates being subject to GST, is unlikely to have been intended, especially when it depends upon inversion of the natural application of the statutory words.

From this, we can conclude that where the sale is made in the course of a land development enterprise, the sale is not representative of either a reduction in size of the enterprise or the permanent cessation of that enterprise. In this case, we have concluded the sale was made in the pursuit of two potential enterprises being the rental enterprise and the one-off profit-making undertaking or scheme of trading in the property. On this basis, we consider the provision applies to your enterprises to include the sale in your GST turnover threshold as the activities are similar to those of a development enterprise and, as a result of that finding, its sale is not outside the 'usual run of transactions' that is expected of an enterprise of your type.

Therefore, even though you are not registered for GST, we consider that you are required to be registered as you exceed the GST turnover threshold as at the date of settlement. You should be registered for GST at least from the date of the sale. We consider that your registration can be backdated to include your earliest potential input tax credits; such as the date you entered the construction contract with the builder.

Questions 2, 3 and 4

Issue

Is the sale of the property assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as either a result of carrying on a business of property development, or as a result of an isolated transaction carried out for profit and commercial in character; or assessable under the capital gains tax (CGT) provisions in Part 3-1 and Part 3-3 of the ITAA 1997 as a result of a realisation of a capital asset?

Summary

The profit from the sale of the property will be assessable as ordinary income under section 6-5 of theITAA 1997, resulting from an isolated transaction carried out for profit-making and commercial in character.

Section 118-20 of the ITAA 1997 will operate to reduce any capital gains by any amounts which are included in your assessable income.

Detailed reasoning

Income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the ITAA 1997 provides that your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income.

Broadly, there are three main ways the proceeds from a property development can be treated for taxation purposes:

•                     as ordinary income under section 6-5 of the ITAA 1997, on revenue account as a result of carrying on a business of property development, involving the sale of land as trading stock

•                     as ordinary income under section 6-5 of the ITAA 1997, on revenue account as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose

•                     as statutory income under the CGT legislation, from a mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 of the ITAA 1997 in accordance with section 6-10 of the ITAA 1997.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

We will consider each of these in relation to your situation as follows.

Carrying on a business

Section 995-1 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property.

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? which uses the following indicators to determine whether a taxpayer is carrying on a business:

•                     whether the activity has a significant commercial purpose or character;

•                     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; and

•                     whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Profits from isolated transaction

Profits arising from an isolated commercial transaction will be ordinary income if the purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of a taxpayer's business (FC of T v Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are ordinary income and assessable under section 6-5 of the ITAA 1997.

The term isolated transaction refers to:

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

•                     those transactions entered into by non-business taxpayers.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

Paragraph 35 of TR 92/3 provides that a profit from an isolated transaction will be ordinary income where:

•                     the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

•                     the transaction was entered into and the profit was made in the course of carrying on a business operation or commercial transaction.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the subdivision activities have become a separate business operation or commercial transaction, or an isolated profit-making venture.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Paragraph 13 of TR 92/3 lists the following factors:

•                     the nature of the entity undertaking the operation or transaction

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

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

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

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

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

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

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

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Paragraphs 56 and 57 of TR 92/3 explains that a profit is income where it is made in any of the following situations:

•                     a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose, or

•                     a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit, or

•                     a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

In very general terms a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Paragraph 42 of TR 92/3 explains that when a taxpayer's intended use of an asset changes, and they decide to venture into a profit-making scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer will constitute the carrying out of a profit-making scheme, although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

However, paragraph 44 of TR 92/3 explains when a taxpayer derives a profit from a transaction outside the ordinary course of carrying on its business and the taxpayer did not enter that transaction with the purpose of making a profit, the profit is not assessable income.

MT 2006/1 aligns with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on. Relevant factors include:

•                     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;

•                     borrowed funds financed the acquisition or subdivision;

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

It is emphasised at paragraph 266 of MT 2006/1 that no single factor is determinative, rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Capital gains tax

The CGT provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 happens if you dispose of your ownership interest in a CGT asset. You make a capital gain if the proceeds from the sale of the CGT asset are more than the asset's cost base. You make a capital loss if the proceeds from the sale of the CGT asset are less than the cost base of the asset. Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes their net capital gain (if any) for the income year.

When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event. Each of the new assets, being each subdivided lot, will be viewed as having been acquired on the same date as the original asset for CGT purposes.

As a general rule, a taxpayer is required to include in their assessable income any capital gain they make from a CGT event that happens to a CGT asset the taxpayer acquired on or after 20 September 1985. Pursuant to section 108-5 of the ITAA 1997, a CGT asset is any kind of property, or a legal or equitable right that is not property. Accordingly, land and buildings are CGT assets.

A capital gain will be made if the cost base of the asset is less than the capital proceeds in accordance with section 102-5 of the ITAA 1997.

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sales.

Application to your circumstances

With consideration to the above authorities and relevant factors in determining whether the sale of the property would be viewed as isolated transaction with a view to a profit-making of commercial character, the following general observations have been made in this case:

•                     It is you that has been carrying out the property development activities. You are not in the business of property development. Accordingly, the sale of the property is not a sale made in the ordinary course of your business.

•                     In your case, you purchased the property on DD MM 20XX, and originally intended to hold the property as a long-term investment. However, after becoming aware of the risks of being in a trust structure, your intentions changed at various points in time, and you sought to determine the most profitable course of action regarding holding or selling the property.

•                     You signed up to a professional program in 20XX. You engaged legal services and registered a corporate trustee and established a trust for the purpose of acquiring and developing property on DD MM 20XX. You acquired an ABN on DD MM 20XX. You have not made a family trust election.

•                     You engaged legal services to execute a development agreement and enter into joint ventures on DD MM 20XX.

•                     You engaged professional services for the property subdivision upon acquisition, to develop add build a new dwelling on the land.

•                     You had readily available funds for the acquisition of the property, with each joint venture partner paying approximately 1/3 each for the purchase price, the subdivision cost and demolition costs. The construction cost of the new dwelling was $X and was funded by a bank loan taken out against P1 and P2's residence.

•                     You were assisted by Trust member P3 who has experience in development of this nature.

•                     You revisited feasibility studies you had engaged in, planned and documented these activities in a businesslike manner.

•                     You acquired the property from an unrelated party and sold the property to an unrelated party in the public market. You sought advice from your property education group, real estate agents and various other sources to determine the most profitable course of action.

•                     You were advised that demand for this type of property was currently high and if sold earlier than previously planned, would yield an additional $X in profit from their previous projections.

•                     You appointed a real estate agent over the property and listed it publicly for rent and sale.

•                     The establishment of a trust and corporate trustee requires you to meet obligations under various complex laws such as trust law, corporations law, and taxation laws. The actions you undertook to subdivide, develop and sell the property were similar to what a person in business, such as a professional developer, would have undertaken. These factors all support the commerciality of the development and sale of the property.

•                     The decision to pursue the development of the property shows a choice by you to engage in the exposure to the financial risks of the parties involved of the subdivision and high costs involved in development of the property prior to sale, with the general aim and purpose being realisation of maximising the potential profit made on the sale of the property.

•                     The activities involved in undertaking the subdivision and development of the property activities are considered to be commercial in character given the various entities involved, professional courses undertaken by key individuals in this venture, funds and risks exposed by those providing funding, various works required by various professionals including period to undertake and up to completion of this venture.

Based on the above, it is the Commissioner's view that the sale of the property is more than a mere realisation of a capital asset or investment. The significant purpose in undertaking these activities was to sell at a profit. Although the property was intended to be held long term as a rental property, the subsequent disposal of the property was considered the most profitable course of action, and therefore would be considered an isolated transaction on revenue account as ordinary income, rather than on capital account. Any profit made on the transaction is assessable income under section 6-5 of the ITAA 1997.

CGT event A1 will occur on the disposal of ownership of the property. The capital gain for each event is worked out by comparing the cost base of the asset with the capital proceeds for its disposal. Section 118-20 of the ITAA 1997 applies such that any capital gain made on the disposal of the property will be reduced to the extent that the profit from the sale of the property is included in your assessable income under section 6-5 of the ITAA 1997.

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