Edited version of private advice

Authorisation Number: 5010101901435

Date of advice: 7 May 2024

Ruling

Subject: GST - subdivision of property

Question 1

Will the sale of the property at xxxx (Property) by xxxx (Trustee) be a taxable supply under section 9-5 of a New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale of the Property would not be a taxable supply under section 9-5 of the GST.

Question 2

Will the sale of the property at xxxx (Property A) by the Trustee be a taxable supply under section 9-5 of the GST Act?

Answer

No. The sale of Property A would not be a taxable supply under section 9-5 of the GST.

Question 3

Where there is GST applicable to the sale of the Property or Property A, when should the Trustee be registered for GST?

Answer

No response required.

Question 4

Where there is GST applicable on the sale of Property A, can GST be claimed on all expenses related to the construction of Property A?

Answer

No response required.

Question 5

Where GST can be claimed on the sale of Property A, in what period can it be claimed?

Answer

No response required.

Question 6

Where there is GST on sale of either the Property or Property A, can the margin scheme be applied?

Answer

No response required.

Question 7

For Capital Gains Tax, is the acquisition date of Property A considered to be the date the land was acquired and therefore 50% discount can be applied if there is a gain, and it is distributed to a beneficiary who is an individual?

Answer

Yes.

This ruling applies for the following period:

1 July 2023 to 30 June 2026

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The Trustee purchased a property at xxxx (Original Property) which consisted of residential premises.

The Original Property was not purchased as a taxable supply.

The Trustee is currently not registered for GST.

The residential premises on the Original Property has been rented out for a period of longer than five years. No GST credits have ever been claimed by the Trustee on expenses incurred in relation to the Property during this period.

On xxxx, the Original Property was subdivided to include one lot that retained the existing dwelling (Property) and a new lot of vacant land. The new subdivided land is now referred to as xxxx (Property A).

Construction on Property A commenced in xxxx and was completed on xxxx with a total construction cost of $xxxx. Property A is a XXX-bedroom dwelling.

No GST credits were claimed on the construction costs in the development of Property A.

The Trustee' intention was always to rent out Property A as well as the Property, however due to financial distress caused by higher-than-expected construction costs and high interest rates, the Trustee will be selling both properties and will close the Trust.

Property A has always been vacant, and no income has been generated from it.

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 23-5

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

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

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

(b)  You make the supply in the course or furtherance of an *enterprise that you *carry on; and

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

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

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

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

On the basis that the Trustee will make the supply for consideration, the supply satisfies paragraph 9-5(a) and 9-5(c) of the GST Act.

Enterprise

Section 9-20 of the GST Act provides an enterprise is an activity, or series of activities, done (among other things) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Section 195-1 provides that the term 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Following the acquisition of the Original Property, the Trustee has leased the existing residential premises. Therefore, the Trustee carried on an enterprise of leasing residential property and will satisfy paragraph 9-5(b) of the GST Act.

Turnover

Section 23-5 of the GST Act states:

You are required to be registered under this Act if:

a)    you are *carrying on an *enterprise; and

b)    your *GST turnover meets the *registration turnover threshold.

Section 188-10 of the GST Act provides that you have a GST turnover that meets the particular registration turnover threshold if:

•         your current GST turnover is at or above the turnover threshold, and the Commissioner is satisfied that your projected GST turnover is below the turnover threshold, or

•         your projected GST turnover is at or below the turnover threshold.

Further, section 188-25 of the GST Act requires you to disregard the following when calculating your projected annual turnover:

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.

This issue of GST turnover is considered in Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7).

Paragraphs 31 to 34 of GSTR 2001/7 states:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject'of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'

In application to the Trustee's situation, the Property and Property A are a capital asset in relation to the Trustee's leasing enterprise which is ceasing. Therefore, the sale amount for the Property and Property A would not be included in the calculation of GST turnover as the requirements of section 188-25 of the GST Act are met.

On this basis the Trustee is not required to register for GST. As the Trustee is not registered of required to be registered for GST, paragraph 9-5(d) of the GST Act is not satisfied. It follows that the supply of the Property and Property A would not be considered a taxable supply under section 9-5.

Note

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) provides the Commissioner' view on the meaning of an enterprise.

MT 2006/1 provides that assets can change their character from investment, which is capital in nature, to trade and therefore revenue in nature (paragraphs 258 to 260). If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant (paragraph 254). The characteristics of trade are explained in paragraphs 243 to 261 and include the length of period of ownership and the frequency or number of similar transactions. In particular attention is drawn to paragraph 251 of MT 2006/1 which states:

251. The greater the frequency of similar transactions the greater the likelihood of trade.

Question 7

For Capital Gains Tax, is the acquisition date of Property A considered to be the date the land was acquired and therefore a 50% discount can be applied if there is a gain, and it is distributed to a beneficiary who is an individual?

Summary

Yes. The Trustee is entitled to a 50% discount under section 112-25 in accordance with section 115-100 of the ITAA 1997 on the capital gain from the original half share.

Detailed reasoning

CGT provisions

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when the Trustee disposes of property. The Trustee will make a capital gain if the capital proceeds from the disposal of the property are more than the cost base. The Trustee will make a capital loss if those capital proceeds are less than the reduced cost base of the property.

Under section 115-100 of the ITAA 1997 there is a discount of 50% for certain capital gains.

Section 115-25 of the ITAA 1997 states:

"To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. "

When subdividing a block of land, each block should be registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks under section 112-25. You do not make a capital gain or a capital loss at the time of subdividing the property.

Paragraph 2 of Taxation Determination TD 97/3 (TD 97/3) states that:

2. We consider that the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3, to divide the original land parcel into two or more assets (viz., the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.

In the Trustee's scenario, the subdivided block on which the sold dwelling was situated had been subdivided from the larger block that was acquired. The Trustee will sell the subdivided land with the new dwelling on it. As the land with the dwelling on it was sold more than 12 months after the property was acquired, the CGT 50% discount will apply to the A1 event that happened on sale of the property.

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 1997 outside of Part 3-1 of that Act as a result of the sale of the property.

Subsection 118-20(1)(a) of the ITAA 1997 will operate in relation to profits from land/property developments where an isolated transaction is found as follows:

A capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in:

a)    your assessable income or exempt income; or

b)    if you are a partner in a partnership, the assessable income or exempt income of the partnership.

CGT discount

A general 50% discount can be applied to a capital gain if certain conditions are met under Division 115 of the ITAA 1997. The main condition is that the CGT asset was acquired by the Trustee at least 12 months before the CGT event (section 115-25 of the ITAA 1997).

As the Trust acquired its share in the land more than 12 months before the CGT event, the Trustee is entitled to a 50% discount (section 112-25 in accordance with section 115-100 of the ITAA 1997) on the capital gain from the original half share.

Further information

The cost base of the original property will be apportioned between the subdivided blocks on a reasonable basis in accordance with the examples contained in TD 97/3.

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