Edited version of your private ruling

Authorisation Number: 1012501106250

Ruling

Subject: Assessable income and capital gains tax

Question 1

Will the proposed subdivision be subject to income tax legislation?

Answer

No

Question 2

Will the proposed subdivision of farming land and subsequent sale of lots be subject to capital gains legislation as it is a mere realisation of capital asset?

Answer

No

Question 3

Is the sale of the proposed subdivision subject to goods and services tax (GST)?

Answer

No, the sale of the proposed subdivision is not subject to GST.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are intending to subdivide part of your rural property comprising a total of x acres (the property).

The property is zoned low density residential which sets lots to range from y hectares to z hectares.

The property was initially inherited from your parent, upon their death in 19XX.

You were approached by the council's local planning department in the 19YYs in relation to a shortage of land for urban expansion. This planning scheme sought a quantity of lots v hectares in size. As a result you provided X lots (Y hectares). These lots were sold between 19ZZ and 19XY.

On dd/mm/yyyy you intended to sell an additional allotment of land to your child however, an error occurred and the property mentioned above was also transferred.

Your child died on dd/mm/yyyy and the property was subsequently transferred from their estate to you and your spouse as tenants in common on dd/mm/yyyy being the next of kin.

In the interest of the proposed subdivision the ownership structure was changed on dd/mm/yyyy to include your spouse as a joint owner with you as tenants in common.

After inheriting the land in 19XX you carried on the business of primary production in partnership with your spouse, until you retired in 19XZ. Since your retirement the property has been used for agistment purposes.

Since inheriting the land you have sold off various parcels of land as a mere realisation of a capital asset. In addition considerable land has been compulsorily acquired by government departments and subsequently re-acquired.

This subdivision was instigated by the planning schemes formulated by your Rural City Council's local planning department. A draft rural living study was commissioned by the council in response to the lack of an adequate strategic framework for rural living in the municipality. The study anticipated that xy lots could be supplied from the property. However, the subdivision, as designed by consultants, only contains xx lots.

The subdivision is in the preparation stages and is intended to be carried out over the following stages.

· The first stage will comprise xy lots.

· The second stage will comprise of xz lots.

· The thirds stage will comprise of xx lots.

· The fourth stage will comprise of yy lots.

· The fifth and final stage will comprise of yz lots.

Once each stage is completed the land sales from that stage will fund the consecutive stage to commence.

Due to the location and nature of the subdivision, you will incur costs, however; it is your intention to incur minimum expenditure to comply with local government regulations. To date expenditure has been limited to consultant and advisor fees.

Stage one does not require any additional roads to be constructed, however the remaining stages will require internal roads to be constructed.

The land sales will occur through real estate agents.

You will have minimal involvement during the subdivision process which primarily consists of meetings with consultants and advisors.

The connection between you and the consultants/advisors is of a commercial nature only. All appointed consultants are independent to the developers and have no financial involvement with the development.

It is expected due to your age and health you will only achieve the completion of stage one of the subdivision.

It is anticipated that your deceased estate will become responsible for the completion of stage two through to an including the final stage five.

Your spouse has subsequently passed away. As a consequence, your spouse's interest in the land subject to the subdivision has transferred to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 108-70(3)

Income Tax Assessment Act 1997 section 108-80

Income Tax Assessment Act 1997 subsection 108-85(3)

Income Tax Assessment Act 1997 subsection 112-25(2)

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

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

Reasons for decision

Question 1

Summary

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation are references to sections of the ITAA 1997 unless otherwise stated.

Under section 6-5 your assessable income includes ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 includes profit arising from carrying on or carrying out of a profit-making undertaking or plan.

Detailed reasoning

Taxation Ruling TR 92/3 discusses profits on isolated transactions and states that profits on an isolated transaction may be income.

Profit from an isolated transaction will be ordinary income when:

(a) the intention or purpose of a 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 on a business operation or commercial transaction.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that a transaction is business or commercial in nature.

If a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either:

· as the capital of a business; or

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

this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

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

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

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

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

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

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

(g) if the transaction involved the acquisition and disposal of property, the nature of that property

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

Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5, or as a profit making undertaking or plan within section 15-15, if the taxpayer's subdivisional activities become a separate business operation or commercial transaction, or an isolated profit making venture.

In deciding your case, it is appropriate to examine some of the court decisions in similar cases.

In FC of T v. Williams 72 ATC 4188; (1972) 127 CLR 226 (Williams) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power was to enable the owner to secure the best price for land and did not amount to carrying out a profit making scheme. The proceeds resulted from a mere realisation of a capital asset and were not income.

In Statham & Anor v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 (Statham) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over, to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means.

Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) considered the sale of farming land. The proceeds were held not to be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5.

In Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amounted to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks.

In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 the court found that the taxpayer's activities in relation to the subdivision of the land amounted to more than the realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot.

Application to your circumstances

The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to your subdivisional activities to determine whether your subdivisional activities amount to the carrying on of a business:

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

You and your spouse owned the property as tenants in common and operated an agistment business on the property as a partnership. Sadly your spouse passed away on dd/mm/yyyy. As a consequence, your spouse's interest in the land subject to the subdivision has passed to yourself.

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

You are a retired primary producer. Over the years you have sold off various parcels of the inherited land as a mere realisation of a capital asset.

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

To date you have spent $X in consultant fees and the estimated cost for the x lot stage one subdivision is $Y (this cost does not include the costs associated with the sale of the blocks). You anticipate that the blocks may sell for $Z per lot, however only y of the x lots will be made available for sale due to planning restrictions. The remaining blocks will require internal roads to be constructed therefore the associated costs for these stages will be higher than that of stage one. The land sales from stage one will fund the consecutive stage to commence. This process will continue through to stage five. Therefore the amount of money involved is minimal as the sale of land will pay for the next stage to commence. As a result the profit sought is only in line with realising a capital asset.

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

Stage one of the subdivision will only require the necessary works to comply with the local government regulations as the road system is already in place. However, the remaining stages will require an internal road system. The proposed subdivision will be conducted in five stages and will consist of xy blocks. Therefore it is a large scale subdivision that will be conducted over an indefinite amount of time which involves minimal development of the land to satisfy the local council regulations.

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

The property was obtained prior to 20 September 1985 and was used for primary production purposes, until your retirement in 19YY. After your retirement the property has been used for agistment purposes. The property was already zoned as low density residential and as a result the local council proposed the land subdivision in relation to future rural living development.

Consultants will be engaged to carry out the necessary work for the subdivision as required by the council and real estate agents will be engaged to arrange for the marketing and sale of the blocks.

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

The Council approached you regarding a potential subdivision of the property that could meet the needs of future strategic expansion of the municipality. You had also been approached by the local council in the 19YYs where you also provided some land for subdivision. You will engage professionals in a commercial nature to undertake all necessary work involved in the subdivision, including the sale of the blocks. Your involvement will be limited to meetings with consultants and advisors.

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

The property was inherited prior to 20 September 1985 and was used for primary production purposes, until your retirement in 19YY. After your retirement the property has been used for agistment purposes.

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

The proposed subdivision will take place in five stages with construction on each subsequent stage only commencing after the previous stage has been completed and blocks sold. Therefore no timeframe for completion can be provided.

Therefore,

· The facts in this case do not indicate that your intention in entering into the relevant transaction was to make a profit from any future sale of lands. You wish to merely realise a capital asset; and

· The transactions do not have the character of business operations or commercial transactions. There is no indication that your subdivisional activities became a separate business operation or commercial transaction, or that you were carrying on or carrying out a profit-making undertaking or plan.

As a result the proceeds from the subdivision of the property are not ordinary income and not assessable under section 6-5 and 15-15. They represent a mere realisation of capital assets as per the established principles in the Williams, Statham and Casimaty cases, and will fall for consideration under the capital gains tax (CGT) provisions.

Question 2

Summary

As discussed above, the disposal of the property is a realisation of capital assets, and therefore the proceeds from the lands subdivision will fall for consideration under the CGT provisions.

Detailed reasoning

CGT event A1 in section 104-10, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. Under subsection 104-10(4), you make capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block.

However, subsection 104-10(5) contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985 (pre-CGT). Where pre-CGT land is subdivided after 20 September 1985, the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event under subsection 112-25(2).

Under subsection 108-70(3) capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event, for example a disposal, happens in relation to the asset, is:

(a) more than the improvement threshold for the relevant income year; and

(b) more than 5% of the capital proceeds from the event.

The capital improvement threshold under subsection 108-85(3) for the year ended 30 June 2013 is $134,200. The improvement threshold is indexed annually.

Application to your circumstances

In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80. The total cost of these improvements is to be allocated over all the subdivided blocks.

Accordingly, if the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold for the relevant year then, for the purposes of any subsequent disposal by you of any of the blocks of land, the capital improvement is not taken to be a separate CGT asset.

As you acquired the property before 20 September 1985, the subdivided blocks maintain the pre-CGT acquisition dates. The capital improvement expenditure was less than the improvement threshold for the 2013 income year. The subdivided blocks are not taken to be a separate CGT asset therefore the gains on the sale of the blocks are not subject to CGT.

As noted previously your spouse passed away on dd/mm/yyyy. As a consequence, your spouse's interest in the land subject to the subdivision has transferred to you. As per subsection 128-15(2) your date of acquisition in relation to your interest in the pre CGT land inherited from your spouse will be deemed to be acquired on their date of death, at its market value on that date. For the post CGT land previously owned jointly by yourself and your spouse and inherited by yourself upon your spouse's passing, you will inherit the share of the cost base held previously by your spouse on their date of death as per subsection 128-15(4).

Question 3

Summary

The sale of the proposed subdivision is not subject to GST.

Detailed reasoning

GST is payable on taxable supplies.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply you make.

A supply is a taxable supply if all the requirements of section 9-5 of the GST Act are met. Section 9-5 of the GST Act provides that you make a taxable supply if the supply is made for consideration; in the course or furtherance of an enterprise that you carry on; the supply is connected with Australia and 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.

All the requirements under section 9-5 of the GST Act need to be satisfied for a supply to be taxable.

In your case, what needs to be determined is:

· whether the sale of the subdivided land will be in the course or furtherance of an enterprise carried on by you; and

· whether you are required to be registered.

Are you carrying on an enterprise of land subdivision?

Section 9-20 of the GST Act provides the definition of enterprise for GST purposes. This definition includes an activity or series of activities done in the form of a business; or in the form of an adventure or concern in the nature of trade; or on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in the property.

You initially inherited the property from your parent in 19XX and continued to use the land for primary production activities through to your retirement in 19YY. You informed that since you retired you have leased the land to other farmers for agistment and presently to hold stock. As such, you have been carrying on an enterprise of leasing on the land.

In this case, we also need to consider whether your activities of land subdivision constitute an enterprise.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on the meaning of 'enterprise' for the purposes of entitlement to an Australian business number.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

In accordance with paragraph 159 of MT 2006/1, whether or not an activity, or series of activities, constitutes an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

There are several other points raised by MT 2006/1 which are of relevance to your circumstances:

· Assets can be categorised as either trading assets or investment/capital assets. 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 (paragraph 258).

· Examples of investment/capital assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere realisation of investment/capital assets does not amount to trade (paragraph 259).

· The mere realisation of a capital/investment asset is not a business or an adventure or concern in the nature of trade (paragraph 263).

In your case, since your inheritance you have, from time to time, sold off various parcels of land as a mere realisation of capital assets. You have also since your retirement lease your land to derive income. In this case, as per paragraph 258, we agree that your land can be categorised as an investment/capital asset.

Therefore, based on the facts provided, we are satisfied that you are disposing of a capital asset when you sell the land. As stated in paragraph 259 of MT 2006/1 the disposal of investment/capital assets does not amount to trade. Paragraph 263 of MT 2006/1 also provides that the sale of a capital asset is not a business or an adventure or concern in the nature of trade despite the size of the assets.

Are you required to be registered for GST in relation to the disposal of your investment/capital asset?

Under section 23-5 of the GST Act, an entity is required to be registered if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

Currently, the registration turnover threshold is $75,000 (or $150,000 for a non-profit body).

You have informed us that you are not required to be registered in relation to your land leasing enterprise.

Furthermore, the disposal of your investment assets does not amount to trade and is not a business or an adventure or concern in the nature of trade.

In your case, according to the circumstances described above, the disposal of your land is considered to be a mere disposal of a capital asset. Therefore, in this case as you are not considered to be carrying on an enterprise of land subdivision there is no need for you to register for the GST in relation to the disposal of your capital asset.

For there to be a taxable supply all the requirements under section 9-5 of the GST Act need to be satisfied. As you are not considered to be carrying on an enterprise of land subdivision not all the requirements under section 9-5 of the GST Act is satisfied. Therefore, you will not be making a taxable supply on the disposal of your capital asset.