Edited version of your written advice

Authorisation Number: 1012772186106

Ruling

Subject: CGT - disposal

Issue 1

Question 1

Where the purchaser elects to have up to XX% of the property settled early (partial settlement), will you be required to bring to account a capital gain with respect to the portion of the property settled when the partial settlement occurs?

Answer

Yes

Question 2

Will granting access to the purchaser of the property for preliminary or minor works prior to settlement cause CGT event B1?

Answer

Decline to rule

Question 3

Where a partial settlement occurs, will the CGT cost base of the property need to be apportioned?

Answer

Yes

Issue 2

Question 1

Are you required to be registered under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No, you are not required to be registered under section 23-5 of the GST Act, because your GST turnover does not meet the registration turnover threshold.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are not registered for goods and services tax (GST).

You jointly purchased the property in 1996.

A business has been operated on the property by you since acquisition. The turnover from the business does not meet the GST registration turnover threshold. The value of all supplies that you have made, or are likely to make, during this month and the next 11 months, in the enterprise is below $75,000. You do not make supplies to any associated entities.

The property is also your principle place of residence.

In November 20XX you signed a contract to sell the property to another entity.

You stated that the purchasers may wish to carry out some minor works on the property prior to settlement. There is no change to the type of minor works anticipated prior to settlement, which were previously advised in your private ruling application in October 20XX.

You granted the purchaser an extension on the final settlement date which you now anticipate will be in November 20XX.

Special condition 17(e) of the Contract allows the purchaser to elect for an early partial settlement of not more than XX% of the property prior to the final settlement date under the contract (partial settlement).

If the purchaser elects for an early partial settlement, the property will be subdivided and the portion of the property elected to be settled early (not more than XX% of the property) would be transferred to the purchaser when partial settlement occurs.

You do not carry on any enterprise of any kind, apart from what is described above and the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Taxation Administration Act 1953 Schedule 1, paragraph 359-35(2)(b)

Income Tax Assessment Act 1997 section 112-25

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

A New Tax System (Goods and Services Tax) Act 1999 section 72-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

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

Reasons for decision

Issue 1

Question 1

Under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gains tax (CGT) event A1 occurs when you dispose of a CGT asset to another entity. The time of the event is when the contract is entered into.

Taxation Determination TD 94/89 provides that where the contract is settled in a later year of income, you are required to include a capital gain or capital loss in the year of income in which the contract was entered into, not in the year of income in which the contract is settled.

If an assessment has already been made for that year of income, you may need to have an assessment amended.

The subdivision of land has the effect of dividing the original land parcel into two or more assets. The subdivided blocks are then treated as separate assets under the capital gains provisions. That is, the original parcel of land is now held by way of a number of separate titles, rather than the original title. They are taken to have been acquired by the owner of the original land parcel when the original parcel was acquired.

In your case, the contract for disposal of land was entered into in November 20XX. A special condition within that contract allows the purchaser to elect for an early settlement of not more than XX% of the property prior to the final settlement date.

If the purchaser makes this election, the original parcel of land (32 hectares) will be subdivided into two blocks. The block for early settlement will not exceed XX% of the total land area, or X hectares (block 1). The remaining land area will constitute the other subdivided block (block 2) and will not settle until the final settlement date in November 20XX.

When subdivision occurs, the subdivided blocks will be treated as separate assets for the purposes of CGT.

When settlement occurs for block 1, you will be required to include a capital gain or capital loss relating to the disposal of this asset (block 1) in the year in which the contract was entered into, the 20XX-XX financial year.

When settlement occurs for block 2 in November 20XX, you will also be required to include a capital gain or capital loss relating to the disposal of this asset (block 2) in the year the contract was entered into, the 20XX-XX financial year.

Question 2

The Commissioner may not give a private ruling about a matter if the matte is already being, or has been, considered by the Commissioner for the applicant (paragraph 359-35(2)(b) of Schedule 1 to the Taxation Administration Act 1953).

In your case, the Commissioner has already considered this matter and has previously issued a private ruling.

The Commissioner is not required to give another ruling on this matter as there has been no change to the facts or circumstances and to do so would constitute a duplication of work.

Question 3

Taxation Determination TD 97/3 provides guidance on the apportionment of cost base and reduced cost base of a property when subdivision occurs. TD 97/3 states:

If an original land parcel is split into two or more blocks, and you are the beneficial owner of the original land parcel and each of the new blocks, section 112-25 of the ITAA 1997 provides that each element of the cost base and reduced cost base of the original asset (worked out at the time of the split) is apportioned in a reasonable way and included in the corresponding element of the cost base and reduced cost base of each new asset.

In determining, for the purposes of section 112-25 of the ITAA 1997, the extent to which it is reasonable to attribute each element of the cost base and reduced cost base of the original land to the corresponding element of the cost base and reduced cost base of each new block, we would accept any approach that is appropriate in the circumstances of the particular case, e.g., on an area basis or relative market value basis.

In your case, a reasonable apportionment could be achieved on a land area basis if all the land is of similar market value, if this is not the case then it may be apportioned on a relative market value basis.

Issue 2

Question 1

Requirement to be registered

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

• you are carrying on an enterprise, and

• your GST turnover meets the registration turnover threshold, which is currently $75,000 for entities other than non-profit entities.

You are carrying on an enterprise. Therefore, we need to determine whether your GST turnover meets the registration turnover threshold.

Registration turnover threshold

Subsection 188-10(1) of the GST Act provides that you have a GST turnover that meets the registration turnover threshold if:

• your current GST turnover is at or above the registration turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the registration turnover threshold, or

• your projected GST turnover is at or above the registration turnover threshold.

The registration turnover threshold applicable to you is $75,000.

Your current GST turnover is the sum of the values of all the supplies in a particular month plus the previous 11 months. Your current GST turnover is less than the registration turnover threshold. However, it is also necessary to determine whether your projected GST turnover meets the threshold.

Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

The following are disregarded when working out your current and projected GST turnover:

• supplies that are input taxed

• supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act)

• supplies that are not made in connection with an enterprise that you carry on, or

• supplies that are not connected with Australia.

None of these exclusions apply to the sale of the property.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you:

• by way of transfer of ownership of a capital asset, or

• solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

Capital asset

The meaning of 'capital asset' is discussed in paragraphs 31 to 36 of 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).

The GST Act does not define the term "capital asset". However, GSTR 2001/7 explains that 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. They may be described as the business entity, structure or organisation set up or established for the earning of profits.

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. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Therefore, the character of an asset must be determined at the time of expected supply.

In this case, you held the property in order to live in the house and carry on a business. The property is a capital asset. It follows that the disposal of the property would be excluded from the calculation of your projected GST turnover.

Your projected GST turnover is below $75,000. Your GST turnover does not meet the $75,000 registration turnover threshold. 

Therefore, you are not required to be registered under section 23-5 of the GST Act.