Edited version of your written advice

Authorisation Number: 1012782163073

Ruling

Subject: CGT - subdivision and GST - margin scheme

Issue 1

Question 1

Will the proceeds from the sale of the subdivided lots be assessable as a capital gain where the property was acquired prior to 20 September 1985?

Answer

No

Question 2

Will the proceeds from the sale of the subdivided lots be assessed under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 3

Will the subdivided lots be considered 'trading stock' under section 70-30 of the ITAA 1997?

Answer

No

Issue 2

Question 1

Will the sales of the subdivided blocks be subject to Goods and Services Tax (GST) and does the margin scheme apply?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired the property as your main residence in 19XX.

You lease a portion of the land to a family trust which encompasses a building and parking lot.

You ran your business from that building until your retirement in 20XX.

Since your retirement you have attempted to sell the property, however due to the property size (approximately X acres) and costs involved to make improvements you have been unable to find a purchaser for the property.

You intend to subdivide the property, which will also involve the demolition of the house and sheds on the property.

You intend to sell the subdivided lots as vacant land, apart from the subdivided lot that contains the leased building.

The zoning of the property has changed from 'rural' to 'developmental'. This change was initiated by the City.

You have engaged the services of a development consultant, who will be acting as project manager and also conduct the marketing and sale of the subdivided lots.

The development consultant will be responsible for managing every aspect of the development.

You relationship with the development consultant is a purely commercial one, at arm's length and entered into in good faith.

You are not registered nor required to be registered for GST.

You propose to fund the subdivision from a mix of personal and institutional funding.

Your intention when purchasing the land was to provide a place of residence and a location to conduct your business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 subsection 70-10(1)

Income Tax Assessment Act 1997 section 70-30

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 995-1

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

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

Reasons for decision

Issue 1

Summary

In your case, given the scale of the activity, the time involved in the subdivision process and your level of involvement, any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset.

As you hold a pre-CGT interest in the property, any capital gain will be disregarded.

Taxation treatment of land subdivisions

There are three ways profits from a land sub-division can be treated for taxation purposes:

(1) 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.

(2) 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.

(3) As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Sale of subdivided land acquired pre-CGT 

Land, or an interest in land, is a CGT asset under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The sale of the land is a disposal which gives rise to CGT event A1. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

When CGT event A1 happens to a CGT asset which was acquired before 20 September 1985, any capital gain or capital loss you make will be disregarded (section 104-10 of the ITAA 1997).

Subdivision

If you subdivide a block of land, each block that results is registered with a different title. For CGT purposes, the original land parcel is divided into two or more assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks (section 112-25 of the ITAA 1997). Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

In the event when the subdivided blocks are sold, the land which resulted from the subdivision maintains its original acquisition date and pre-CGT status. As the subdivided lots maintain their pre-CGT status, any capital gain or loss that results on their disposal is disregarded (subsection 104-10(5) of the ITAA 1997).

Income

Section 6-5 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 an income year. Ordinary income is income according to ordinary concepts, and includes income from carrying on a business.

An amount which is not assessable under 6-5 of the ITAA 1997 may be assessable under section 15-15 of the ITAA 1997 if the profit or gain arises from the carrying on or carrying out of a profit making undertaking or plan. This may take the form of a business operation or commercial transaction.

Mere realisation of a capital asset

The mere realisation of a capital asset is not income. However, if the capital asset is used in a business operation or commercial transaction with a profit making intention, the profit may be assessable. The dividing line between realisations that give rise to assessable income and those that involve the mere realisation of a capital asset is narrow (IRC v British Salmson Aero Engines Ltd [1938] 2 KB 484, 498; Californian Copper Sydnicate v Harris (Inspector of Taxes) (1904) 5 TC 159, 165-166 (the Californian Copper case).

The Californian Copper case held that the questions to be determined are:

• is the gain that has been made a mere enhancement of values by realising security?, or

• is it a gain made in the operation of a business in carrying out a scheme of profit making?

It is therefore necessary to determine if the activity of subdividing and selling land is conducted in the course of carrying on a business.

Section 995-1 of the ITAA 1997 defines business as including any profession, trade, employment, vocation or calling. It does not include occupation as an employee.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, 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.

In your situation, the Commissioner is satisfied you are not carrying on a business of property development. You are not a registered builder. You purchased the property in 19XX as you main residence and as a location in which to conduct your business. The repetition, scale and volume of your activity are not of the same nature as is ordinarily carried on by a property developer that is carrying on a business.

As the Commissioner is satisfied you are not carrying on a business of property development, the property would not be considered 'trading stock' as the definition of trading stock under subsection 70-10(1) of the ITAA 1997 is 'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business and livestock'.

However, whilst you are not carrying on a business of property development, the proceeds from the sale of your subdivision may still be assessable as ordinary income, if those proceeds are considered to be from an isolated business transaction.

Isolated business transactions

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's 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 the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium).

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

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

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

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 involves the acquisition and disposal of property, the nature of that property, and

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

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the 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.

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.

In your situation, the Commissioner is satisfied that proceeds from the sale of your subdivided lots will not be those from an isolated transaction and will not be assessable under section 6-5 of the ITAA 1997.

Conclusion

The activities involved in the subdivision and sale of the subdivided blocks do not amount to the carrying on of a business. You had no profit-making purpose at the time you acquired the property, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that your subdivisional activity has become a separate business operation or commercial transaction, or that you were carrying on or carrying out a profit-making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under sections 6-5 and 15-15 of the ITAA 1997. The proceeds represent a mere realisation of capital assets as per the Casimaty case, which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997. However, as the subdivided lots maintain their pre-CGT status, any capital gain or loss that results on their disposal is disregarded

Issue 2

Summary

As you are not registered nor required to be registered for GST your sales will not be subject to GST and the margin scheme cannot apply to the sales of the land.

Detailed reasoning

As discussed in the questions above the activities do not amount to carrying on an enterprise and is the mere realisation of capital assets. In order for GST to apply to the sale of your property it would need to be a taxable supply. One of the conditions of a taxable supply is that a supply must be made in the course or furtherance of an enterprise that you carry on. As you are not carrying on an enterprise your supply cannot be a taxable supply, as such GST will not apply.

The margin scheme applies to sales of property that are taxable sales. As your sales are not taxable the margin scheme cannot be applied to your sales of subdivided land.