Edited version of your written advice

Authorisation Number: 1012808545066

Ruling

Subject: Subdivision of land

Issue 1

Question 1

Are the proceeds from the sale of the subdivided land assessable as capital receipts?

Answer

Yes.

Question 2

Will capital gains tax (CGT) event A1 occur when each individual lot is sold?

Answer

Yes.

Issue 2

Question 1

Will your supply of the subdivided lots be a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You and your spouse acquired a property in 19XX. You have primarily used the property as your main residence and hobby farm and for private recreational purposes. It has not been used for a primary production enterprise or any other enterprise activity.

Neither of you are registered for GST in your individual capacities or together, nor do you conduct any enterprise jointly.

An unrelated third party developer, has approached you with a proposal to develop the whole Property.

You have entered into a contract with the developer for them to prepare the property for subdivision including removal of existing structures (house) and subdivide the Property into less than 60 lots and to sell them on your behalf.

The contract details are set out in the draft Development Agreement (DA) between yourself and the developer.

You will remain the legal and beneficial owners of the land throughout the course of the development until the lots are sold to third parties in the course of the project.

Relevant legislative provisions

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 A New Tax System (Goods and Services Tax) Act 1999

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Reasons for decision

Issue 1

Question 1

We need to determine whether the proceeds from the sale of the lots:

• are assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as you were carrying on a business of property development

• are assessable ordinary income under section 6-5 of the ITAA 1997 as you conducted an isolated commercial transaction with a view to a profit, or

• are a realisation of a capital asset and assessable under the CGT provisions of the ITAA 1997.

Carrying on a business of property development

Based on the information provided, we do not consider that any proceeds received from the sale of the subdivided land would be derived in the course of carrying on a business.

Profits from an isolated transaction

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 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.

Application to your circumstances

In this case, you and your spouse purchased the property and it has always been your main residence and has never been used to produce assessable income. You and your spouse do not have any history of involvement in property development activities.

You and your spouse have not acquired any additional land for the purposes of the subdivision. Further, the subdivision does not include the construction of any buildings prior to sale.

Although you are not actually performing the development activities yourself, you can exert influence on the development. The relevant agreement also required you and your spouse to make regular payments to the developer for their services.

Having regards to your circumstances and the factors outlined in TR 92/3, we do not consider that the proceeds from the sale of the land will be assessable under section 6-5 of the ITAA 1997. We accept the proceeds for the sale of the subdivided land will be assessable under the CGT provisions.

Question 2

Under subsection 104-10(1) of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(3) of the ITAA 1997, the time of an event is when the entity enters into the contract for the disposal.

When you enter into a contract to dispose of each lot, CGT event A1 will occur.

Issue 2

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 Australia; 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.

For the supply of your sub-divided land to be a taxable supply, all of the requirements in section 9-5 of the GST Act must be satisfied.

In this case, you will be selling vacant lots for consideration and the property is connected with Australia as it is located in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. In addition the supply of the vacant lots in your factual situation will neither be GST-free or input taxed.

Accordingly, we must determine whether your sales are in the course or furtherance of an enterprise that you carry on and if so whether you are required to be registered for GST.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act relevantly defines enterprise as 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.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade:

• A business encompasses trade engaged in on a regular or continuous basis.

• An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

In your case, your activity does not amount to a business engaged in, on a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal.

Paragraph 247 considers the subject matter of realisation and provides the following commentary.

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset…

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

• Assets can be categorised as trading/revenue assets or capital/ investment 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.

• Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

Paragraph 261 of MT 2006/1 provides further discussion on the nature of assets.

261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes.

The property which is the subject matter of this ruling was held as a private asset, (being your principle place of residence). The relevant issue in your circumstances is whether the nature of the asset has changed as a consequence of your entering into an agreement with a developer to develop your property, subdivide and sell the Lots.

Paragraph 178 of MT 2006/1 outline the indicators of a business and paragraph 265 sets out the factors when examining whether activities are an adventure or concern in the nature of trade. We have listed these indicators below.

Indicators of carrying on a business.

1. a significant commercial activity

2. a purpose and intention of the taxpayer to engage in commercial activity

3. an intention to make a profit from the activity

4. the activity is or will be profitable

5. the recurrent or regular nature of the activity

6. the activity is carried on in a similar manner to that of other businesses in the same or similar trade

7. activity is systematic, organised and carried on in a businesslike manner and records are kept

8. the activities are of a reasonable size and scale

9. a business plan exists

10. commercial sales of product; and

11. the entity has relevant knowledge or skill.

Factors used to examine an adventure or concern in the nature of trade:

12. there is a change of purpose for which the land is held

13. additional land is acquired to be added to the original parcel of land

14. the parcel of land is brought into account as a business asset

15. there is a coherent plan for the subdivision of the land

16. there is a business organisation (for example, a manager, office and letterhead)

17. borrowed funds financed the acquisition or subdivision

18. interest on money borrowed to defray subdivisional costs was claimed as a business expense

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

20. buildings have been erected on the land.

In addition it is relevant to consider:

21 the length of time the property had been held and to what purpose it had been put to in that time; and

22 the personal involvement in the development activity.

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.

In looking at the above factors to this case we consider that the supply of the lots by you will not be in the course of an enterprise of property development.

Requirement to register for GST

Section 23-5 of the GST Act requires you to be registered for GST if you are carrying on an enterprise and your GST turnover meets or exceeds the registration turnover threshold. The current registration turnover threshold is $75,000.

As set out above we consider that you are not carrying on a property development enterprise and therefore you are not required to be registered.

Conclusion

Therefore as your sales are not in the course of an enterprise they will not be taxable supplies pursuant to section 9-5.