Edited version of your written advice

Authorisation Number: 1012906594661

Date of advice: 6 November 2015

Ruling

Subject: Subdivision and sale of land

The Proceeds from your proposal to subdivide a portion of your land will be subject to the capital gains tax provisions of the ITAA 1997. Additionally the supply of vacant land does not meet the requirements to be a taxable supply for GST purposes.

Question 1

Are the proceeds from the sale of the subdivided land ordinary income?

Answer

No.

Question 2

Is the subdivided land trading stock?

Answer

No.

Question 3

Will the supply of the subdivided vacant blocks of land by you be a taxable supply for goods and services tax (GST) purposes?

Answer

No.

This ruling applies for the following periods:

The year ended 30 June 2014

The year ended 30 June 2015

The year ending 30 June 2016

The year ending 30 June 2017

The year ending 30 June 2018

The scheme commences on:

On or after 1 January 2014

Relevant facts and circumstances

Background facts

In 200X you acquired farm land which you were leasing to carry on a farming business. The farm land is comprised of two blocks -

• A large block consisting of several titles and a number of paddocks.

• A small block consisting of one title and a single paddock; adjacent to the main town.

The small block is not adjacent to the large block; they are separated by a distance of over 1 km. Livestock are driven between the large and small blocks to adjust stocking rates (that is to adjust the number of livestock on each paddock at a given time).

The livestock are transported via third party trucks between the blocks however this is becoming unviable with increased traffic on the roads.

In 200Y you and your spouse formed a partnership to continue the farming business on the farm land. The partnership conducts the farming operation, owns the livestock and equipment and you continue to own the land. The partnership continues to conduct the farming business today.

You don't live on the farm but reside in a separate residence

A small residential house is on the large block and is leased to third parties, with rental income disclosed in your income tax returns.

The subdivision and sale of the land

You are subdividing the small block of land for the following reasons:

• It is adjacent to the main town area.

• Its proximity to existing sewer infrastructure.

• The distance between the small block and the large block as well as the inefficiencies arising from transporting livestock between the two.

• The reduced disturbance to the farming business as the small block is X% of the total farm land used in the farming business.

You and your spouse both have no experience with subdivisions or property development. You have engaged professionals to assist with every aspect of the process. This includes planning, surveying and engineering professionals.

Your development application was approved in 20XX.

The engineers will manage the associated development works, including the engagement and oversight of contractors on your behalf. You will pay the contractors directly once the engineers have confirmed the supply and satisfactory completion of the works.

The level of development will be the minimum required by the council for the subdivision.

There will be no buildings constructed on the sale land. The land will be sold vacant once the subdivision has been completed.

You intend to borrow funds for the initial development but will conduct the subdivision in stages and fund future stages with the proceeds from the earlier stages.

The stages are as follows (timing is dependant on the sales of the subdivided land providing cash flow for the further works):

1. Stage 1 by X 2016 - X allotments.

2. Stage 2 by Y 2016 - Y allotments.

3. Stage 3 by Z 2016 - Z allotments.

4. Stage 4 during 2017 - W allotments.

You are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997subsection 6-5(1);

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20.

Reasons for decision

Question 1

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) deals with profits from isolated transactions.

Assessable income for an income year includes any net capital gain and any ordinary income derived in the year. Any capital gain realised from the sale of a capital asset is usually assessable under the capital gains tax provisions and not as ordinary income.

Case law has established that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable as ordinary income (FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses profits on isolated transactions. According to paragraph 1 of TR 92/3, the term 'isolated transactions' refers to:

• those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

• those transactions entered into by non-business taxpayers.

Further, paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

• your intention or purpose in entering into the transaction was to make a profit or gain, and

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

The courts have often found 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. If a transaction satisfies the elements set out above it is generally not a mere realisation of an investment (paragraph 36 of TR 92/3).

Where the transaction involves the sale of property, it is usually necessary that the taxpayer has a profit-making purpose at the time of acquiring the property for the proceeds to be considered as being income. However, this may not always be the case (paragraph 41 of TR 92/3).

Paragraph 49 of TR 92/3 states that the following factors may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: 

(a) the nature of the entity undertaking the operation or transaction (for example, the existence of a corporate entity may indicate that the transaction is of a commercial nature);

(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 (for example, the use of professional agents or advisers may indicate that the transaction was more commercial in nature);

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (for example, the involvement of another family member may indicate a family dealing);

(g) if the transaction involves the acquisition and disposal of property, the nature of that property (for example, did the property have a commercial use or nature); and

(h) the timing of the transaction or the various steps in the transaction (for example, in regard to the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not of a commercial nature).

Application to your circumstances

Although the subdivision is a substantial development, it is considered that the proceeds from the sale of subdivided land are not ordinary income but assessable under the capital gains tax provisions. The sale of blocks will constitute the mere realisation of an asset rather than the carrying on of a business operation or commercial transaction because of the following:

• You have no prior experience with subdivision.

• The land has always been used for farming.

• You did not acquire the land for the purpose of subdivision.

• You are developing the land to the minimum requirements of council.

• You intent to realise a capital asset to fund your retirement, pay debts and to allow you to solely focus on your farming activities.

The proceeds you receive from the subdivided blocks of land will be subject to the capital gains tax provisions of the ITAA 1997.

Question 2

Section 70-10 of the ITAA 1997 provides that trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

Taxation Determination TD 92/124 provides that land is treated as trading stock for income tax purposes if:

• it is acquired for the purpose of resale; and

• a business activity which involves dealing in land has commenced.

TD 92/124 states that both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operation designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive as a single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock.

Application to your circumstances

In your case, you are not considered to be carrying on a business of property development. The originating purpose of the acquisition of your land was not for subdivision and sale but for farming activities. Your activity is considered part of an isolated transaction and your property is not trading stock.

Question 3

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

GST is payable on a taxable supply. You will make a taxable supply under section 9-5 of the GST Act 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 for GST.

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

All of the above requirements must be satisfied for your supply of vacant blocks of land to be a taxable supply under section 9-5 of the GST Act.

Paragraph 9-5(a) of the GST Act

You will satisfy paragraphs 9-5(a) of the GST Act when you sell the subdivided blocks of vacant land as you will make the supply for consideration.

Paragraph 9-5(b) of the GST Act

The definition of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) an activity or series of activities done:

• in the form of a business;

• on a regular continuous basis, in the form of a lease, licence or other grant of an interest in property;

• in the form of an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 provides guidance on what constitutes an enterprise for the purposes of eligibility for registration for an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to GST.

• In the form of a business

From the fact given you are not in the business of purchasing and selling properties.

The supply of the subdivided vacant blocks of land will therefore not be made in the course of an enterprise in the form of a business under subsection 9-20(1) of the GST Act.

• On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

From the facts given you are supplying the farmland to the partnership on a continuous basis so that the partnership can carry on the livestock business and leasing the residential house located on the large block to a third party. In this instance you are considered carrying on an enterprise in the form of a lease, licence or other grant of an interest in property under subsection 9-20(1) of the GST Act.

However, under paragraph 9-20(2)( c) of the GST Act, an enterprise does not include an activity or series of activities done by an individual (other than a trustee of a charitable fund, or a fund covered by item 2 if the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN), or a partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain.

From the facts received, you are not deriving any income from the partnership when they use the farm land and you have no expectation to make a profit when the partnership uses the farm land since, the partnership is paying for the costs related to the farm land that you would normally pay should the partnership not be using the properties for their farming business. Further you are not providing the farm land to the partnership in a business manner.

In this instance, when you provide the farmland to the partnership we consider you are not carrying on an enterprise by virtue of paragraph 9-20(2)(c) of the GST Act since you are not supplying the farmland to the partnership with an expectation of profit. You are carrying on a leasing enterprise only in regard to the lease of the residential house located on the large block of land to the third party.

The supply of the subdivided blocks of land from the small block of land will therefore not be made through an enterprise in the form of a lease, licence or other grant of an interest in property under subsection 9-20(1) of the GST Act.

• In the form of an adventure or concern in the nature of trade

From the information received, you are not in the business of property development and subdivision. In this instance, your subdivision of the small block of land and sale of the subdivided vacant blocks of land will be a 'one-off' or isolated real property transaction.

In regard to isolated or one-off transaction, paragraphs 262 and 263 of MT 2006/1state:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. ...

. ...

As your sale of the subdivided vacant blocks of land is an isolated transaction, it is necessary to consider whether the subdivision and sale of the vacant blocks of land is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 outlines factors that indicate whether activities undertaken on a one-off are an 'adventure or concern in the nature of trade' and states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade… If several of these 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.

In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be the combination of factors that will lead to a conclusion as to the character of the activities.

Based on the information received, the purpose for which the land was held remains unchanged since the farming business will continue on the land you own except for the X acres which you are contemplating to subdivide and sell. You have a coherent plan for the subdivision in that you have lodged the development application and completed all the requirements to obtain the subdivision approval. However, the level of development of the land consisted only of the necessary to obtain Council approval for the subdivision and no buildings will be erected on the vacant land to be sold.

We consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the subdivision does not amount to an enterprise and is a mere realisation of a capital asset.

Accordingly, paragraph 9-5(b) of the GST Act will not be met as you will not be selling the vacant blocks of land in the course of an enterprise that you will be carrying on.

Since this paragraph is not satisfied, there is no need to consider the other requirements in section 9-5 of the GST Act.