Edited version of your written advice

Authorisation Number: 1012930313596

Date of advice: 18 December 2015

Ruling

Subject: Land subdivision and development

Issue 1:

The CGT implications of property subdivision and subsequent development.

Question 1:

Will the proceeds from the sale of the subdivided lot known as the new home be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as an isolated commercial transaction with a view to a profit?

Answer:

No.

Question 2:

Will the proceeds from the sale of the new home be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer:

Yes.

Question 3:

Are you entitled to a full main residence exemption on the sale of the new home?

Answer:

No.

Question 4:

Are you entitled to a full main residence exemption on the sale of the subdivided lot known as the original home?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commences on:

1 July 20XX.

Issue 2

Was the taxpayer carrying on an enterprise for Goods and Services Tax (GST) purposes?

Question 1:

Is the sale of the original dwelling (the property) or the sub-divided new dwelling at the same property by the taxpayer a taxable supply within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Sometime in 20XX the taxpayer purchased a residential property with the original intention of occupying it as a primary place of residence for the taxpayer and their family. The taxpayer and their family actually occupied the property after settlement.

A few years later the taxpayer had the property surveyed for subdivision as the taxpayer intended to construct a new dwelling on the property, occupy the new dwelling as the taxpayer's primary place of residence and, depending on the cost of constructing the new dwelling, either rent out or sell the original dwelling.

A few months after this the taxpayer's employer asked the taxpayer to move to another part of Australia for two years commencing sometime in 20YY. The taxpayer and the taxpayer's family moved to the new location. The taxpayer did not rent out the original dwelling on the property and constructed the new dwelling on the property with the intention of occupying the new dwelling upon returning from the employment transfer.

Prior to the end of the two year period the taxpayer's employer asked the taxpayer to remain in the new location permanently, which made it necessary for the taxpayer to purchase a dwelling there.

Later the construction of the new dwelling on the property was completed.

The taxpayer put the original dwelling and the new dwelling at the property up for sale. The taxpayer obtained a contract for the purchase of the new dwelling and finalised the subdivision of the property before that contract (for the sale of the new home) was settled. The taxpayer settled the sale of the original dwelling on the property a short time later. The dwellings were sold to different purchasers.

The taxpayer did not purchase a property in the new location of employment until after the two properties known as the new home and original dwelling were sold.

The taxpayer has made the continuing main residence choice (absence choice) in regard to the original dwelling.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 8-1

Income Tax Assessment Act 1997, Section 25-40

Income Tax Assessment Act 1997, Section 104-10

Income Tax Assessment Act 1997, Section 112-25

Income Tax Assessment Act 1997, Section 118-110

Income Tax Assessment Act 1997, Section 118-145

Income Tax Assessment Act 1997, Section 118-150

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 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 195-1

Reasons for decision

Issue 1

Question 1 and Question 2

Summary

The proceeds from the sale of the subdivided lot known as the new home will not be assessable income under section 6-5 of the ITAA 1997 as an isolated commercial transaction with a view to a profit. The proceeds from the sale of the subdivided lot will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Detailed reasoning

We need to determine whether the proceeds from the sale of the new home:

• is assessable ordinary income under section 6-5 of the ITAA 1997 as you were carrying on a business of property development

• is 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

• is 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 new home would be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated business or commercial transactions 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.

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 new home will be assessable under section 6-5 of the ITAA 1997. We consider that the disposal of the new home will be a mere realisation of a capital asset.

Question 3

You are not entitled to a full main residence exemption on the sale of the subdivided lot known as the new home. It was never established as your main residence therefore you are not entitled to a main residence exemption on the sale of this property. Having an intention to live in a dwelling as your main residence is not sufficient.

Question 4

Summary

You are entitled to a full main residence exemption on the sale of the subdivided lot known as the original dwelling.

Detailed reasoning

You make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset. CGT event A1 will happen when you sell the original dwelling.

Generally, you disregard any capital gain or capital loss that you make on the disposal of a dwelling that was your main residence for your entire ownership period.

In some cases, you can choose to continue to treat a dwelling as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence.

Where you use the dwelling to produce income, you can choose to treat it as your main residence while you use it for that purpose for a period of up to six years after you stop living in it. If you do not use the dwelling to produce income, you can treat the dwelling as your main residence for an unlimited period after you stop living in it. If you make this choice you cannot treat any other dwelling as your main residence for that period.

In your situation, you have chosen to continue to treat the original dwelling as your main residence during the period that you were renting it and whilst you were renting a home in the new location of employment for you and your family. As you will be disposing of the original dwelling within the six year period, any capital gain or capital loss that you make on its sale will be disregarded.

Issue 2

Summary of decision:

The supplies by the taxpayer of the subdivided land including the original dwelling and the subdivided land including the new dwelling are not taxable supplies (and therefore not subject to GST) because the taxpayer was not carrying on an enterprise.

Detailed reasoning:

GST is required to be paid on a taxable supply. Section 9-5 of the GST Act states:

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 the indirect tax zone; 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.

One of the requirements under section 9-5 for a taxable supply turns upon whether the taxpayer was carrying on an enterprise when the original dwelling and the new dwelling were sold.

Paragraph 9-5(b) of the GST Act requires that the supply of each dwelling was made in the course or furtherance of an enterprise carried on by the taxpayer. Paragraph 9-5(d) requires that the taxpayer was either registered for GST or required to be so registered and section 23 -5 of the GST Act provides that an entity is required to be registered for GST if the entity is carrying on an enterprise and has a GST turnover which meets the registration turnover threshold.

Section 9-20 of the GST Act relevantly states that an enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade; or….

Section 195-1 of the GST Act, which is the Dictionary for GST terms, defines business as:

Business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

and states:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise

Paragraph 234 of 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) states:

Ordinarily, the term 'business' would encompass trade engaged in on a regular or continuous basis. However, 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.

MT 2006/1 discusses the meaning of 'entity carrying on an 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 A New Tax System (Australian Business Number) Act 1999 (ABN Act) uses a definition of 'enterprise' that appears in the GST Act and that the principles in MT 2006/1 apply equally to the term 'enterprise' as it appears in the GST Act.

Activity or series of activities:

The 'enterprise' definition refers to 'an activity, or a series of activities, done'. Paragraphs 153 and 154 of MT 2006/1 provide that an activity is essentially an act or series of acts that an entity does and that it is necessary to identify one activity or a series of activities that amount to an enterprise. Example 15 under paragraph 161 in MT 2006/1 discusses activities associated with the sale of real property:

Example 15 - activities associated with the sale of real property

161. Giovanna sold a block of units. What are the relevant activities in determining whether Giovanna carried on an enterprise?

162. Giovanna carried out a series of activities that led to the sale of the units. All of Giovanna's activities need to be considered. These included:

assessing the economic viability of the project;

purchasing the land;

engaging an architect;

constructing a block of units on the land;

engaging a real estate agent and auctioneer; and

arranging for the sale of the units at auction.

163. An activity such as the selling of an asset may not of itself amount to an enterprise but account should also be taken of the other activities leading up to the sale to determine if Giovanna carried on an enterprise.

Example 15 indicates that where an entity engages a third party to perform a task (e.g. engaging an architect or a real estate agent) that entity is nevertheless carrying out an activity. We therefore consider that in the present case, where the taxpayer engaged a surveyor, a builder and a real estate agent to perform certain activities, the taxpayer is nevertheless taken to carry out those activities for the purpose of determining whether the taxpayer is carrying on an enterprise.

Isolated real property transactions:

Paragraphs 262 to 302 of MT 2006/1 deal specifically with whether an entity is carrying on an enterprise (i.e. either in the form of a business or in the form of an adventure or concern in the nature of trade) or merely realising a capital asset where there is a 'one-off' real property transaction.

MT 2006/1 refers to Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 and Casimaty v Federal Commissioner of Taxation 97 ATC 5135; 151 ALR 242; 37 ATR 358 (Casimaty) and paragraph 265 of MT 2006/1 states that if several of the following factors are present in relation to an isolated property transaction it may be an indication that a business or an adventure or concern in the nature of trade is being carried on:

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 relation to the first factor, in the Casimaty case Ryan J held that there had been no change in the purpose for which the land was held where part of a 988 acre farming property (Acton View) had been subdivided and sold in eight subdivisions over 18 years and where the works undertaken by the taxpayer (roads, water, sewerage and fencing) were limited to those required in order to obtain approvals of the subdivisions (p.5151):

Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there is nothing to suggest a change in the purpose or object with which 'Acton View' was held.

In this respect, the present case is to be contrasted with those cases in which particular circumstances provided an occasion for imputing to the landholder a change in purpose. In Whitfords Beach those circumstances were the passing of control of the landholding company from the owners of the fishing shacks to the three development companies. In Official Receiver v FCT the critical circumstance was that control of the land passed to the Official Receiver who sought the instructions of the creditors as to whether he should dispose of the land in its undeveloped state or undertake its extensive development to increase returns to creditors. In the Melbourne Trust case one critical consideration was the formation of the realization company as a distinct entity with shareholders unrelated to the failed banks or their creditors.

Ryan J's judgment indicates that whether there has been a change of purpose for which land is held is not a subjective test of the taxpayer's intention but an objective test based on the circumstances surrounding the land and the taxpayer. Applying that objective test to the present case, we consider that there was no change of purpose until the taxpayer was told by their employer that the taxpayer's position had been permanently located to another place in Australia which made it necessary for the taxpayer to sell the property in order to be able to purchase a home at the new employment location. The taxpayer's purpose and intention in relation to the original dwelling and the new dwelling constructed on the property was to occupy both as a residence for the taxpayer's family before the taxpayer's move.

The second factor listed in paragraph 265 of MT 2006/1 (additional land is acquired to be added to the original parcel of land) is not present.

Nor is the third factor (the parcel of land is brought into account as a business asset) present.

We doubt that the fourth factor (i.e. there is a coherent plan for the subdivision of the land) is present in relation to the taxpayer. When the taxpayer had the property surveyed for subdivision, the taxpayer's intention was merely to build a second dwelling on the property more suitable for the taxpayer and their family. It was only later after the taxpayer's employer told the taxpayer that their position had been permanently re-located that the taxpayer decided to sell the property (in order to fund the acquisition of a property in the new employment location) and only after the taxpayer secured a contract of sale in respect of the new dwelling that the taxpayer finalised the subdivision of the property.

The fifth factor (there is a business organisation - for example a manager, office and letterhead) is not present.

We do not know whether the sixth factor (borrowed funds finance the acquisition or subdivision) is present in relation to the taxpayer, but we assume that the taxpayer would have had to borrow to fund the construction of the new dwelling as at the time the taxpayer was living in the new employment location and the original dwelling was not rented out. We note, however, that at the relevant time any borrowing would have been for the purpose of constructing a dwelling intended to be occupied by the taxpayer and their family after the arrangement for the taxpayer to work in the new location for two years was completed.

Given that, at the time the new dwelling was constructed the taxpayer intended to occupy the new dwelling as a family home, we assume that the seventh factor (interest on money borrowed to defray subdivisional costs was claimed as a business expense) is not present.

The eighth factor (there is a level of development of the land beyond that necessary to secure council approval for the subdivision) is not present. In the Casimaty case, where the taxpayer occupied and operated a 988 acre farm and but only carried out the development required in order to obtain approval of the subdivisions undertaken in respect of part of the farm, Ryan J held that the taxpayer was not carrying on a business or a profit-making undertaking or scheme. On the other hand, Example 31 in paragraphs 284 to 287 of MT2006/1 found the seventh factor to be present as per extracted below:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

their house to be demolished;

the land to be subdivided;

a builder to be engaged;

two houses to be built;

water meters, telephone and electricity to be supplied to the new houses; and

a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

Paragraph 287 of MT2006/1 states that in Example 31 the taxpayers' activities went beyond the minimal activities required to sell the subdivided land. In the present case the taxpayer's activities did not go as far as the taxpayers in Example 31.

The ninth factor (buildings have been erected on the land) is present as the taxpayer constructed the new dwelling on the property.

Only two of the nine factors listed in paragraph 265 of MT 2006/1 are present in relation to the taxpayer, which indicates that the taxpayer is not carrying on an enterprise.

This view is confirmed by the similarity between the taxpayer's circumstances and Example 32 in paragraphs 288 to 290 of MT 2006/1 as per below:

Example 32

288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live.

289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house.

290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter.

In the present case, the survey of the property and construction of the new dwelling were undertaken as part of a private or domestic arrangement intended to provide a dwelling that was more suitable for the taxpayer and their family than the original dwelling. At the time the property was surveyed and the new dwelling constructed the taxpayer either intended to occupy the new dwelling or intended to return to the property and occupy the dwelling after working in the new employment location for two years. At that point no decision had been made whether to rent the original dwelling or subdivide the land and sell the original dwelling. It was only after the taxpayer's employer informed the taxpayer that the taxpayer's position had been permanently located that the taxpayer decided to sell both dwellings in order to purchase a property in the new employment location and the taxpayer only finalised the subdivision after a contract of sale was secured for the new dwelling.

Given the information and facts provided, we consider that the sale of the original dwelling and the sub-divided new dwelling at the property by the taxpayer is not in the course or furtherance of an enterprise carried on by the taxpayer. On this basis, paragraph 9-5(b) of the GST Act is not satisfied.

Further, the taxpayer is not required to be registered for GST as the taxpayer is not carrying on an enterprise and paragraph 9-5(d) is not met.

Hence the sales of the original dwelling and the sub-divided new dwelling at the property by the taxpayer are not taxable supplies under section 9-5 of the GST Act.