Edited version of your written advice

Authorisation Number: 1013078780063

Date of advice: 26 August 2016

Ruling

Subject: Sale of vacant land

Question

Is the sale of the vacant land held by the organisation the mere realisation of a capital asset or a taxable supply?

Answer

The sale of the vacant land is the mere realisation of a capital asset.

Relevant facts and circumstances

• You are registered for goods and services tax (GST).

• You operate an aged care facility.

• You purchased adjoining properties over many years with a view to expansion of the facility.

• Most of the blocks were residential premises which were rented.

• A notice of intention to resume was issued by the council.

• The properties were formally resumed on by a Taking of Land Notice in the Government Gazette.

• A verbal agreement that the land was to be returned once construction was complete.

• A written agreement was then made later when the now vacant land was ready to be returned.

• The council paid compensation for the use of the land, interest and reimbursement of legal fees.

• The land transfer to the organisation was completed.

• The land was rented as a worksite for a period.

• There were no further prospects of renting the vacant land without it being developed.

• You decided it was surplus to your needs as increasing rates and land taxes were becoming a significant financial burden you decided to sell.

• The contract to sell included a GST Margin Scheme clause.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

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

A New Tax System (Goods and Services Tax) Act 1999 Subsection 142-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 142-10

Reasons for decision

All legislative references in this Ruling, unless otherwise stated are to A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The relevant legislative provisions are discussed below.

Section 9-5 defines a taxable supply as:

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 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.

* denotes a defined term under section 195-1

When you sold the subdivided vacant lots you will made a supply of land in Australia for consideration, satisfying paragraphs 9-5(a) and (c). Further, the GST-free and input tax provisions do not apply in your circumstances.

The primary issue here is whether the supply of the vacant lots was made in the course or furtherance of an enterprise you carry on.

Enterprise

Subsection 9-20(1) provides that an enterprise relevantly includes:

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.

Paragraphs 262 and 263 of Miscellaneous Tax Ruling MT 2006/1 state:

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. ...

We consider your activities in the subdivision and sale of the subdivided lots will be a 'one-off' or isolated real property transaction, and we need to consider whether the activities are the carrying on of a business or an adventure or concern in the nature of trade.

Taxation Ruling TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

• a significant commercial activity; a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

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

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

A trading asset is generally dealt with or traded within a short time after acquisition.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. 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.

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.

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.

In your case, you do not carry on a business of buying, selling or developing land. You purchased the property as an investment for the expansion of the aged care facility. You did not demolish the houses on the land. You are not developing the land and are selling the blocks of vacant land which are surplus to your needs.

Accordingly, the proceeds from the sale of the vacant blocks will not be your ordinary income. Rather, the sale of the vacant blocks, are considered to be a mere realisation of a capital asset. As the requirements of section 9-5 are not met the supply of the land is not a taxable supply.