Edited version of your written advice

Authorisation Number: 1051232209372

Date of advice: 02 June 2017

Ruling

Subject: Property Development and GST

Question 1

Will the sale proceeds from the sale of subdivided land you inherited be taxed on revenue account in accordance with section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the supply of the subdivided land be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Answer

No

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You are employed as a secretary and have not previously been personally involved in any property development.

You are not currently registered for GST, and do not have an ABN.

You acquired the land prior to XXX following the passing of a family member.

The land has been used for agistment purposes, but has recently been rezoned to allow for residential development. You were not involved in the rezoning process.

You did not originally acquire or hold the property for the purpose of subdivision and sale.

Due to ongoing losses on the property, you decided that you would consider any reasonable offers made for the property; however you did not actively seek to sell the property.

In order to best realise the property, you decided to obtain a planning permit for the subdivision of the property in the event that a developer made an offer for the property.

You received an offer from a developer to subdivide, develop and sell the property by way of lots.

The offer was preferable to you because the work is to be undertaken by the developer, and you are not exposed to any significant financial risk.

The development does not go beyond the level necessary to secure council approval.

You have provided relevant clauses of the proposed agreement which details the obligations of the parties.

The developer is responsible for the management of the project, and the financing, development, marketing and selling of the property. The developer will set the price at their discretion.

You will not have any involvement in these activities. You are only required to that which is necessary to facilitate these activities.

You will receive an agreed sum as part of the agreement, to be paid in instalments following the sale of each individual lot. The developer will receive a fee for developing the property, the amount of which is dependent on the total income received less the payment to you, and any tax required to be paid.

You seek advice as to whether the proceeds from the sale of the property will be capital or revenue, and whether it would constitute a taxable supply.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5,

Income Tax Assessment Act 1997 section 6-10,

Income Tax Assessment Act 1997 section 15-15,

Income Tax Assessment Act 1997 section 102-5,

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 23-5 and

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1).

Reasons for decision

Question 1

Will the sale proceeds from the sale of subdivided land you inherited be taxed on revenue account in accordance with section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No. The sale of each of the subdivided lots will be on capital account so that any net capital gains would be included in your statutory income under section 6-10 and section 102-5 of the ITAA 1997

Detailed reasoning

You are proposing to contract for the development, subdivision, and sale of your property, and are seeking clarification as to whether the proceeds of the eventual sales will be on revenue account.

Section 6-5 of the ITAA 1997 includes in your assessable income all ordinary income derived by you during an income year. Ordinary income is defined as income according to ordinary concepts. While the legislation does not define income according to ordinary concepts, case law has established that ordinary income includes income that arises in the normal scope of a taxpayer's business.

Alternatively, an amount which is not assessable as ordinary income under section 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.

Ordinary Course of Business

The High Court in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; [1987] HCA 18; 87 ATC 4363; 18 ATR 693 (Myer) determined that transactions that are in the ordinary course of business are treated as ordinary income.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock’? provides that a business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. There is no requirement of repetition, a single acquisition by a business commenced for the purpose of development, subdivision and sale will be sufficient to constitute a business activity.

As detailed in paragraph 1 of TD 92/124, in considering whether the sale of the land is in the ordinary course of business, we are to consider the purpose for which the land is held.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? illustrates a number of indicia at paragraph 18 that are to be taken into account when considering whether a taxpayer is carrying on a business. These include the following:

● a significant commercial activity;

● the purpose and intention of the taxpayer in engaging in the activity;

● an intention to make a profit from the activity;

● the activity is or will be profitable;

● repetition and regularity of activity;

● activity is carried on in a similar manner to that of the ordinary trade;

● activity organised and carried on in a businesslike manner and systematically – records are kept;

● size and scale of the activity;

● a business plan exists;

● commercial sales of product; and

● taxpayer has knowledge or skill.

Whether a taxpayer is carrying on a business is to be judged by reference to all of the relevant indicia.

Additionally, for the purposes of property developments, 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 discusses a number of factors at paragraph 265 that are to be considered in determining whether a business of property development exists. Some of these factors include whether:

● there is a change of purpose for which the land 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 considering the factors outlined in TR 97/11 and MT 2006/1, and applying them to the facts and circumstances of your particular case, we conclude that you have not commenced a business of property development with respect to the proposed development.

Therefore, we do not consider the property to be trading stock because you do not hold the land for the purpose of sale in the ordinary course of a land development business.

Potential Characterisation

Given that the sale is not a disposal in the ordinary course of your business, there are three possible characterisations of the income resulting from the proposed disposal. The income is either:

i. a 'mere realisation’ of a capital asset under which net capital gains may be included as statutory income (which is part of assessable income) under subsection 6-10(1), 6-10(2) and subsection 102-5(1) of the ITAA 1997; or

ii. profit from an 'isolated transaction’ which is ordinary income and included in your assessable income under section 6-5 of the ITAA 1997; or

iii. profit arising from the carrying on or carrying out of a profit-making undertaking or plan under section 15-15 of the ITAA 1997 which is included in your statutory income under subsection 6-10(1) and 6-10(2).

Profits from an Isolated Transaction

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions. It states at paragraph 35 that profits on isolated transactions may be ordinary income if:

● the intention or purpose of a taxpayer 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 on a business operation or commercial transaction.

Profit Making Intention

If the transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. However, as the High Court decision in Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; [1982] HCA 8; 82 ATC 4031; 12 ATR 692 (Whitfords Beach) demonstrate, that is not always the case.

For example, if a taxpayer acquires an asset with an intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the profit is income even though the taxpayer did not have the purpose of profit-making at the time of acquisition.

Paragraph 40 of TR 92/3 states that it is not necessary that the profit-making intention be the sole or dominant purpose for entering into the transaction; however it needs to be at least a significant purpose.

The facts of your particular case indicate that a profit-making intention is not a significant purpose for entering into the transaction. Even in the event that such a profit-making intention existed, we would also have to be satisfied that a profit was made in carrying out a business operation or commercial transaction.

Business operation or commercial transaction

In order for a transaction to be characterised as a business operation or commercial transaction it is sufficient if the transaction is a business operation or commercial in nature.

Paragraph 49 of TR 92/3 provides a number of factors that may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction:

(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.

These factors are to be considered objectively in their totality, and must be weighed against all other factors. No single factor will be determinative in any particular case.

The courts have often been required to consider whether a planned development was the mere realisation of a capital asset, or an isolated transaction that amounted to a business operation or commercial transaction. See for example Statham & Anor v. Federal Commissioner of Taxation [1988] FCA 463; 89 ATC 4070; 20 ATR 228 (Statham); McCorkell v. Federal Commissioner of Taxation (1998) 98 ATC 2199; 39 ATR 1112 (McCorkell); and Casimaty v. Federal Commissioner of Taxation (1997) 97 ATC 5135; 37 ATR 358 (Casimaty).

In the case of Statham, the taxpayer acquired property in 1970 in order to conduct farming activities. Due to a depressed agricultural market, and ill-health, the taxpayer made the decision to subdivide and sell the property. The subdivision occurred over a number of stages over a six year period. The facts in the case of Casimaty are similar to those in the case of Statham.

In the case of McCorkell, the taxpayer inherited land upon the death of his father that had historically been used as an orchard. After years of using the land for this purpose, and following the rezoning of the land, the taxpayer decided to subdivide and sell the property.

In the examples outlined above, the courts found that the profits from the sale of the property were the result of a mere realisation of a capital asset. The court considered a number of factors relevant in making such a determination. These included:

● the complexity of the development;

● the extent to which the development goes further than that required to obtain council approval;

● the level of involvement that the taxpayer had in the development, marketing and sale of the property;

● whether any finance that must be obtained in order to fund the development activities;

● the purposes of acquiring the property, and whether it was used for any primary production purposes prior to sale;

● the relevant motivations behind the sale of the property;

The facts of your case support the proposition that the development and sale of the respective lots do not amount to a business operation or commercial transaction on your behalf.

Conclusion

You do not have the requisite profit-making intention, and nor does the transaction constitute a business operation or commercial transaction. Accordingly, we conclude that any profits from the development and sale of the land would result from the mere realisation of a capital asset, and would not constitute a profit from an isolated transaction.

In considering the above factors, we conclude that any profits made by you from the development would result from the mere realisation of a capital asset. The sale of each of the subdivided lots will be on capital account, such that any net capital gains would be included in your statutory income under section 6-10 and section 102-5 of the ITAA 1997.

Question 2

Will the supply of the subdivided land be a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)?

Summary

No. The supply of the subdivided land will not be a taxable supply, as you are not required to be registered for GST.

Detailed reasoning

GST is payable on taxable supplies that you make. Section 9-5 of the GST Act refers to taxable supplies and states 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.

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

Section 9-10 of the GST Act refers to the meaning of supply and states that a supply is any form of supply whatsoever. It further states that a supply includes, amongst other things, a grant, assignment or surrender of real property. Therefore, the sale of your land satisfies the criteria for a supply under the GST Act.

You will make the supply of each lot for consideration. Your supply is connected with Australia as the lots are situated in Australia. Therefore, paragraphs 9-5(a) and (c) of the GST Act will be satisfied.

As stated in the facts, you are not registered for GST, nor do you intend to register for GST. However, section 23-5 of the GST Act states that you are required to be registered if:

(a) you are carrying on an enterprise; and

(b) your GST turnover meets the registration turnover threshold.

Hence, in order to determine whether the supply of the subdivided land is a taxable supply, it is necessary to ascertain whether your supply will be made in the course or furtherance of an enterprise that you carry on, and accordingly, whether you are required to be registered for GST.

Enterprise

The term 'enterprise' under the GST Act has a wider meaning than the term 'business'. An enterprise is defined in subsection 9-20(1) of the GST Act. Amongst other things, it states that an enterprise is 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. An adventure or concern in the nature of trade can include an isolated or one -off transaction that does not amount to a business deal.

MT 2006/1 refers to the meaning of an entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (ABN). MT 2006/1 states at paragraph 263 that:

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 set out at question 1, MT 2006/1 discusses a number of factors at paragraph 265 that are relevant to whether an enterprise is being carried on.

In considering these factors and applying them to your particular facts, we do not consider the subdivision and sale of the property to be either an activity in the form of a business nor in the form of an adventure or concern in the nature of trade. As a result, we do not believe that you are carrying on an enterprise.

As you are not carrying on an enterprise, you are not required to be registered for GST. Therefore, paragraphs 9-5(b) and (d) of the GST Act will not be satisfied.

Accordingly, we conclude that the sale of the subdivided land will not be a taxable supply, and GST will not be payable on the disposal of the land.