Edited version of your written advice

Authorisation Number: 1051313360750

Date of advice: 28 November 2017

Ruling

Subject: Land subdivision

Issue 1

Question 1

Will the proceeds from the sale of the subdivided lots of land (the Land) be subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the proceeds from the sale of the subdivided lots from the Land be assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

Yes.

Issue 2

Question 1

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2017.

Year ending 30 June 2018.

Year ending 30 June 2019.

Year ending 30 June 2020.

Year ending 30 June 2021.

The scheme commences on:

4 December 2015.

Relevant facts and circumstances

You are the Trustee of a deceased estate and are not registered for GST.

Person A and Person B are children of the deceased, and beneficiaries and the trustees of the Estate.

The deceased passed away some years ago and the ownership of a property, totalling a number of hectares (the Land) transferred to you.

The deceased inherited the land more than 50 years ago and it was used for primary production in partnership with their spouse until their retirement some years ago, and subsequently for agistment purposes.

Under the will of the deceased, the remainder of their property was to be transferred to their Trustee on Trust which they may convert into money when and how they think best.

You are completing a subdivision of the Land in conjunction with adjacent land (the Other Lots) owned by a related entity, Company Z as trustee for a Self-Managed Super Fund (the SMSF). The deceased sold the Other Lots to the SMSF recently before passing.

Person A and Person B are directors of Company Z.

The land has not been subject to zoning changes and is currently zoned as low density residential.

A Valuation Report provided the Land value in recent years.

You and the SMSF intend to separately treat the sales of subdivided land on your respective lots of land. If any subdivided lots cross boundaries you will treat the sales as tenants in common.

You own two other lots of land which do not form part of the proposed subdivision. You do not intend to subdivide or develop these two lots at this point in time. You may however sell one or both of the lots to assist in funding the current subdivision.

The development will be fully serviced with water, sewer, roads, telecommunications NBN and gas if available at the time of construction.

You will engage local real estate agents as and when the lots become available for sale.

It is the preference of you and the SMSF that the subdivision is carried out in stages (quantity of which is yet to be resolved) to enable initial completion and subsequent sale of lots to fund additional stages. You have funds to (approximately) initially fund stage one. The SMSF also has funds to attend to their commitments.

A number of planning permits had been lodged or approved under the deceased’s ownership, all of which have lapsed.

You do not have a current planning approval for the subdivision. You have provided an Outline Development Plan for the proposed subdivision for over 100 lots prepared by Service Provider AA (the Plan). This Plan outlies the subdivision occurring across the Land and the Other Lots. The approximate division between the Land and the Other Lots is shown. The Land will comprise of around 50 subdivided lots of land.

You are currently awaiting a traffic impact assessment report (TIAR) and once received, the Plan will be amended to include the recommendations of the TIAR and the planning permit application will then be submitted to the Council.

The following entities (Service Providers) have been engaged for the subdivision (in some cases prior to the transfer of the Land to you) and you will be continuing to rely on the previous and future work performed by these Service Providers:

● Service Provider AA – to attend to town planning, engineering, surveying and project management.

● Service Provider BB – engaged by Service Provider AA to attend to traffic engineering.

● Service Provider CC – engaged by Service Provider AA to attend to a cultural heritage management plan.

You are not connected with or control any of these service providers.

The activities you undertake in relation to the subdivision (on your behalf and also on behalf of the SMSF) are to:

● meet with

● Project Manager - Service Provider AA

● Accountant

● Solicitor

● pay any costs as they arise.

You are in regular contact with your project managers and attend to both your matters and those of the SMSF.

All costs incurred in relation to the development have totalled a specified amount since the Estate of deceased came into being. All costs have been incurred by you, however, the sum of approximately half is the amount that specifically applies to you. As the SMSF has not paid any expenses, these will need to be reimbursed to you.

You have provided a copy of a spreadsheet listing the subdivision costs from a number of years ago (prior to the passing of the deceased) for the Land and the Other Lots.

Service Provider AA have provided that an estimate of development costs has not been undertaken as a planning permit has not been issued yet which allow consideration for Council requirements. However, Service Provider AA have provided an estimate of costs per allotment.

Service Provider AA will be paid according to the work they carry out, and not under a profit sharing arrangement.

The SMSF has obtained an estimate of lot sales for the proposed subdivision, and you have provided a copy of the relevant letter which also provides details of property.

Estimated proceeds are approximately several million dollars.

You have provided a copy of an environmental assessment report, which Service Provider AA is listed as the contact. The environmental assessment report imposes a number of conditions on the development of the land.

You have provided a copy of traffic engineering advice prepared by Service Provider BB. It is addressed to Service Provider AA and includes information on the works and costs that may be required.

The proposed subdivision incorporates two areas of open space including:

● An area where it is prohibited to be developed because of the limitations imposed by a height restriction relating to the nearby aerodrome; and

● An area of land where it is prohibited to be developed as specified under a cultural heritage management plan.

You have made no attempts to dispose of the land in its entirety.

You currently have no formal agreement in place between you and the SMSF in relation to the subdivision.

You have not been involved in any other subdivision activities or land developments apart from the connection you have to SMSF and its involvement with this current subdivision.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Subsection 995-1(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 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Division 188

Reasons for decision

Issue 1

Summary

On balance, you are carrying on a business, and the proceeds on the sale of the subdivided blocks are on revenue. Alternatively, you have entered into a profit making undertaking or scheme, and the proceeds are on revenue. This means that you have derived ordinary income which is assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

There are three ways profits from property sales can be treated for taxation purposes:

1. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2. As ordinary income under section 6-5 of the ITAA, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;

3. As statutory income under the capital gains tax legislation.

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997 defines ‘business’ as ‘including any profession, trade, employment, vocation or calling, but not occupation as an employee’.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner’s view of the factors used to determine if you are in business for tax purposes. In the Commissioner’s view, the factors that are considered important in determining the question of business activity are:

● whether the activity has a significant commercial purpose or character

● whether the taxpayer has more than just an intention to engage in business

● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

● whether there is regularity and repetition of the activity

● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

● the size, scale and permanency of the activity, and

● whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one factor is decisive. The indicators must be considered in combination and as a whole.

As to when such a business is taken to have commenced, Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? also states 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.” That is, the land will become trading stock when you are demonstrably fully committed to the business of land development. When that occurs is determined by a consideration of the facts of the case.

Trading Stock

When the business starts, the subdivided land becomes trading stock. 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 states that land will be treated as trading stock for income tax purposes if it is held for the purpose of resale and a business activity which involves dealing in land has commenced. Where such a business exists, the proceeds from the sale will be assessable under section 6-5 of the ITAA.

Isolated transactions

Alternatively, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income where:

● 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 operation or commercial transaction.

Taxation Ruling TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer’s subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

At paragraphs 56 and 57, Taxation Ruling TR 92/3 explains that a profit is income where it is made in any of the following situations:

● a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

● a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

● a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

CGT provisions

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss of those capital proceeds are less than the reduced cost base of the block.

Where the land is treated as trading stock, section 118-25 of the ITAA 1997 provides that a capital gain or capital loss you make at the time of CGT event is disregarded.

Application to your situation

Carrying on a business

Taking all of the facts into consideration, and on weighing the various factors, you are considered to be carrying on a business of property development, or alternatively, to have entered into a profit-making scheme or undertaking.

We acknowledge that the deceased inherited the land from their parent in a number of decades ago, and it was used by the deceased for primary production purposes in partnership with the deceased’s spouse, until retirement some years ago. Since the deceased’s retirement, the property was used for agistment purposes. Furthermore, we acknowledge that you, as the trustees of his estate, wish to carry out the development in accordance with the steps previously carried out by the deceased, based on the intention of deceased in relation to the development of the subject land. However, this private ruling has considered the relevant facts in relation to the scheme being carried on by you, the trustees of the deceased’s estate.

There have been no attempts to dispose of the land in its entirety, either to another party or a developer, rather you are developing the land and baring the associated risk. We note that the living study prepared some years ago does not specifically amount to an approach from the local council, but provides details of the land’s development potential. Additionally, you have taken actions to obtain a planning permit shortly after acquiring the land, although you are yet to receive an approval.

The development is planned, organised and carried on in a businesslike manner in order to make a profit; showing that the subdivision has a significant commercial purpose. The large scale of the total development, producing in excess of 100 lots with approximately 50 of those lots attributable to you, further supports the view that you are carrying on a business. While the entire development can be carried out in one stage, it is your preference that it is completed over a number of stages. It is clear that the land is now held by you for the purpose of development and resale, as opposed to its use by previous owners for primary production and agricultural activities.

The development will require significant infrastructure activities. Service Provider BB has been engaged to attend to traffic engineering and the development will include water, sewer, roads, telecommunications, NBN and gas if available at the time of construction. Service Provider CC has been engaged, who have completed a cultural heritage management plan, and Service Provider AA who project manage the development and will attend to other tasks including town planning, engineering and surveying.

Once the land has been developed and subdivided, you will continue to hold the subdivided lots for the purposes of sale and in some instances there may be some lots where there is a cross over in ownership with the SMSF. In such complex situations, you intend to deal with these blocks as tenants in common. Additionally, you bare a degree of risk in any arrangement with the SMSF. You have no formal agreement with the SMSF and the broader development being carried out is reliant on the understanding and compliance of the SMSF in a range of matters across the development.

You have engaged a number of entities in relation to the development; although you may be guided by the advice of your advisors, including project managers, you retain ultimate control as the final decision maker with respect to the subdivision activities on your land. You are in regular contact with your project managers, attending to both your matters and matters of the SMSF at the same time.

The financial risk involved in the development rests directly with you as legal owner and due to you using your own funds. While you stand to profit from the overall development, in the event the development fails, you will be subject to losses or resulting liabilities. Ultimately, you will bare all profit and loss risk in relation the development of your land.

You will incur significant expenses in relation to the development, with the SMSF to reimburse you for the costs attributable to it. Based on the estimated costs provided per allotment, your subdivision costs will be significant. You expect to receive substantial proceeds from the sale of the subdivided lots. This is substantially higher than the expected market value when you acquired the land on the passing of the deceased and indicates that by undertaking the development, there is an intention to make a profit, rather than the sale being a capital transaction to realise the value of the land. Based on the figures provided, the objective intention is that the development will be undertaken for the purpose of producing a profit.

In Casimaty, Ryan J found that the taxpayer was not carrying on a business of property development, but was merely selling off the family farm, that had been gifted to him by his father, in a piecemeal fashion. In Casimaty, the property was subdivided in a number of stages, at different times, so that there was ‘no coherent plan conceived at the outset’.

Your situation can be distinguished from Casimaty in that you are not undertaking the subdivision in a piecemeal fashion. A coherent plan is in place for the development of the land. Furthermore, it is considered that the size and scale of the development being undertaken is such that the development cannot be considered to be a mere realisation of the land.

Your case shares some similarity to Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) which involved a 220 block subdivision with the taxpayer actively involved in the planning, employment of contractors and marketing of the blocks. The Court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amounted to the carrying on of a business.

Furthermore, as you are carrying on a business of property development and subdivision, the land will be treated as trading stock under section 70-10 of the ITAA 1997. When the land becomes trading stock, the owner is treated as having disposed of the land for either its cost or market value and acquired the land back as trading stock for the same amount. The owner can elect to use the value at cost or market value of the land. If the owner elects to use the market value, CGT event K4 will occur. CGT event K4 occurs when the business commences.

Isolated transactions

Alternatively, the Commissioner is satisfied that if you are not carrying on a business, the proceeds from the sale of the properties will be those from an isolated transaction. Based on the facts, it can be concluded that the development and subsequent sale of the subdivided lots, occurs with the intention of profit as a commercial transaction.

Therefore, proceeds from the sale of the subdivided blocks will constitute a profit from an isolated transaction and should be included as ordinary income under section 6-5. Following this, where you are not carrying on a business the land would not be treated as trading stock.

Conclusion

In this case, you are considered to be carrying on a business of property development and any profit from the sale of the subdivided lots will be assessable as ordinary income under section 6-5 of the ITAA 1997. The Land will be considered trading stock, and any capital gain or loss made at the time of sale of the subdivided lots will be disregarded under sub-section 118-25(1)(a).

Alternatively, whilst CGT event A1 will occur on the disposal of the subdivided blocks, the disposal of each lot will be viewed as an isolated transaction. Any profit from the sale will be assessable as ordinary income under section 6-5 of the ITAA 1997 as an isolated transaction. Any capital gain arising from each CGT event will be reduced to the extent any profit is also assessable under section 6-5 of the ITAA 1997.

Issue 2

In this reasoning of issue 2:

● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all terms marked by an asterisk are defined terms in the GST Act

● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides that you make a taxable supply if:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (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.

You intend to subdivide the Land into residential lots. For the supply of your subdivided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

In this case, you will be selling vacant residential lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Further, the supply of the lots in your situation will neither be GST-free or input taxed.

Accordingly, we must determine whether:

(a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and

(b) if so, whether you are required to be registered for GST.

Enterprise

We acknowledge that the deceased inherited the land from their parent many years ago, and it was used by the deceased for primary production purposes in partnership with the deceased’s spouse, until retirement some years ago. Since their retirement, the property was used for agistment purposes. Whilst it is acknowledged you are carrying out your late parent’s wishes by continuing the subdivision, this private ruling must consider the relevant facts in relation to the scheme being carried on by you, the trustees of the deceased’s estate.

Section 9-20 provides that the term ‘enterprise’ includes, among other things, 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 phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 provides guidance on what activities will amount to an enterprise.

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’. In particular:

● 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.

Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to a business.

In addition paragraph 265 of MT 2006/1 includes a list of factors from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) in relation to isolated transactions and sales of real property that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade is being carried on. If several of these factors are present it may be an indication that a business or an adventure in the nature of trade is being carried on.

You have advised that your intention is to carry out the deceased’s intention in realising this farmland in the current subdivision. The intention of the deceased is not the relevant factor in this situation. What is relevant are your intentions. In Federal Commissioner of Taxation v. N.F. Williams 72 ATC 4188, the following consideration of intention was given in the judgement of Barwick CJ:

The intention with which the respondent's spouse purchased their interest in the land and their purpose in divesting themselves of that interest are, in my opinion, irrelevant to the determination of the character for the purposes of the Act of the receipt by the respondent of the proceeds of the sale of their interest in the land. Neither the fact that the respondent's spouse had purchased what they later gave to their spouse with a view to its resale by them at a profit nor the fact that the respondent's spouse subsequently decided to transfer the interest in the land to the respondent so as to deny themselves the opportunity to make a profit by its sale and to provide the respondent with an opportunity to make money is relevant, in my opinion, to the determination of whether or not the respondent received assessable income when they obtained their share of the proceeds of the sale of the land.

Whilst you have advised the purpose of the development is to carry out the deceased’s wishes, this is not a determinative factor. What is relevant are your intentions at the time you obtained your interest in the land and the character of the asset based on your facts and circumstances. In your situation there is a clear profit making intention as evidenced by the research conducted on the development costs and estimates of sale. Proceeds are estimated at several million dollars, whilst estimated costs are significant.

Paragraph 266 of MT 2006/1 recognises that in determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine all the facts and circumstances. Whilst this includes consideration of the factors outlined above there are other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

Further factors we have taken into consideration include:

● You have made no attempts to sell the land in its entirety to another party or a developer. You are developing the land and bearing the associated risk. You took actions to obtain a planning permit shortly after acquiring the land. You hold the land for the sole purpose of development and resale, as opposed to its use by previous owners for agricultural activities.

● The development has a significant commercial purpose and is planned, organised and carried on in a businesslike manner in order to make a profit. This is supported by the large scale of the total development of in excess of 100 lots approximately 50 of those lots attributable to you. While the entire development can be carried out in one stage your preference is to complete it over a number of stages.

● Significant infrastructure activities are planned including roads, water, sewer, telecommunications, NBN and gas if available at the time of construction. This has required the engagement of Service Providers to attend to project management including town planning, engineering and surveying, as well as traffic engineering, and a cultural heritage management plan.

● Once the land has been developed and subdivided you will continue to hold the subdivided lots for the purposes of sale. Some lots may be jointly owned with the SMSF which you intend to deal with as tenants in common. You bare a degree of risk in any arrangement with the SMSF as you have no formal agreement and the broader development is reliant on the understanding and compliance of the SMSF in a range of matters across the development.

● Whilst Service Providers are engaged and you may be guided by your advisors including project managers, you retain ultimate control as the final decision maker with respect to the subdivision activities on your land. You are in regular contact with your project managers and attend to both your matters and those of the SMSF.

● The financial and commercial risk rests directly with you as the legal owner using your own funds. You bare all profit and loss risk in relation the development of your land.

● You will incur significant expenses including at this stage. The expected proceeds are substantially higher than the Land’s market value when you acquired the land from the deceased. This indicates that by undertaking the development, there is an intention to make a profit, rather than realise the value of the land thorough a sale of a capital asset.

The level of development undertaken by you to create individual serviced residential lots suitable for sale is an important factor and is considered further. The phrase used in court cases of ‘undertaking only the development of the land required to secure council approval for subdivision’ must be taken in the context of the level of activity required for the relevant development and not simply based on the fact that the parties carried out what council required them to do.

The level of development in your case can be contrasted with that undertaken in the cases of Statham & Anor v. Federal Commissioner of Taxation; (89 ATC 4070); (20 ATR 228) and Casimaty v. FC of T; (1997) 151 ALR 242:

Statham

● The process by which the land was subdivided was relatively simple so far as the owners were concerned. All that was required of them was the making of applications to the Kingaroy Shire Council and the provision of a bond to it by way of a bank guarantee.

● The Council, after approval of the application, undertook all the necessary subdivisional work. This included roads, earthworks, sewerage and electrical works. Three subsequent applications were made to the Council in relation to stages 2, 3 and 4 of the subdivision.

● The owners sold the subdivided land simply by listing it with local real estate agents. The marketing of the land was attended to by the agents without participation by the owners.

● Although the owners obtained some professional advice from an engineering firm, they did not engage any contractors to carry out work, leaving that to the Kingaroy Shire Council.

Casimaty

● No coherent plan was conceived at the outset for the subdivision of the whole of the property, even in stages, to maximise the return from the aggregate of the individual lots.

● The taxpayer did not undertake any works on, or development of the land beyond what was necessary to secure the approval by the municipal authorities. Had he constructed internal fencing or other improvements, it would have been easier to impute an intention to carry on a business of land development and improvement.

In the course of his judgement in FC of T v Whitfords Beach Pty Ltd, Mason J acknowledged that merely because a sale of land is preceded by subdivision does not preclude it from being the realisation of a capital asset. However, his Honour pointed out that the surrounding circumstances of a subdivision may carry it across the line into the business of land development. His Honour concluded, at ATC 4047 – 4048; CLR 385:

… In this respect I do not agree with the proposition which appears to be founded on remarks in some judgements that sale of land which has been subdivided is necessarily no more than the realisation of an asset merely because it is an enterprising way of realising an asset to best advantage. That may be so in the case where an area of land is merely divided into allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvements of the land to such a marked degree that it is impossible to say that it is mere realisation of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Whether subdivisional activity is sufficiently extensive and systematic to amount to the conduct of a business is a question of fact.

Ryan J continued in Casimaty that in his view, the approach which has to be taken to the question of fact raised by cases of this kind has been illuminated by the following passage, at 330, from the dissenting judgment of Dean J in Whitfords Beach 79 ATC 4648; (1979) 44 FLR 312 which was approved on appeal by the Full High Court (82 ATC 4031; 150 CLR 355):

The determination of the question whether the proceeds of sale of an asset should properly be seen as representing profits made in the ordinary course of what is in truth a business will not infrequently require precise definition both of the relevant business and of those activities which are comprehended in its ordinary course…

Where a person who carries on a business sells an asset which had been held as a capital asset, one must, in each case, ask the question whether the asset was devoted to the particular business to such an extent that it can properly be said that the proceeds of sales represent profits made in the ordinary course of that business.

In a case where the asset has been divided and the divided parts improved in the course of a business of dividing and improving such assets, it would be rare that one could say that the profits from sale of the individual improved items (after making allowance for the value of the original asset) represented part of the proceeds of mere realisation of a capital asset as distinct from profits made in the ordinary course of that business. Where the activities of dividing and improving are of sufficient scale and scope, the fact that no prior independent business existed will not prevent those activities themselves constituting a business of which the profits arising on sale are the ordinary proceeds.

Your situation can be distinguished from Casimaty in that you are not undertaking the subdivision in a piecemeal fashion. A coherent plan is in place for the development of the land. Furthermore, it is considered that the size and scale of the development being undertaken is such that the development cannot be considered to be a mere realisation of the land.

Your case shares some similarity to Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) which involved a 220 block subdivision with the taxpayer actively involved in the planning, employment of contractors and marketing of the blocks. The Court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amounted to the carrying on of a business.

After examining all the facts and circumstances, on balance, we consider your activities are a series of activities done in the form of a business and/or a series of activities done in the form of an adventure or concern in the nature of trade. The resulting individual residential lots (fully serviced) from this development for the purposes of sale and have the character of a revenue asset, rather than a realisation of a capital asset.

As such, your sale of the lots are in the course or furtherance of an enterprise that you are carrying on satisfying paragraph 9-5(b).

Registration

Section 23-5 provides that you are required to be registered for GST if:

(a) you are carrying on an enterprise, and

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

The registration turnover threshold is currently $75,000.

Section 188-10 provides that you have a GST turnover that meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or

(b) your projected GST turnover is at or above the turnover threshold.

Of relevance here is your projected GST turnover. Section 188-20 provides that your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made or are likely to make during that month and the next 11 months other than input taxed supplies.

In working out your projected GST turnover, paragraph 188-25(a) requires that you disregard any supply made or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

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.

Goods and Services Tax Ruling GSTR 2001/7 Goods and Services Tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of a ‘capital asset’ at paragraphs 31 to 36.

Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets.

We have considered section 188-25 and this section does not apply as the sale of the lots has the character of a revenue asset, rather than a realisation of a capital asset.

As the sale proceeds for the sale of the lots will exceed the registration turnover threshold you will be required to be registered for GST.

The supply of your subdivided land is considered to be a taxable supply as all of the requirements of a taxable supply under section 9-5 will be met.