Edited version of your written advice

Authorisation Number: 1051422121656

Date of advice: 29 August 2018

Ruling

Subject: Relating to land subdivision

Issue 1

Question 1

Is the first element of the cost base of the property the market value of date of death?

Answer

Yes.

Question 2

Is the profit derived from the subdivision and subsequent sale, by the executor of the deceased estate considered a capital gains tax under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

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

No.

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 (GST Act)?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

The scheme commences on:

9 October 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.

You are the executor of the deceased’s estate.

The deceased had purchased the property as joint tenants, comprising a single dwelling on a suburban block of land, after 19 September 1985.

The deceased acquired sole proprietorship of the property following the death their spouse on XX XX 20XX.

From the purchase of the property until the deceased’s date of death, the property was the main residence of the deceased.

No significant improvements have been done to the property since the date of purchase and it has never been used as the capital of business or in any profit-making undertaking.

The executor of the deceased estate has proposed to realise the value of the property by demolition of the dwelling on the property, subdividing the block into a small number of lots and selling those lots.

The dwelling as it currently stands on the property would need improvements to make it at sellable state.

Demolishing the dwelling and selling the subdivided lots will be a more feasible option.

On the XX XX 20XX the council approved the application to subdivide the land.

The property’s market value of the deceased date of death was $XXX,XXX.

The estimated sale price of all the lots is between $XXX,XXX and $X,XXX,XXX.

The deceased had previously not been involved in subdivision activities.

Neither you nor any related entities have been involved in subdivision activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 128-15(4)

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 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 Section 995-1

Detailed reasoning

Issue 1

Capital vs revenue

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions.

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 Income tax: whether profits on isolated transaction are income, 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.

Cost base

If you acquire a dwelling that a deceased person owned, there are special rules for calculating cost base when working out your capital gain. The first element of the cost base or reduced cost base of the dwelling is its market value at date of death if the dwelling passes to you after 20 August 1996 (but not as a joint tenant) and it was the main residence of the deceased immediately before their death and was not being used to produce assessable income.

Application to your situation

On balance, the sale of the subdivided lots is considered to be a mere realisation of a capital asset. Profits from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997. The proceeds will be subject to capital gains tax provisions Parts 3-1 and 3-3 of the ITAA 1997.

The first element of the asset’s cost base is the market value as at the day the deceased passed away.

Issue 2

You must pay the GST payable on any taxable supply that you make.

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply.

Section 9-5 of the GST Act 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 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.

You will demolish the dwelling, subdivide the land, and sell off the lots.

The transactions will be made for consideration and the property is located in Australia therefore the transactions will meet paragraphs 9-5(a) and 9-5(c) of the GST Act. The supply of the vacant lots in your factual situation will neither be GST-free nor input taxed.

It must also be determined:

1. Whether the supply is in the course or furtherance of an enterprise being carried on, and

2. Whether there is a requirement for GST registration.

As provided in section 23-5 of the GST Act, you are required to be registered if:

● you are carrying on an enterprise, and

● your GST turnover meets the registration turnover threshold (currently $75,000).

Application to your situation

We consider that you are not carrying on an ‘enterprise’ as defined in section 9-20 of the GST Act and you are neither registered nor required to be registered for GST in regard to your activities relating to the sale of your properties.

The demolition and subdivision of the land into a small number of lots does not constitute running an enterprise and the sale of the subdivided lots will not be taxable supplies pursuant to section 9-5 of the GST Act.