Edited version of private advice

Authorisation Number: 1051585201011

Date of advice: 1 October 2019

Ruling

Subject: Property development, mere realisation of a capital asset

Question 1

Will amounts received from the sales of the Land be assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), or as statutory income under section 15-15 of the ITAA 1997, or would the sales be treated as a mere realisation of a capital asset?

Answer:

The development activities will amount to carrying on of a business of property development.

Question 2

Will your supply of the subdivided lots be included in the measurement of turnover for GST registration requirements under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes.

This ruling applies for the following periods:

1 June 20xx to 30 June 20xx

Relevant facts and circumstances

·         you carry on a farming enterprise.

·         You are not currently registered for GST.

·         Your total land holdings are approximately xx hectares.

·         The property was acquired for the purpose of, and has been used solely for, running a farming enterprise during the entire period of ownership to date.

·         The stakeholders are scaling back their activities, and looking to retire in the near future, and separate any joint investments wherever possible.

·         In 20xx, the council rezoned the land as residential.

·         You lodged a Development Application, which was granted in July 20xx.

·         It is proposed that the subdivision will take place in approximately 7-8 stages, expected to run over the next 5 to 10 years.

·         You have provided a signed Developer Agreement with the Developer.

·         Under the agreement, the Developer will pay you a fixed amount at every stage, plus a percentage of any excess sales proceeds if sales exceed $XX.

o   You have engaged a Developer to develop the land and a real estate agent.

·         You are providing the initial capital to finance the first stage.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

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 subsection 9-20(1)

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 188-10

Reasons for decision

Question 1: Will amounts received from the sales of the Land be assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), or as statutory income under section 15-15 of the ITAA 1997, or would the sales be treated as a mere realisation of a capital asset?

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. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

We need to consider if your obligations under the Developer Agreement and the facts of your scheme constitute the carrying on of a business of property development.

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? (TR97/11) provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. The factors that are considered important in determining the question of business activity are:

·  Does the activity have a significant commercial purpose or character?

·  Does the taxpayer have more than a mere intention to engage in the activity?

·  Is there an intention to make a profit from the activity or a genuine belief that a profit will be made? Will the activity be profitable?

·  Is there repetition and regularity in the activity?

·  Is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

·  Is the activity organised in a businesslike manner?

·  What is the size or scale of the activity?

·  Is the activity better described as a hobby, recreation or sporting activity?

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

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 amount to a business operation or commercial transaction.

Are your activities conducted in the form of a business?

(i) Significant commercial purpose or character

In your case, you have negotiated a Development Agreement with a developer, obtained feasibility studies and engaged experts to verify costs, and to assist in marketing and finding buyers for the developed lots. These activities have a commercial character. You have set up your activities in a commercial manner that would be expected of any entity involved in developing properties.

(ii) Intention

From the documents provided, it is clear that you intend that this project succeeds. You have put a lot of effort in negotiating the Developer Agreement. You have accessed feasibility studies and sought expert specialist advice in regards to this development. We conclude that this indicator is met.

(iii) Prospect of profit

You should be able to demonstrate how a profit is likely to be made, and that the expectation of profit is reasonable. It is fairly clear that there is a prospect of profit in a project of this magnitude. This indicator is met.

(iv) Repetition and regularity

You will not be involved in the ongoing development of the blocks and advertising and selling of the properties. You are merely selling the broadacre land. We believe you will still have an ongoing role throughout the project, especially in your role in providing the finance, and as land owner, when it comes to signing contracts with ultimate third-party purchasers of the house and land packages. There are several residential stages. Although you will not play an active role in this development, we do see that you will play a role up to the final sale.

(v) Activities characteristic of the industry

An activity is more likely to be a business if it is carried on in a similar manner to other participants in the same industry. An arrangement like yours, where a land-owner entails the services of a developer to develop the land, and a real estate agent to market the development and find ultimate third-party buyers, is very common in the industry. We have concluded that this indicator is met.

(vi) Business-like manner

Activities that are conducted in a systematic and organised manner are more likely to amount to a business than ones which are conducted on an ad hoc basis. There are many facts in your arrangement that contribute to this indicator, including:

·   the enlisting of a lawyer and negotiating (and re-negotiating) a Developer Agreement with the Developer;

·   Obtaining cost estimates for works for developing the land.

·   Development of the land is over several stages.

·   The stakeholders are financing the development (either by providing the property to be mortgaged or providing their own funds) - taking on the risk in the project

·   You will enter into the contracts with final third party purchasers

Therefore, we conclude that this indicator is met.

(vii) Size and scale

We consider this property development subdivision to be of a very significant size and scale. Therefore, we consider that this indicator is met.

(viii) Hobby or recreation

The pursuit of a hobby is not the carrying on of a business for taxation purposes. We accept that a development of this magnitude is not a hobby or recreation.

Our conclusion

After considering the above indicators and weighing them up, we have concluded that your arrangement will amount to carrying on of a business of land development. This means that any receipts will be included in your assessable income under section 6-5 of the ITAA 1997 as ordinary income, or failing that, under section 15-15 of the ITAA 1997 as profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

As you are carrying on a business of property development subdivision, the land will be treated as trading stock under section 70-10 of the ITAA 1997. When the land becomes trading stock, you are 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. You can elect to use the value at cost or market value of the land. If you elect for the transfer of the land to trading stock to occur at market value, CGT event K4 occurs at the time of the transfer, as per section 104-220 of the ITAA 1997.

Question 2: Will your supply of the subdivided lots be included in the measurement of turnover for GST registration requirements under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

An entity is required to be registered for GST if it satisfies the requirements of section 23-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This section states:

You are required to be registered under this Act if:

(a) you are carrying on an enterprise; and

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

Carrying on an enterprise

The term 'enterprise' is defined in subsection 9-20(1) of the GST Act to include, amongst other things, 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...

The courts have determined that the question of whether an activity constitutes a business or hobby depends upon an assessment of the relevant facts and involves matters of fact and degree. No one factor is decisive and many elements may have to be considered in combination and on what the 'large or general impression gained' is (Ferguson v. FC of T (1979) 79 ATC 4261 and Martin v. FC of T (1953) 90 CLR 470).

In determining whether you are carrying on an enterprise, we take into consideration factors which the courts have held to be relevant in determining whether an activity is an enterprise. These factors and indicators are mentioned in Taxation Ruling TR 97/11, and were considered in question 1 above. We consider you to be carrying on a business of land development for GST purposes.

GST turnover meets the registration turnover threshold

The second limb of section 23-5 of the GST Act provides that an entity is required to be registered for GST if its GST turnover meets the registration turnover threshold.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

(a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

(b) your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a) Supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises that are not new residential premises).

(b) Supplies that are not for consideration.

(c) Supplies that are not made in connection with an enterprise that you carry on.

(d) Supplies that are not connected with Australia.

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make. Section 9-5 provides that you make a taxable supply if you make the supply for consideration, in the course of furtherance of an enterprise that you carry on, the supply is connected with an indirect zone, and you are registered or required to be registered. Further, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

As the supplies of the developed lots that will be made by you meet all the requirements of section 9-5 of the GST Act and are not GST-free or input taxed, the sales of the developed lots will be taxable supplies and subject to GST. Due to the size of the development and magnitude of sums involved, it is reasonable to expect your projected GST turnover will be at or above the threshold.

Therefore, you are considered to be carrying on a business of land development for GST purposes and the supply of subdivided lots are considered taxable supplies, and included in the measurement of turnover for GST registration requirements, meaning that you will need to register for GST purposes.