Edited version of private advice

Authorisation Number: 1051610202362

Date of advice: 27 November 2019

Ruling

Subject: Mere realisation of a capital asset - pre-CGT

Issue 1

Question 1

Will the proceeds received from the sale of each individual subdivided block be assessable pursuant to section 6-5 of the Income Tax Assessment Act 1997(ITAA1997)?

Answer 1

No.

Question 2

Are the proceeds from the sale of subdivided blocks subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the ITAA 1997?

Answer 2

Yes.

Issue 2

Question 3

Is the sale of the subdivided blocks be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 3

No.

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Relevant facts and circumstances

You own pre-CGT land. You have provided details of the land and it's usage over a number of years. You built a pre-CGT dwelling on the land. You have resided in the home since it was built and it is your main residence.

There have been no significant improvements to the dwelling since construction.

Over the past decade, the council has made a decision to rezone the land in and around the area to facilitate further plans for urban development in the area.

Over a decade ago, the council decided to rezone the land from rural zone to light industrial B4 zone. This was further followed by the decision to rezone the land B6 Enterprise Corridor zone and meant any lots must maintain a minimal lot size of four thousand square meters.

You and your parent have been approached by council in the past to assist facilitating council planning in the area.

You intend to sell the land due to your age and downsizing as the land is now too large. There has been no offer from potential buyer to motivate you into subdividing your land and you have no intention to enter into a development agreement in anticipation of sale.

You are not required to undertake any physical work such as roads, driveways drainage, or connection of water or electricity mains or any other infrastructure.

This year, you considered subdividing the land. You have provided a copy of the draft concept; however, no formal application has been lodged with the local municipal council.

You envisage selling all of your land including your main residence. No formal market valuation has been obtained, however you have received an opinion from the Real Estate who indicated the current market value of the land ranges over 1 million dollars.

You have engaged a surveyor for the costings of the subdivision and at this stage there is no formal documentation, you have provided estimation for the subdivision.

You propose to create a residue subdivision and additional lots to be acquired by council for the widening of roads and the drainage area.

The land subdivision requires you to undertake the following points:

·        Completion of application form, arrangement of fee quotes from council, payment of certain applications and other fees.

·        Provide survey plan that outlines dimensions of the lots, waste and water disposal for the existing dwelling, statement of environmental effect, arrange for the contamination assessment, onsite waste water report, bushfire and indigenous assessments, obtain DA consent, lodge subdivision certificate with local council with fees paid to related to entities of the subdivision, payments for new title when they are created.

·        You are contemplating an extension of the sewer line to each new block, this is not a requirement by council.

You have decided to connect sewer to all lots, as if they were to be sold individually the purchasers of lots would need to connect their sewer line through the other lots as well as under the proposed road. If this is done prior to sale, it will eliminate the difficulty to the potential buyers mediating with each lot to organise the sewer line.

You will be not be borrowing funds to fund the subdivision activities.

You or any related entities have not previously been involved in any subdivision or property development activities.

You or any related entities do not intend to be involved in any future subdivision or property development activities.

You are registered for GST as this is required for your profession. Following the subdivision you look to sell the lots either individually or in one line to a single purchaser if the opportunity presents itself.

At this stage, you have taken the flowing steps in relation to the proposed subdivision:

·        You hired a surveyor this year and obtained a cost estimate from the surveyor.

·        You have engaged local real estate agent.

The real-estate agent will receive a commission based on the sale price obtained for the land, this is a base commission and the sale of each lot has not currently been set.

You have provided details of costs and expected proceeds.

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 102-5

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-70

Income Tax Assessment Act 1997 section 112-25

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(1)

Reasons for decision

Issue 1 - Income tax

Broadly, there are three ways profits from the subdivision and sale of pre-CGT land can be treated for taxation purposes:

1. as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development
2. As statutory income under section 15-15 of the ITAA 1997, 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, where the land was acquired or subsequently held for a profit-making purpose, and
3. as statutory income under the capital gains tax (CGT) legislation, (section 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Profits on isolated transactions

Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan (section 15-15 of the ITAA 1997).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will be income when:

a)     the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

b)     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.

Capital gains tax

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset) you own. Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997).

Split assets - subdivision of land

Where pre-CGT land is subdivided and the original owner of the land remains as the owner of the subdivided lots, no CGT event happens. (section 112-25 of the ITAA 1997). Each new lot is a separate CGT asset and retains its pre-CGT status. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

However, in cases where some work has been undertaken to improve the land, subsections

108-70(2) and 108-70(3) of the ITAA 1997 may have application. Capital improvements that are related to each other are taken to be a separate CGT asset if the total of their cost bases (assuming each one is a separate CGT asset) when a CGT event happens to the original asset is:

·        more than the improvement threshold for the relevant income year, and

·        more than 5% of the capital proceeds from the event (108-70(3)).

Note: If the improvements are a separate asset, the capital proceeds from the event must be apportioned between the original asset and the improvements: see section 116-40 of the ITAA 1997.

Disposal of a CGT asset - CGT event A1

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2)). However, a capital gain or loss you make is disregarded if you acquired the CGT asset before 20 September 1985 (subsection 104-10(5).

Application to your situation

You are not considered to be carrying on a business of property development, or to have been carrying on or carrying out a profit-making undertaking or plan. The subdivision, development and sales of the land will be considered to be the mere realisation of a capital asset. CGT event A1 will happen when each of the subdivided lots is sold. You will make a capital gain at that time. If the capital improvement expenditure for a lot is less than the improvement threshold for the relevant year, the capital gain you make on that lot will be disregarded.

Issue 2 - Goods and Services Tax (GST)

Taxable supplies

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 intend to sell your main residence, subdivide the rest of 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

Having applied all the principles in Miscellaneous Taxation Ruling MT 2006/1 to the present circumstances, we conclude that the sale of the subdivided lots will not be a taxable supply pursuant to section 9-5 of the GST Act. You are neither registered nor required to be registered for GST in regard to your activities relating to the sale of your property.