Edited version of private advice

Authorisation Number: 1051634388423

Date of advice: 19 February 2020

Ruling

Subject: Capital gains tax provisions

All references in issue 1 are to the Income Tax Assessment Act 1997 unless otherwise stated. All references in issue 2 are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

Issue 1 - Income Tax

Question 1

Will the Taxpayer's proceeds from the sales of the subdivided lots of land ('the Lots') under the terms of the Development Agreement be subject to the capital gains tax ('CGT') provisions set out in Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes

Question 2

Will the receipt of Entitlement Proportions under of the Agreement be subject to the capital gains tax (CGT) provisions set out in Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997?

Answer

Yes.

Issue 2 - Goods and Services Tax

Question 3

If the Commissioner of Taxation ('the Commissioner') considers that the net proceeds of sales of the Lots and the Entitlement Proportions will only be subject to the CGT provisions, then will he be satisfied that:

1.           the Taxpayer's "projected GST turnover" (as that phrase is defined in section 188-20 of what can be conveniently called the "GST Act") is below the relevant threshold;

2.           the Taxpayer is not required to be registered for GST; and

3.           the sales of the Lots and Entitlement Proportion payments are taxable supplies made by the Taxpayer for GST purposes?

Answer

1.           Yes. The taxpayer's projected GST turnover is below the relevant threshold.

2.           The taxpayer is not required to be registered for GST.

3.           No, the sales of the Taxpayer's Lots and the Entitlement Proportion payments are not taxable supplies made by the Taxpayer.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

1.           The late Taxpayer ('Taxpayer') purchased a property of close to X hectares or Y acres known as ('the property') in 19XX, where they built their family home and an animal training track and facilities.

2.           The Taxpayer resided in this property with their family until their death in 20XX. The taxpayer also had three businesses on the property prior to the introduction of GST and ABN.

3.           For many years prior to 20XX, the poor state of the taxpayer's health prevented them from receiving any other than pension.

4.           In 20XX, the taxpayer entered into discussion with an interested buyer for the sale of the property. The taxpayer also engaged a real estate agent and prepared a contract of sale but the sale fell through.

5.           In 20XX, the taxpayer was approached by representatives of the Developer ('Developer') to develop the property. It was proposed that their property should be aggregated with the adjacent land for the development, in order to maximise the property value.

6.           The Developer also advised the taxpayer that, in the absence of a consolidated planning push with adjoining landowners, the property value was minimal (certainly much less than what may have been achievable by proceeding with the Development Agreement).

7.           On XX XX 20XX, the taxpayer and the owners of the adjacent land entered into the Development Agreement (DA) with the Developer. On the same day, the Developer registered a caveat on the property. The caveat was subsequently granted.

8.           In 20XX, the taxpayer passed away. As they had not left a will, their spouse was appointed as the administrator of their Estate ('Estate'), and subsequently became a party to the DA.

9.           On xx xx 20xx, following the request from the Developer, the Plan was approved and the land was subsequently rezoned from a farming / rural conservation zone to a predominately residential zone.

10.        On the same day, the Estate received a loan from the Developer.

11.        On 20xx, the Developer applied for a planning permit for subdivision on the Estate's land. The permit was subsequently granted.

12.        It is submitted that all of the Estate's land is to be subdivided and sold (or transferred to council for roads, open space, etc.).

The Development Agreement

13.        As stated above, a DA was entered between the taxpayer, other adjoining landowners, and the Developer. It consists of individual development agreements with every single adjoining landowner. It also consists of a contract of sale, in which the Developer bought the land outright from an adjoining landowner.

14.        The Development Agreement prescribed that:

·        The Estate is the registered proprietor and the beneficial owner of the land until transferring the land to purchaser or vesting the land to relevant Authorities.

·        The Estate agreed to appoint the Developer to carry out the development on their land, which includes the subdivision of the development land via one or more stages into a multiple lot residential development and or mixed use residential and commercial development, and the sale and settlement of those lots.

·        The Developer will appoint Company A as its development manager for the development on terms and conditions agreed between the Developer and Company A

·        The Estate shall pay the Development Fee to the Developer progressively according to the Stage Forecast, as those amounts are disbursed from the lot sales.

·        The Development Fee includes Development Costs plus a margin.

·        The Estate is only required to pay the Development Fee to the Developer. In return, the Developer shall pay all Development Costs incurred after the effective date without seeking reimbursement or refund from the Estate.

·        The Developer shall grant a loan to the Estate on the date when the Plan is approved and gazetted.

·        The Estate shall be entitled to the Landowner Amount. xx% of which would be retained by the Estate, while the balance shall be shared between the taxpayer and the adjoining landowners in proportion to their Entitlement Proportion.

·        Under the terms of the agreement, the Estate has the right to Entitlement Proportions. This is described as a mechanism of determining the ultimate profit the Landowners are entitled to under the DA, to ensure their respective entitlements are not affected by the timing of the development and sale of their respective properties as subdivided Lots.

·        For any Lot that is sold within the broader development XX% of the gross sales proceeds (GSP) of the Lot is allocated amongst the Landowners in a proportion equal to the proportion that the relevant Landowner's developable land bears to the total developable land within the broader development. Administration of these payments is conducted by the Developer and payments are allocated by the Developer as sale proceeds are received.

·        The developer may give written notice to the Landowner to terminate the development if the sale amounts are below certain threshold.

·        Should the DA be terminated for any reason, the Developer is entitled to the Development Costs incurred up to and including the date of termination, or Development Fee accrued on any Lot sales that occurred before the date of termination.

·        The Developer shall be entitled to register a caveat on the title to the taxpayer's property noting the interest arising by virtue of the taxpayer's charge.

·        The charger as beneficial owner charges in favour of the charge the whole of its right title and interest in and to the charged property to secure the performance of the obligations.

·        The chargee (including receiver or other person appointed by the charge) shall be indemnified out of the charged property in respect of all liabilities and expenses incurred in the (purported) execution of any of the powers and discretions conferred, as well as against actions and claim relating to the Charged property. The chargee may pay out of any money received hereunder all sums necessary to effect such indemnity.

·        the Estate granted a Power of Attorney to the Developer to properly exercise all powers referred in Schedule 1 - Developer's Responsibilities in the name of the Estate.

Further information provided in response to our questions

15.        The amalgamated development consists of the subdivision of primarily residential land with some smaller areas of commercial land. Within the amalgamation there will also be roads and parkland, to be developed as appropriate to service the development.

16.        The proposed development does not include the construction of any residential or commercial properties.

17.        The taxpayer has never been involved in property development/subdivision while he was alive.

18.        The taxpayer's land was formerly in a farming zone (as to part) and a rural conservation zone (as to part). The property was rezoned on approval of the Plan.

19.        It is noted that under the terms of the DA the Developer bears all development expenses and the landowner receives a fixed proportion of the sale price of each Lot net of the Development Fee.

20.        All applications for rezoning and planning approvals were handled by the Developer. It is confirmed that all preliminary activities were handled solely by the Developer.

21.        All work pertaining to the development has been undertaken by the Developer.

22.        Neither the taxpayer nor any of his associates have been involved in the ownership of broad acre property or any aspect of land development. The costs of development are managed by the Developer. The expenditures, fees and costs referred to in the question, and the activities which give rise to those outlays, are entirely the responsibility of the Developer, in accordance with the terms of the Development Agreement. The Estate is not required to contribute in any way to the cost of the development or participate in the development, marketing and sale of the sites or administrative aspects of the development.

23.        All of the Estate's land is to be subdivided and sold (or transferred to council for roads, open space, etc.).

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 104-10(1)

Income Tax Assessment Act 1997 - section 104-10(2)

Income Tax Assessment Act 1997 - section 104-10(3)

Income Tax Assessment Act 1997 - section 104-10(4)

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

Income Tax Assessment Act 1997 - section 104-25

Income Tax Assessment Act 1997 - subsection 104-25(3)

Income Tax Assessment Act 1997 - section 115-30

Income Tax Assessment Act 1997 - section 116-20

Income Tax Assessment Act 1997 - section 128-15

Income Tax Assessment Act 1997 - section 995-1

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-5

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9- 20

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-40

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 188-10

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 188-20

Reasons for decision

All references in issue 1 are to the Income Tax Assessment Act 1997 unless otherwise stated. All references in issue 2 are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

Summary

24.        The net proceeds of sales by the Estate of subdivided Lots of land under the terms of the Development Agreement will be subject to CGT provisions set out in Part 3-1 and Part 3-3 of the ITAA 1997.

Detailed reasoning

25.        Proceeds from the sale of land will be taxed for income tax purposes in one of the following ways:

·        as ordinary income where the land is held as trading stock and sold as part of a business under section 6-5;

·        as ordinary income, where land is not trading stock and is sold as part of an isolated commercial transaction entered into with a profit-making intention under section 6-5; or

·        on capital account, where the proceeds of sale are a mere realisation of a capital asset under the CGT provisions in Part 3-1 and Part 3-3.

26.        Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

Carrying on a business of property development

27.        Section 995-1 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

28.        The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax; am I carrying on a business of primary production?, which uses the following indicators to determine whether a taxpayer is carrying on a business:

·        whether the activity has a significant commercial purpose or character;

·        whether there is repetition and regularity of the activity;

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

·        whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

29.        In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impressions gained' from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

30.        Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock? (TD 92/124) provides that land will be treated as trading stock if it is held for the purpose of resale and a business activity which involves the dealing in land has commenced. Both the required purpose and the business activity must be present.

31.        TD 92/124 further provides that the 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.

Isolated transactions

32.        Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5, on revenue account( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a 'mere realisation' which is not ordinary income.

33.        Taxation Ruling TR 92/3 - Income tax: whether profits on isolated transactions ('TR 92/3') discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5. It refers to isolated transactions' as:

·        those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

·        those transactions entered into by non-business taxpayers.

34.        TR 92/3 also provides that profits from an isolated transaction will be income when:

·        the 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.

35.        For an isolated transaction to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. In Myer Emporium, the Full High Court said the following about the nature of profits from isolated transactions and the purpose of profit-making at the time of acquisition:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

36.        In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case. Matters listed in TR 92/3, which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

(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.

37.        In determining whether activities relating to isolated transactions are a profit making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be 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.

Mere realisation

38.        Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

39.        A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from carrying on of a business or income from a profit making undertaking or scheme.

40.        The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit making scheme.

41.        Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

42.        In McClelland v FC of T [1970] HCA 39, for example, the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

43.        Lord Justice Clark, in distinguishing between proceeds that are mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

...What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out of a scheme of profit-making?

44.        In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ similarly said (at 4034), that:

When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in California Copper...'what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.

45.        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 considers at paragraphs 262 to 270 whether isolated property transactions, including those involving the subdivision and sale of land, are considered to be a profit making undertaking or scheme, as opposed to the mere realisation of a capital asset.

46.        Paragraphs 264 to 266 of MT 2006/1 state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

·     there is a change of purpose for which the land is 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.

266. 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 the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be 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.

Application to your circumstances

There is a change of purpose for which the land is held

47.        The property was originally purchased in the XX with the intention to use to use it as a residence and for animal activities. The property was in fact used for those purposes until the taxpayer's death in XXXX. The taxpayer was never required to obtain an ABN or register for GST in relation to their activity and the property was not bought for resale at a profit.

48.        Due to poor health the taxpayer's main source of income was a pension.

49.        The taxpayer had some discussions with interested purchaser to sell the property, but the sale fell through.

50.        The taxpayer was approached by the Developer and received advice that, absent a consolidated planning push with adjoining owners, the property value was minimal (certainly much less than what may have been achievable by proceeding with the development agreement).

51.        In this instance the taxpayer had minimal involvement in the subdivision of the land and has not contributed any funds, expertise or been involved in the development plans or applications. Their role is passive and subdivision activities were initiated by the Developer who is conducting the development activities and providing the funding.

52.        The arrangement was part of the property development agreement and was organised by the Developer. This was not something that was undertaken personally by the Taxpayer.

53.        The DA provides that the Developer has the responsibility and right to do all of the things which are necessary or desirable to complete the development.

54.        The Landowners responsibilities were limited to matters related to the execution of necessary documentation required by the Developer and prohibitions relating to independent personal deals with the development land.

55.        It is noted that neither the Taxpayer nor their Estate, have previously carried on an enterprise of buying, selling or developing land.

56.        It is considered that there is no change of purpose for which the whole property is held. The taxpayer entered the contract for the sale of the property and subdivision in order to realise the best possible return for the property.

Additional land is acquired to be added to the original parcel of land

57.        Even though there is an aggregation of land, it was initiate by the Developer and the Estate itself did not acquire the additional land to be added to the Estate's original parcel of land.

The parcel of land is brought into account as a business asset

58.        The land has not been brought to account as a business asset. There has been no accounting/tax treatment suggesting the land is a business asset.

There is a coherent plan for the subdivision of the land

59.        In this instance even though there is a coherent plan in place for the subdivision of the land; it is the Developer's plan and not the Estate's plan. The Estate's role in relation to the development plan has been a passive one.

There is a business organisation - for example a manager, office and letterhead;

60.        Neither the taxpayer, nor their Estate has any of the features of a business organisation like a manager, office or letterhead.

There is a level of development of the land beyond that necessary to secure council approval for the subdivision

61.        Though there is a level of development of the land beyond that necessary to secure council approval for the subdivision all those activities are the Developer's activities.

Buildings have been erected on the land

62.        The proposed development does not include the construction of any residential or commercial properties.

Other factors

63.        The Developer assumed the risk.

64.        The Developer retained control.

Conclusion

65.        In consideration of all of the above, the taxpayer's activities do not amount to carrying on a business or the undertaking of a profit making scheme. The long length of time the property was held as a capital asset, the intention at the time of purchase and the lack of change in intention, the Landowners limited involvement in the activities, together with the lack of risk all suggests the mere realisation of an asset in the most enterprising way.

66.        As the disposal of property is considered a mere realisation of a CGT asset upon the execution of the contract CGT event A1 will happen in relation to the property.

Other information

67.        Division 128 sets out the CGT rules relating to death. A summary of the cost base consequences for different assets is contained in section 128-15.

68.        As the property was acquired by the Taxpayer in XXXX (pre-CGT), the Beneficiary (i.e. the Estate) is deemed to have acquired the property on the day of the Taxpayer's death and the cost base is market value of the asset at the date of his death, under section 115-30 Items 5 and 6.

69.        Although the property was used as the main residence of the Taxpayer's spouse, the main residence exemption can only apply if the property is occupied by the taxpayer's spouse until it is sold. Partial exemption rules under sections 118-190 and 118-120 should be considered as the land is greater than 2 hectares in size and was partly used for producing assessable income during the ownership period.

70.        If none of the above applies, the normal CGT rules on the sale of assets inherited from a deceased person will apply in determining the capital gain and capital loss that arises.

Issue 1

Question 2

Summary

71.        The Entitlement Proportion will be assessed under the CGT provisions contained in Part 3-1 and 3-3 as separate and distinct CGT assets from each other and the land. A CGT event C2 under section 104-25 occurs each time there is a receipt of the Entitlement Proportion and the right to enforce a contractual obligation ends.

Detailed reasoning

CGT provisions

72.        The CGT provisions contained in Parts 3-1 and 3-3 include in assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

73.        Section 102-5 provides that your assessable income includes an amount that is a net capital gain.

74.        Pursuant to section 102-20, you can only make a capital gain or loss when a CGT event happens. The gain or loss is made at the time of the CGT event and can only be made in respect of a CGT asset.

Separate CGT assets

75.        A CGT asset is defined widely in section 108-5 to include any kind of property or a legal or equitable right that is not property.

76.        At Note 1 of section 108-5 it lists land and buildings as an example of a CGT asset.

77.        Further, Note 1 of section 108-5 lists a right to enforce a contractual obligation.

78.        In this case, the taxpayer holds the land as a CGT asset.

79.        The way the proceeds from the sale of land is treated under the DA, is that every time a Lot is sold within the wider development, the Lot owner is entitled to XX % of the Gross Capital Proceeds, XX% of which they retain at the time and the other XX% is shared among the other Landowners in accordance with their Entitlement Proportion.

80.        The right to the receipt of their Entitlement Proportion is considered a right to enforce a contractual obligation and therefore a CGT asset under section 108-5.

81.        Under this arrangement, the land and the multiple rights created under the Agreement to the Entitlement Proportion are considered separate CGT assets.

CGT event A1

82.        CGT event A1, under section 104-10, happens if you dispose of a CGT asset (subsection 104-10(1)). You dispose of a CGT asset if your ownership interest in a CGT asset changes to another entity (subsection 104-10(2)). CGT event A1 occurs when you enter into a contract to dispose of the CGT asset (subsection 104-10(3).

Capital proceeds

83.        Under subsection 104-10(4), a taxpayer will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. The capital gain is calculated by determining the capital proceeds from the disposal, less the asset's cost base.

84.        The capital proceeds from a CGT event are calculated in accordance with the rules set out in Division 116.

85.        The general rule regarding capital proceeds is outlined in subsection 116-20(1) which provides that capital proceeds are equal to the total of the money a taxpayer received, or is entitled to receive, in respect of the event happening and the market value of any other property the taxpayer has received or is entitled to receive in respect of the event happening.

Time of acquisition

86.        CGT Section 109-5 sets out the way in which you can acquire a CGT asset and the time of acquisition. It proves that generally you acquire a CGT asset when you become its owner.

87.        Division 128 sets out the effect of death on CGT assets. Subsection 128-15(2) provides that the legal personal representative or beneficiary is taken to have acquired the asset on the date of death. The Estate went on to acquire these rights on the day of his death.

CGT event C2

88.        CGT event C2 under 104-25 happens when the ownership of an intangible CGT asset (such as contractual rights) ends. The time of the event is when the asset ends. There are a number of ways such an asset can end including being released, discharged, redeemed, cancelled, abandoned, surrendered or forfeited.

89.        At the point the Estate receives their Entitlement Proportion, their right to enforce a contractual obligation ends and CGT event C2 will occur under section 104-25.

Capital proceeds

90.        Under subsection 104-25(3), a taxpayer will make a capital gain if the capital proceeds from the ending of the right are more than the asset's cost base. The capital gain is calculated by determining the capital proceeds from the ending of the right, less the asset's cost base.

91.        The Estate accepts that the right to the Entitlement Proportion would have a nil cost base for CGT purposes.

92.        The capital proceeds from a CGT event are calculated in accordance with the rules set out in Division 116.

93.        The general rule regarding capital proceeds is outlined in subsection 116-20(1) which provides that capital proceeds are equal to the total of the money a taxpayer received, or is entitled to receive, in respect of the event happening and the market value of any other property the taxpayer has received or is entitled to receive in respect of the event happening.

Conclusion

94.        The CGT treatment is summarised in the table as follows:

Issue 2 - Goods and Services Tax

Question 3

Summary

95.        The sales of the Estate's lots and the Entitlement Proportion payments are not taxable supplies made by the Estate.

Detailed reasoning

96.        Section 9-40 provides that an entity is liable for GST on any taxable supplies that it makes.

97.        Section 9-5 provides that an entity makes a 'taxable supply'if:

(a) it makes the supply for consideration

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

(c) the supply is connected with the indirect tax zone (Australia), and

(d) the entity is registered, or required to be registered for GST.

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

99.        For the supply to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

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

101.    Accordingly, we must determine whether the sale of the Lots are in the course or furtherance of an enterprise that the taxpayer carries on (9-5 (b)) and whether the taxpayer is required to be registered for GST (9-5(d)).

Enterprise

102.    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.

103.    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.

104.    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.

105.    MT 2006/1 at paragraph 262 mentions that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Further where the activities involve subdivision and sale of real property, MT 2006/1 lists a number of factors drawn from Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) to determine whether the activities are an adventure in the nature of trade. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

Application to your circumstances

106.    These factors and their application to your circumstances have been addressed above under Question 1 and are equally applicable here.

107.    It is concluded that the activities and sale of the Lots do not amount to an enterprise for GST purposes. The sale of the Lots will be regarded as the mere realisation of a capital asset.

Requirement to register

108.    Under section 23-5 of the GST Act an entity is required to register for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.

109.    In calculating current GST turnover and projected GST turnover, the following supplies 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 an entity carries on.

(d) Supplies that are not connected with Australia.

110.    Section 188-20 of the GST Act provides that an entity's projected GST turnover (among other things) is the sum of the values of all supplies made in a particular month plus the next 11 months other than supplies not made in connection with an enterprise the entity carries on.

111.    Further, in working out an entity's projected GST turnover, paragraph 188-25(a) of the GST Act requires that an entity disregards any supply made or are likely to be made, by it by way of transfer of ownership of a capital asset.

112.    In this instance the taxpayer is disposing of a capital asset and is not considered as carrying on an enterprise. Consequently there is no need to consider the projected GST turnover threshold and there is no requirement for the estate to register for GST.

Taxable supply

The sales of the Estate's lots and the Entitlement Proportion payments are not taxable supplies made by the Estate.