Edited version of private advice

Authorisation Number: 1051734451794

Date of advice: 05 August 2020

Ruling

Subject: Property development and sale

Question 1

Did XCo start holding the Subdivision Land as trading stock within the meaning of section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on 1 January 2016?

Answer

yes

Question 2

Does XCo hold the Investment Land as trading stock within the meaning of section 70-10 of the ITAA 1997?

Answer

No

Question 3

Will the amount of compensation to be received by XCo for the compulsory acquisition of the Reserve Land be assessable income for XCo under sections 6-5, 15-15 or 102-5 of the ITAA 1997?

Answer

Yes. It will be assessable under section 6-5 of the ITAA 1997.

Question 4

When XCo starts holding the Subdivision Land as trading stock on 1 January 2016, will an amount be included in XCo's assessable income pursuant to sections 6-5, 15-15 or 104-220 of the ITAA 1997?

Answer

No

Question 5

Was the Land a 'pre-CGT asset' for the purposes of section 149-10 of the ITAA 1997 and Subdivision 149-B of the ITAA 1997 immediately before 1 January 2016?

Answer

Yes, to the extent that it is not property acquired after 1985.

Question 6

Has XCo commenced carrying on an enterprise for the purposes of paragraph 9-5(b) and section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) from 1 January 2016?

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Answer

Yes, from 1 January 2016, the land subdivision and development activities undertaken by XCo have constituted an enterprise for the purposes of paragraph 9-5(b) and section 9-20 of the GST Act.

Question 7

Will the subdivision of the Land by XCo be a taxable supply under section 9-5 of the GST Act?

Answer

No.

Question 8

Will the sale of the individual lots by XCo be considered to be taxable supplies under section 9-5 of the GST Act?

Answer

Yes.

Question 9

Can XCo apply the margin scheme for the purposes of calculating the GST payable in accordance with subsection 75-10(1) of the GST Act on any taxable supplies of the Land that it makes?

Answer

Yes.

Question 10

Is the margin calculated for the purposes of subsections 75-10(2) and (3) of the GST Act to be the difference between the sale proceeds received from the sale of the individual lots and a valuation of these individual lots as at 1 January 2017?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

Year ending 30 June 2029

Year ending 30 June 2030

Year ending 30 June 2031

The scheme commences on:

1 July 2012

Relevant facts and circumstances

XCo was incorporated in Australia before 1985. XCo was registered for GST with retroactive effect from 1 January 2017. Of the shares in XCo, 'A' class shares only carry voting rights. The 'B' class shares entitle the holder to receive dividend and capital distributions from XCo.

Family X included three Children: Child 1, Child 2 and Child 3.

Immediately before 20 September 1985, the shareholding of XCo was as follows:

1.   1 held 2 'A' class shares and 100 'B' class shares, and had a vested and indefeasible interest in an additional 100 'B' class shares through Child 1 Trust.

2.   2 held 1 'A' class share and 100 'B' class shares, and had a vested and indefeasible interest in an additional 100 'B' class shares through Child 2 Trust.

3.   3 held 2 'A' class shares and 300 'B' class shares.

Before 1985, XCo purchased rural property (the Land) in Australia for the purposes of undertaking activities connected with the agricultural industry, and for the personal use of Family X. Subsequently, XCo's agricultural activities were relocated and the Land was leased to agricultural tenants. The leasing supplies in the period 1 July 2000 to 31 December 2015 did not exceed the relevant GST Registration threshold.

Subsequently, the Children formed a partnership (the Partnership) which acquired land adjacent to that held by XCo. Decisions in relation to XCo and the Partnership were made unanimously by the Children.

Together, XCo and the Partnership held a large contiguous parcel of land (Total Land). Various maintenance activities were undertaken in relation to the Total Land over the period of ownership.

Prior to 30 June 2000 but after 20 September 1985, XCo acquired additional land adjacent to its existing landholdings.

The Partnership made a number of attempts to rezone and develop all or part of the Total Land, and undertook various activities and obtained various reports in relation to the Total Land that would assist in obtaining relevant developmental approvals for the subdivision of the land into residential lots.

Minutes of a meeting of the board of XCo and the partners of the Partnership on 1 July 2012 disclose that it was agreed to commence work on various development applications to prepare the Total Land for sale, and that if the Total Land could not be sold, the development approvals would ready the property for development.

Subsequently, Child 3's interests in XCo and the Partnership were bought out by related entities of Child 1 and Child 2, and Child 3 ceased any involvement with the Total Land.

XCo and the Partnership obtained development approval for work on the Total Land.

Until 31 December 2015, the Total Land was subject to exclusive leases by third parties.

Since 1 January 2016, development and construction activities have taken place on the Total Land. Sale of lots to the public also commenced in January 2016. Settlement in relation to the first lot for XCo (which was above $75,000) was expected to take place in January 2018.

The real property held by XCo includes:

·    Subdivision Land: land held for the purposes of subdivision and sale. For the year ended 30 June 2016, XCo will elect under subsection 70-30(1) of the ITAA 1997 that the land ventured into the business of land development and subdivision is deemed to be sold and reacquired at market value as at 1 January 2016. XCo will also elect the sale and reacquisition at cost for relevant post-CGT land.

·    Investment Land: land retained by XCo for the purposes of constructing commercial and retail premises which will be let and held indefinitely.

·    Reserve Land: the land zoned by the Department of Planning for the construction of compulsory infrastructure works, including roads, parks and reserves, and drainage basins. The land is being developed by XCo and will be compulsorily acquired by the local authorities, with compensation to be paid by the local authorities to XCo for the acquisition of the land. The acquisition by the local authorities will take place when the subdivision of the Reserve Land is approved. When subdivision occurs, title to the new subdivided parcel of land will vest automatically in the local authorities.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-10(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-25(4)

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-15

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

A New Tax System (Goods and Services Tax) Act 1999 section 38-475

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

A New Tax System (Goods and Services Tax) Act 1999 section 75-14

A New Tax System (Goods and Services Tax) Act 1999 section 75-15

A New Tax System (Goods and Services Tax) Act 1999 section 75-16

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1936 subsection 25A

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 subsection 70-10(1)

Income Tax Assessment Act 1997 subsection 70-30(1)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-220

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 subsection 118-25(2)

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 paragraph 149-10(a)

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

A New Tax System (Good and Services Tax) Regulations 1999 regulation 23-15.01

Reasons for decision

Question 1

Ordinary course of a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on the indicia of carrying on a business. TR 97/11 provides that while the term 'business' is defined in subsection 995-1(1) of the ITAA 1997 to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee', this definition does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Paragraph 13 of TR 97/11 states that case law has indicated the following factors as relevant in the determination of whether a taxpayer is carrying on business, although the Commissioner notes at paragraph 14 that no single factor is decisive:

a)  er the activity has a significant commercial purpose or character;

b)  er the taxpayer has more than just an intention to engage in business;

c)  er the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

d)  er there is repetition and regularity of the activity;

e)  er 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;

f)   whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

g)  ize, scale and permanency of the activity; and

h)  er the activity is better described as a hobby, a form of recreation or a sporting activity.

Trading stock

Division 70 of the ITAA 1997 provides rules regarding the taxation of trading stock. Relevantly, subsection 70-10(1) of the ITAA 1997 provides that:

Trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business ...

In FCT v St. Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 (St Hubert's Island), the High Court held that land may be trading stock for the purposes of the definition in the income tax legislation.

The High Court in St Hubert's Island concluded that, for a business whose purpose was the development and subdivision of property for sale, the subdivided lots were the trading stock of the relevant taxpayer. Further, it was held that the legislative definition of trading stock also encompassed the materials from which a taxpayer manufactured its trading stock: i.e. the undeveloped land.

Subsection 70-30(1) of the ITAA 1997 provides that:

If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:

(a) just before it became trading stock, you had sold the item to someone else (at *arm's length) for whichever of these amounts you elect:

·    its cost (as worked out under subsection (3) or (4);

·    its market value just before it became trading stock; and

(b) you had immediately bought it back for the same amount.

Subsection 104-220(1) of the ITAA 1997 provides that CGT event K4 happens if you start holding as trading stock a CGT asset that you do not already hold as trading stock, and you elect under paragraph 70-30(1)(a) of the ITAA 1997 to treat the asset as having been sold for its market value. However, subsection 104-220(4) of the ITAA 1997 then provides that a capital gain or loss will be disregarded where the asset was acquired prior to 20 September 1985.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? (TD 92/124) states that land is treated as trading stock for income tax purposes if it is held for the purposes of resale and a business activity which involves dealing in land has commenced. TD 92/124 states 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.

Is XCo carrying on business?

From incorporation, XCo was used to carry on various business activities. Subsequently, the primary use of the Land was as a capital asset from which rental income was derived from agricultural leases.

Subsequently, activities were undertaken in relation to the Land that were designed to increase its value. Although these activities were primarily undertaken by the Partnership, this has at all times been controlled by the ultimate controllers of XCo.

On 1 July 2012, the Children agreed to commence work on various development applications to prepare the Total Land for sale. Property development activities such as obtaining development approvals and various marketing activities were undertaken.

On 31 December 2015, the agricultural tenancies over the Total Land expired.

From January 2016, sale of lots from the Subdivision Land to the public commenced.

Considering the factors listed in TR 97/11, given the significant activities undertaken in relation to the Land on behalf of XCo that occurred from January 2016, XCo has been carrying on a business of property development from at least that point. Relevantly:

·       ctivities have a significant commercial purpose or character, as they were intended to significantly improve the value of a substantial currently held asset and prepare it for sale in portions. XCo has engaged consultants and contractors with relevant professional experience in the field, and has access to detailed reports regarding the proposed use to which the Land will be put.

·       as more than just an intention to engage in business, as it has commenced business activities, including the entry into contracts for the sale of residential lots.

·       as a purpose and prospect of profit from the activity, as the activities are designed to increase the profitability of the land held.

·        is repetition and regularity of the activities undertaken by XCo, as the development and preparation of the land for sale involves ongoing activities.

·       ctivities undertaken by XCo are consistent with those undertaken by a business of property development and sale.

·       ctivities undertaken indicate that XCo is undertaking its activities in a businesslike manner directed at making a profit.

·       ize and scale of the activities are significant and the physical development activities undertaken in relation to the land are also significant and substantially permanent.

·        activities are not to be characterised as a hobby, a form of recreation or a sporting activity.

Is the land held as trading stock?

As stated above, the High Court in St Hubert's Island held that, for a business whose purpose was the development and subdivision of property for sale, the subdivided lots were the trading stock of the relevant taxpayer. Further, the High Court held that the legislative definition of trading stock also encompassed the materials from which a taxpayer manufactured its trading stock; relevantly, the undeveloped land.

Here, XCo has taken certain land (the Subdivision Land) and developed and subdivided some of that land, and is planning on or in the process of developing and subdividing more of that land.

From the time that the agricultural leases over the Land ended on 31 December 2015, the purpose for which XCo was holding the Subdivision Land was that of development and subdivision. Prior to this time, the Land was unable to be developed due to the existing rights of the tenant in relation to that land.

The Subdivision Land was the raw material out of which XCo would manufacture its tradeable items (i.e. the subdivided residential lots). The Subdivision Land has a direct relationship to the eventual tradeable items, because it will be subdivided into those individual residential lots.

As XCo is carrying on the business of property development and sale, the residential lots that will be created out of the Land will be something that is held by XCo for purposes of sale in the ordinary course of its business. It therefore follows that the raw materials out of which the residential lots are made will also be items of trading stock, under the reasoning in St Hubert's Island.

As XCo already held the Subdivision Land, section 70-30 of the ITAA 1997 will apply due to the change in purpose for which the land is held.

Question 2

XCo has characterised certain portions of the Land as Investment Land. This land will be used to construct commercial and retail premises and XCo will not dispose of this land in the ordinary course of XCo's property development and sale business.

This land will not be used for the manufacture of XCo's tradeable items (i.e. the residential lots contained on the Subdivision Land) and will therefore not be held by XCo as trading stock within the meaning of section 70-10 of the ITAA 1997.

Question 3

The land that is classed as Reserve Land will be compulsorily acquired by the local authorities and compensation for this acquisition will be paid to XCo. The Reserve Land consists of land acquired after 20 September 1985 (the Post CGT Reserve Land) and land acquired prior to 20 September 1985. The acquisition by the local authorities will take place when the subdivision of the Reserve Land is approved. When subdivision occurs, title to the new subdivided parcel of land will vest automatically in the local authorities.

Although the Reserve Land only forms part of various larger pieces of land that are each represented by a single certificate of title, each piece of the Reserve Land will nonetheless be a CGT asset in its own right. This is because paragraph 108-5(2)(a) of the ITAA 1997 provides that part of a CGT asset is also a CGT asset.

On the compulsory acquisition of the Reserve Land, either CGT event A1 or CGT event C1 will occur; however, as the exact identification of the relevant CGT event will not affect the calculation of any capital gain or loss arising from the compulsory acquisition, it is unnecessary to decide which is the most appropriate CGT event.

Where the Reserve Land was acquired by XCo prior to 20 September 1985, any capital gain or loss made as a result of the compulsory acquisition will be disregarded under either paragraph 104-10(5)(a) or subsection 104-20(4) of the ITAA 1997.

As the Post CGT Reserve Land was acquired after 20 September 1985, neither paragraph 104-10(5)(a) nor subsection 104-20(4) of the ITAA 1997 will operate to disregard any capital gain or loss made as a result of the compulsory acquisition this land.

Revenue gain considerations

A profit derived from the sale of property acquired before 20 September 1985 may be assessable income under a number of different provisions, if certain conditions are met: see Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income at paragraphs 15 and 16.

·    If the profit was derived from the sale of property in the ordinary course of a taxpayer's business, that profit is income according to ordinary concepts and is assessable under section 6-5 of the ITAA 1997.

·    If the profit was derived from the sale of property in the course of the taxpayer's business, but not the ordinary course of that business, and the transaction or operation was entered into with the intention or purpose of making a profit, the profit is income according to ordinary concepts and is assessable under section 6-5 of the ITAA 1997.

·    Finally, if the profit was derived from the sale of property and that sale was not in the course of the taxpayer's business, the profit will still be income according to ordinary concepts if the intention or purpose of entry into the profit-making transaction or operation was to make a profit or gain, and the transaction or operation was entered into and the profit made in carrying out a business operation or commercial transaction.

If the above conditions are not met, a profit may still be assessable income under section 15-15 of the ITAA 1997 where the profit arises from a profit-making undertaking or scheme; or, where there was no relevant profit-making undertaking or scheme but there was a purpose of profit-making by sale at the time of acquisition of the property, the profit may be assessable under section 25A of the ITAA 1936.

When the Land was originally acquired by XCo, it was for use in XCo's agricultural activities, as well as for limited personal use. As discussed above in Question 1, certain portions of the Land began to be held as trading stock on 1 January 2016 in relation to a business of property development and sale that commenced by 1 January 2016.

Paragraph 32 of TR 92/3 sets out the Commissioner's view on when a transaction is within the ordinary course of a taxpayer's business:

It is not completely clear what the High Court meant in referring to 'profits or gains made in the ordinary course of carrying on a business'. However, we consider that there are two types of profits or gains which come within that description, namely:

(i) a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages) - provided that the gross receipts from the transaction lack the character of income (Commercial and General Acceptance Ltd v. FC of T (1977) 137 CLR 373 at 381; 77 ATC 4375 at 4380; 7 ATR 716 at 722); and

(ii) a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity e.g. profits of insurance companies and banks on the sale of investments are generally income (Chamber of Manufactures Insurance Ltd v. FC of T (1984) 2 FCR 455; 84 ATC 4315; 15 ATR 599 and C of T v. Commercial Banking Co. of Sydney (1927) 27 SR(NSW) 231).

The usual transactions that XCo will engage in in the course of its business are the sale of residential lots, however the compulsory acquisition of land by a local authority for use as infrastructure and public recreation areas is a part of the overall manner in which the land is developed and is therefore an ordinary incident of the business activity of a property development and sale business. The compulsory acquisition forms an integral part of the process by which subdivision approval is obtained and, without this, the business activities of XCo could not be carried out.

The compulsory acquisition of the Reserve Land constitutes a transaction or operation within the ordinary course of XCo's business and therefore the amount received by XCo as compensation for that compulsory acquisition will be ordinary income under section 6-5 of the ITAA 1997.

In the alternative, if the compulsory acquisition is a transaction or operation within the course of XCo's business of property development and sale, but is not within the ordinary course of that business, then it is nonetheless a transaction that was entered into with the intention or purpose of making a profit, as part of carrying out a business operation or commercial transaction.

In the further alternative, if the compulsory acquisition of the Reserve Land is not a transaction or operation within the course of XCo's business, then it is nonetheless a part of a transaction or operation that was entered into with the intention or purpose of making a profit or gain. The actions undertaken by XCo indicate that the Land had been ventured into a profit making undertaking or plan, as the gain that was to be realised in relation to the Land was no longer attributable to a mere realisation of a capital asset.

The amount received by XCo as a result of the compulsory acquisition of the Reserve Land will be assessable income of XCo under section 6-5 of the ITAA 1997. To the extent that a concurrent capital gain is made in relation to the Post CGT Reserve Land, section 118-20 of the ITAA 1997 will apply to reduce the amount of that capital gain and avoid any double-counting.

Question 4

Section 70-30 of the ITAA 1997 provides that:

(1) If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if:.

(a) just before it became trading stock, you had sold the item to someone else (at arm's length) for whichever of these amounts you elect:

its cost (as worked out under subsection (3) or (4));

its market value just before it became trading stock; and

(b) you had immediately bought it back for the same amount.

Example: You start holding a depreciating asset as part of your trading stock. You are treated as having sold it just before that time, and immediately bought it back, for its cost or market value, whichever you elect. (Subdivision 40-D provides for the consequences of selling depreciating assets.)

The same amount is normally a general deduction under section 8-1 as an outgoing in connection with acquiring trading stock. The amount is also taken into account in working out the item's cost for the purposes of section 70- 45 (about valuing trading stock at the end of the income year).

Note: Depending on how you elect under paragraph (1)(a), the sale may or may not give rise to a capital gain or a capital loss for the purposes of Parts 3-1 and 3-3 (about CGT). It does not if you elect to be treated as having sold the item for what would have been its cost: see subsection 118-25(2). However, it can if you elect market value.

Section 104-220 of the ITAA 1997 provides that CGT Event K4 happens if:

·       payer starts holding as trading stock a CGT asset that they already own but do not hold as trading stock; and

·       axpayer elects under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having sold the asset for its market value.

Subsection 118-25(2) of the ITAA 1997 provides that a capital gain or loss is to be disregarded in circumstances where:

·       payer starts holding as trading stock a CGT asset that they already own but do not hold as trading stock; and

·       axpayer elects under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having sold the asset for its cost (as worked out under section 70-30)

XCo started holding the Subdivision Land as trading stock on 1 January 2016. As XCo already holds this land, but has changed the purpose for which the land is held, section 70-30 of the ITAA 1997 will apply to deem a disposal and reacquisition of these parcels of land.

For the land acquired prior to 20 September 1985, XCo will elect under paragraph 70-30(1)(a) of the ITAA 1997 to be treated as having disposed of the property for its market value just before it became trading stock. CGT event K4 will therefore apply. However, any capital gain or loss made under CGT event K4 will be disregarded as a result of subsection 104-220(4) of the ITAA 1997, which provides that any capital gain or loss made under CGT event K4 will be disregarded in relation to CGT assets that were acquired prior to 20 September 1985.

For the land acquired after 20 September 1985, XCo will elect under paragraph 70-30(1)(a) to be treated as having disposed the property for its cost. Under subsection 118-25(2) of the ITAA 1997, any capital gain or loss made in relation to the change of use of this land will also be disregarded.

There is no relevant gain that will be taken into account under either section 6-5 or section 15-15 of the ITAA 1997, as the deemed disposal and reacquisition of the property under section 70-30 of the ITAA 1997 is merely notional.

Question 5

Section 149-10 of the ITAA 1997 provides as follows:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

XCo holds land that was acquired after 20 September 1985 (the Post-CGT Land) and land that was acquired prior to 20 September 1985 (the Pre-CGT Land). Each parcel of land is a CGT asset within the definition in subsection 108-5(1) of the ITAA 1997.

None of the assets that comprise the Post-CGT Land are pre-CGT assets within the meaning of section 149-10 of the ITAA 1997, as they were all acquired after 20 September 1985 and therefore do not meet the requirement of paragraph 149-10(a).

As the Pre-CGT Land was acquired prior to 20 September 1985, paragraph 149-10(a) of the ITAA 1997 will be satisfied.

The next requirement is, generally, that neither Division 149 of the ITAA 1997 (which relates to the issue of majority underlying interests in a CGT asset) nor its former, equivalent provisions in the ITAA 1936 operate to treat the Pre-CGT Land as having been acquired after 20 September 1985.

Section 149-30 of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

The definition of 'Majority underlying interests' in a CGT asset is contained in section 149-15 of the ITAA 1997, which relevantly provides:

(1) Majority underlying interests in a CGT asset consist of:

(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

Ultimate owners include individuals: subsection 149-15(3) of the ITAA 1997. The concept of indirect beneficial interests is described as follows in subsections 149-15(4) and (5) of the ITAA 1997:

(4) An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a) the other entity were to distribute any of its capital; and

(b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

(5) An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if:

(a) the other entity were to pay that dividend, or otherwise distribute that income; and

(b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

Of the shares in XCo, 'A' class shares only carry voting rights. The 'B' class shares entitle the holder to receive dividend and capital distributions from XCo. Immediately before 20 September 1985, the shareholding of XCo was:

·        1 had 2 'A' class shares and 100 'B' class shares;

·        1 Trust had 100 'B' class shares;

·        2 had 1 'A' class share and 100 'B' class shares;

·        2 Trust had 100 'B' class shares.

·        3 had 2 'A' class shares and 300 'B' class shares;

Child 3 was an 'ultimate owner' with indirect beneficial interests in the Pre-CGT Land as he owned 'B' class shares in XCo and would therefore receive for his own benefit any income, dividend or capital distributed by XCo.

Child 1 and Child 2 were 'ultimate owners' with the following indirect beneficial interests in the Land:

·       lass shares in XCo owned as shareholders in their own names. As shareholders they would receive for their own benefit any income, dividend or capital distributed by XCo.

·       lass shares in XCo owned through the Child 1 Trust and the Child 2 Trust respectively. As both Child 1 and Child 2 became absolutely entitled to the shares held by the Child 1 Trust and the Child 2 Trust respectively on dates prior to 20 September 1985, they have an absolute and indefeasible interest in the shares. As such, they would receive for their own benefit any income, dividend or capital distributed by XCo through those trusts. The trustees of the relevant trusts have no discretionary powers with respect to the shares in XCo; they hold the shares at the absolute disposal and benefit of their respective beneficiaries, Child 1 and Child 2.

Immediately before 20 September 1985, 57% of the beneficial interests in the Pre-CGT Land were held by Child 1 and Child 2 as 'ultimate owners'.

Since immediately before 20 September 1985 until at least 1 January 2016, Child 1 and Child 2 have at all times held more than 50% of the beneficial interests in the Pre-CGT Land as ultimate owners, even after Child 3's interests were acquired by entities related to Child 1 and Child 2.

The property that comprises the Pre-CGT Land has therefore not ceased to be pre-CGT assets under section 149-30 of the ITAA 1997. Therefore, immediately before 1 January 2016, the Pre-CGT Land consisted of pre-CGT assets for the purposes of section 149-10 of the ITAA 1997 and Subdivision 149-B of the ITAA 1997.

Question 6

Section 9-5 of the GST Act states that one of the conditions for making a taxable supply is that the supply be made in the course of an enterprise that the supplier carries on.

The term 'enterprise' is relevantly defined in subsection 9-20(1) of the GST Act to mean an activity or series of activities done:

·       e form of a business; or

·       e form of an adventure or concern in the nature of trade; or

·       regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Subsection 9-20(2) of the GST Act excludes certain activities from the definition of enterprise, including private recreational pursuits or hobbies. The other exclusions typically apply to individuals and are not relevant to the present case.

As is clear from the definition, it is not necessary that there be a series of activities. A single activity can be an enterprise.

In paragraphs 170 to 176 of 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 (MT 2006/1), the meaning of 'in the form of a business' is stated as being broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. Thus not all the main features of business such as the capacity to earn and distribute profits need to be present before an activity has the form of a business.

Commenting on the words 'in the form of', the Federal Court stated in FCT v Swansea Services Pty Ltd (2009) 72 ATR 120 at [99] that:

Rather than these words supporting a suggestion that form alone may prevail over substance, they have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. That this is so is clear from the exclusions to s 9-20 of the GST Act which, relevantly, rules out private recreational pursuits or hobbies or, in the case of individuals, (other than a charitable trustee) an activity or activities done without a reasonable expectation of profit or gain.

To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. TR 97/11 sets out the main indicators of carrying on a business:

·       nificant commercial activity;

·       pose and intention of the taxpayer to engage in commercial activity;

·       tention to make a profit from the activity;

·       ctivity is or will be profitable;

·       ecurrent or regular nature of the activity;

·       ctivity is carried on in a similar manner to that of other businesses in the same or similar trade;

·       ity is systematic, organised and carried on in a businesslike manner and records are kept;

·       ctivities are of a reasonable size and scale;

·       iness plan exists;

·       rcial sales of product; and

·       ntity has relevant knowledge or skill.

There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that 'whilst each case might turn on its particular facts, the determination of the question is generally the result of weighting all the relevant indicators'.

From 1 July 2000 to 31 December 2015, XCo would be considered to be carrying on an enterprise in accordance with paragraph 9-20(1)(c) of the GST Act, as the Land was subject to agricultural leases during this period. However, whether XCo was carrying on an enterprise during this period does not need to be determined because XCo was not required to be registered for GST as the value of its leasing supplies was less than the GST registration threshold during the entire period.

From at least 1 January 2016 to the present day, XCo has undertaken a number of development activities in respect of the Subdivision Land. These activities comprised a business of land subdivision and land development to produce residential blocks on the land for sale to members of the public.This is because the extent of the activities and the means used to realise the land was more than the mere realisation of an existing asset. It constituted work done in the course of a business venture.

The activities which XCo conducted on the Subdivision Land (from at least 1 January 2016 to the present day) were in 'the form of a business' and thus were an 'enterprise' in accordance with paragraphs 9-20(1)(a) and 9-5(b) of the GST Act.

Question 7

Subsection 9-10(1) of the GST Act states that the meaning of a supply is:

...any form of supply whatsoever.

A supply will be a taxable supply if the requirements of section 9-5 of the GST Act are met.

Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies states, at paragraph 71, that:

An entity will make a supply whenever that entity (the supplier) provides something of value to another entity (the recipient). This is consistent with the ordinary meaning of 'supply', being to furnish or provide.

The subdivision of land does not result in the provision of anything from one entity to another, and is not a supply for GST purposes. It follows that the subdivision is not a taxable supply.

Question 8

Section 9-5 of the GST Act provides as follows:

You make a taxable supply if:

(a) You make the supply for consideration; and

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

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

Subsection 9-25(4) of the GST Act provides:

A supply of real property is connected with the indirect tax zone if the real property, or the land to which the real property relates, is in the indirect tax zone.

Section 195-1 of the GST Act provides that the 'indirect tax zone' includes Australia, with certain exceptions that are not presently relevant.

Section 40-65 of the GST Act relevantly provides that:

(1) A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2) However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Section 195-1 of the GST Act defines 'real property' as including:

(a) any interest in or right over land...

Section 195-1 of the GST Act defines 'residential premises' as:

...land or a building that:

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; ...

Paragraph 47 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises states that:

Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

Supplies of real property that are GST-free supplies in Division 38 of the GST Act are the following:

·       property sold as part of a going concern as set out in section 38-325 of the GST Act;

·       land that is subdivided and sold to associates for residential purposes as set out in section 38-475 of the GST Act;

·       land supplied for farming as set out in section 38-480 of the GST Act.

The sale of the individual lots by XCo will be a taxable supply as each of the requirements of section 9-5 of the GST Act will be met:

·       ale of the individual lots will be supplies for consideration; and

·       ill sell the individual lots in the course or furtherance of an enterprise that it carries on, being the land subdivision business discussed in Question 6;

·       ndividual lots are situated in Australia, and therefore, in accordance with subsection 9-25(4) of the GST Act, are connected with the indirect tax zone; and

·       ecame registered for GST on 1 January 2017.

The Subdivision Land is that which is being or has been subdivided and sold as residential blocks to purchasers. The sale of vacant land does not fall under the definition of residential premises under section 195-1 of the GST Act and therefore the sale of these individual lots will not be input taxed supplies under section 40-65 of the GST Act. Likewise, the sale of these individual lots will also not qualify as GST free supplies as they do not fall under sections 38-325, 38-475 and 38-480 of the GST Act.

Therefore, the sale of the individual lots by XCo will be taxable supplies under section 9-5 of the GST Act.

Question 9

The margin scheme sets out a method for working out the GST payable on a taxable supply of real property in certain circumstances. Subsection 75-10(1) of the GST Act provides:

If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies as follows:

The margin scheme applies in working out the amount of GST on a taxable supply of real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a stratum unit; or

(c) granting or selling a long-erm lease;

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act provides that the agreement to apply the margin scheme must be made on or before the making of the supply, or within such further period as the Commissioner allows.

However, subsection 75-5(2) of the GST Act provides that the margin scheme will not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act provides that a supply will be 'ineligible for the margin scheme' if:

(a) it is a taxable supply on which the GST was worked out without applying the margin scheme; or

(b) it is a supply of a thing you acquired by inheriting it from a deceased person, and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme; or

(c) it is a supply in relation to which all of the following apply:

(i) you were a member of a GST group at the time you acquired the interest, unit or lease in question;

(ii) the entity from whom you acquired it was a member of the GST group at that time;

(iii) the last supply of the interest, unit or lease by an entity who was not (at the time of that supply) a member of the GST group to an entity who was (at that time) such a member was a supply that was ineligible for the margin scheme; or

(d) it is a supply in relation to which both of the following apply:

(i) you acquired the interest, unit or lease from the joint venture operator of a GST joint venture at a time when you were a participant in the joint venture;

(ii) the joint venture operator had acquired the interest, unit or lease through a supply that was ineligible for the margin scheme; or

(e) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity as, or as part of, a supply of a going concern to you that was GST-ree under Subdivision 38-;

(ii) the entity was registered or required to be registered, at the time of the acquisition;

(iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; or

(f) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity as, or as part of, a supply to you that was GST-ree under Subdivision 38-;

(ii) the entity was registered or required to be registered, at the time of the acquisition;

(iii) the entity had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme; or

(g) it is a supply in relation to which all of the following apply:

(i) you acquired the interest, unit or lease from an entity who was your associate, and who was registered or required to be registered, at the time of the acquisition;

(ii) the acquisition from your associate was without consideration;

(iii) the supply by your associate was not a taxable supply;

(iv) your associate made the supply in the course or furtherance of an enterprise that your associate carried on;

(v) your associate had acquired the entire interest, unit or lease through a taxable supply on which the GST was worked out without applying the margin scheme.

...

As XCo acquired the Land prior the introduction of the GST on 1 July 2000, it was therefore not acquired through a supply on which the GST was worked out without applying the margin scheme or through a supply which was otherwise ineligible for the margin scheme under subsection 75-5(3) of the GST Act.

As outlined in Question 8, when XCo sells individual lots to the public, it will be a taxable supply of real property. XCo will be able to use the margin scheme to calculate the GST, provided that the decision to apply the margin scheme is agreed to in writing by XCo and the purchaser of the individual lot on or before the day the supply is made.

Question 10

Subsection 75-10(1) of the GST Act provides:

If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.

In general, the consideration method is used to calculate the margin, as outlined in subsection 75-10(2) of the GST Act:

....the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.

However, if the circumstances in subsection 75-10(3) of the GST Act apply, the valuation method instead of the consideration method will be used to calculate the margin. Under the valuation method, the margin is calculated as the amount by which consideration for the supply exceeds an approved valuation of the interest, unit or lease made at the prescribed time set out in the table in that subsection.

For example, item 2 of the table in subsection 75-10(3) provides that if the supplier acquired the interest, unit or lease before 1 July 2000, but did not become registered or required to be registered until after 1 July 2000, then the day an approved valuation of the freehold interest is to be made is at the date of effect of the taxpayer's registration, or the day on which the taxpayer applied for registration (if it was earlier) has been made.

Neither the consideration method nor the valuation method for calculating the margin will apply if any of the special rules apply. These special rules apply to: subdivided land (section 75-15 of the GST Act); improvements made to the property since acquisition, such as development costs (section 75-14 of the GST Act); and merged properties (section 75-16 of the GST Act).

There are also special rules that apply to the calculation on supplies of real property involving GST Groups; GST joint ventures; property inherited from deceased estates; supplies made by governments; supplies from or to associates; and supplies where the property was acquired through a GST-free supply (as a going concern or as farm land).

Section 23-5 of the GST Act 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.

In accordance with section 23-15 of the GST Act and regulation 23-15.01 of A New Tax System (Good and Services Tax) Regulations 1999 (GST Regulations), the registration turnover threshold for the purposes of section 23-5 of the GST Act was $50,000 until 30 June 2007 and was subsequently $75,000 (other than for non-profit bodies). Subsection 188-10(1) of the GST Act provides that a GST turnover 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.

Current GST turnover refers to the value of taxable supplies and GST-free supplies made in a twelve (12) month period. Subsection 188-15(1) of the GST Act provides:

Your current GST turnover at a time during the particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

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

Projected GST turnover refers to the value of the supplies at a time during a particular month where the sum of the sums that have been made and are likely to be made during that month and the next 12 months exceeds the turnover threshold. Subsection 188-20(1) of the GST Act provides:

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:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

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

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(GSTR 2001/7) sets out the Commissioner's view as to whether an entity's GST turnover meets, or does not exceed, a turnover threshold. GSTR 2001/7 provides at paragraphs 16 and 19 that:

16. Whether you have a GST turnover that meets or does not exceed a particular turnover threshold depends on an objective assessment of your projected GST turnover and current GST turnover. An 'objective assessment' is one that a reasonable person could be expected to arrive at having regard to the facts and circumstances which apply to your enterprise at the relevant time. The Commissioner will accept your assessment of these turnovers unless he has reason to believe that your assessment was not reasonable.

...

19. Although your current GST turnover and your projected GST turnover may be capable of being determined on every day during a month, there is no requirement for continuous recalculation. However, under the GST Act there are obligations if you meet or exceed a particular threshold and there is an opportunity for you to make certain elections if you do not exceed a particular threshold. Therefore, you should be aware of the relevant thresholds likely to affect you and consider whether your turnover may be sufficiently close to the relevant thresholds to make a review prudent. For example, Entity A conducts an enterprise with a GST turnover of $70,000 and is not registered for GST. Because Entity A is aware that a $5,000 increase in its GST turnover will result in the $75,000 registration turnover threshold being met, it should monitor changes in its turnover. Entity B by contrast, is registered for GST, conducts an enterprise with a GST turnover of $600,000 and accounts on a cash basis. The nearest relevant threshold is the cash accounting turnover threshold ($2,000,000). Entity B may decide to review its current GST turnover and projected GST turnover on an annual basis whilst being aware that a significant change in turnover may require a further review.

XCo acquired the Land prior to the introduction of the GST on 1 July 2000, therefore it was not acquired as a taxable supply.

XCo was not required to be registered for GST until after 1 July 2000 because:

·       alue of XCo's leasing supplies in the period 1 July 2000 to 31 December 2015 did not exceed the relevant GST Registration threshold;

·       e period from 1 January 2016 to 1 January 2017, XCo made no taxable supplies and, during this period, XCo was not expected, based on an objective assessment of events, to make taxable supplies in the next twelve month period.

·       ompletion of the land contracts are subject to the registration of the plan of subdivision to which the relevant lot relates. Based on an objective assessment, XCo's projected GST turnover from the settlement of the first lot, being more than $75,000, was expected to occur in January 2018.

The relevant date that the approved valuation should be made is at 1 January 2017. This is because this was the date that XCo registered for GST and was also the date that XCo was required to be registered for GST.

Thus when XCo makes a sale of the individual lots, the margin for GST purposes will be calculated on the difference between the sale proceeds received from the sale of those individual lots and a valuation of these individual lots as at 1 January 2017.