Edited version of private advice

Authorisation Number: 1051749909478

Date of advice: 01 October 2020

Ruling

Subject: Capital gains tax - real property

Question 1

Will the proceeds from the sale of x allotments be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of ITAA 1997?

Answer

Yes.

Question 2

Are you required to register for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 3

Will the sales of subdivided lots constitute taxable supplies pursuant to section 9-5 of the GST Act?

Answer

No

Question 4

Are you eligible to use the margin scheme when you sell subdivided lots pursuant to Division 75 of the GST Act?

Answer

Not applicable

This ruling applies for the following period:

Year ended 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts

You acquired a property after 20 September 1985. (Property 1).

Property 1 is your main residence.

Property 1 is x acres in size and the main residence is approximately xx square metres in size (two storey home).

At the time of the acquisition you assisted your spouse operated the family held business which has been operated since 19xx.

The business ceased operating in 20xx when you and your spouse decided to retire.

Property 1 was a heritage listed property.

Since acquisition you have spent an amount on the renovation of the residence.

In total, the initial outlay and improvements to the property totalled between $x to $y.

Property 1 is located on the edge of a township. There is a sealed road in front of the property, and on each side, running parallel to the property. The roads running parallel to the property has recently been sealed in an effort by the council to control the development of the town along its perimeters.

The road at the right hand side of the property was sealed recently.

The rear of the property over looks a mix of open space and residential development which began in the late 19xxs. The left hand side of the property has suburban development, while on the right hand side of the property is open fields where a Z existed in the 1850s which is heritage listed.

In 20XX you and your spouse began considering your retirements.

In 20XX you acquired a parcel of land. (Property 2).

You had architectural plans had been drawn up for property 2. The estimated outlay for the dwelling was estimated to be approximately $X.

One issue which surfaced during this period was that the price differential in property between property 1 and property 2. There was a significant difference in the price of land and dwelling in property 1 and property 2.

You listed property 1 with a starting price of $X.

The property was listed with a high profile real estate agent to attract interstate buyers.

Property 1 did not sell as there was not an offer made for the listed price and feedback from the viewers was that they were only prepared to pay $Y for the home. One of the main reasons why the property did not sell for the asking price was the land size was considered too big to look after, The residence was too small to operate an accommodation business and there was a heritage listing on the property which made any enhancements on the property a challenging exercise.

The heritage listing placed strict controls on what could and could not be done to the property. One of the restrictions at the time was the property could not be subdivided into smaller allotments and any building work had to be approved by a planning committee.

It was planned that the proceeds from the then sale were to finance the development of the dwelling on property 2.

In the 20XX and 20YY financial year, your spouse had sought out a business agent to sell the business.

Unfortunately, the business did not attract any buyers due to its operation, the business was too small to attract a large or national entity and the asking price was too large for a family/single buyer to acquire it.

As a result of the property and business not being able to sell, you changed your plans and decided to continue to live in the township and continued with the operation of the business until its closure in 20xx.

During the 20xx financial year the you decided to sell property 2 and a capital loss was realised.

Also during the 20xx financial year, your self managed superannuation fund controlled by you and your spouse sold the business premises from which the business operated from.

In 20xx the council re zoned the use of the of land around property 1 and lifted the heritage listing on the rear X acres of the property. The lifting of the heritage listing on the land was to encourage the development of the town in an orderly manner on its fringes rather than in a haphazard or ribbon development.

The heritage listing on the residence continued.

With the rezoning of the land a resident approached you to enquire if they would be interested in subdividing the rear of the property - the X acres for a development.

You declined this offer and began to make enquiries to the council to what you could do

with your land holding. The council advised you that you could sub divide the rear of the property - up to X acres as part of its urban consolidation programme.

You began to make enquires as to the requirements for a subdivision of allotments with the council, the estimated costs of doing so, engaging a surveyor and a real estate agent as to what would be the estimated sale prices be for a single allotment or for X single allotments.

In early 20XX a resident of the town approached you and enquired if you would be interested in selling one allotment at the rear of the property - not the entire rear of the property but one standard housing sized allotment.

You decided to subdivide the rear of the property into X allotments meeting the basic council requirements of a boundary fence between their property and the newly created allotments, electricity connection and water and sewage connection to the allotments.

You have delegated these tasks to the surveyors who have coordinated with council on your behalf and organised the contractors to carry out the subdivision.

You have had minimal involvement in the process.

No further activity is to be undertaken on these allotments.

Costs for the subdivision of the X allotments is estimated to be $Y with the starting sales price for the allotments to be $Z per allotment.

Property 1 will be able to be sold (the residential dwelling and the remaining acres).

In March 2xxx your spouse had a medical procedure.

The treatment has now meant that your retirement plans have changed. There is now a more heightened sense of urgency to sell the allotments.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-20

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

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 75

Reasons for decision

Question 1

There are three ways profits from a land subdivision can be treated for taxation purposes:

1. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock.
2. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose.
3. As statutory income under the capital gains tax (CGT) legislation, (section 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Ordinary income

In your situation, the Commissioner is satisfied you are not carrying on a business of property development. The repetition, scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business.

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693)(MyerEmporium).

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

TR 92/3 defines the term 'isolated transactions' as:

• transactions outside the ordinary course of business of a taxpayer carrying on a business; and
• transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayer's business but:

• the intention or purpose of the taxpayer in entering 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 was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

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.

In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135 (Casimaty), the legal principles in relation to the subdivision of land were discussed at length. In concluding his judgment that the subdivision of the taxpayer was a mere realisation of a capital asset, Justice Ryan said, at 97 ATC 5152:

Nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. [Emphasis added]

In addition to the above general factors, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the 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.

No single factor is 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

In your case, you acquired a property that you have lived in as your main residence for a significant number of years. You will subdivide the land into a small number of allotments. One block will contain your existing main residence and you will sell the remaining subdivided allotments.

In accordance with the direction provided in TR 92/3 and MT 2006/1 we consider that the activities amount to a mere realisation of an asset to its best advantage. There is a coherent plan in place to carry out a sequence of actions that will result in a profit, there is a change of purpose for which the land is held as the land was originally held as your main residence. There is a minor development of the land beyond that necessary to secure council approval for a subdivision. You have not borrowed money to finance the development. You have not acquired any additional land.

On a weighing of the facts of your case we find that the subdivision and the sales of the subdivided lots to be the mere realisation of a capital asset.

Question 2

In this ruling,

·   unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

·   all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

·   all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 23-5 states 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 (currently $75,000 unless you are a non-profit body).

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   ...

The question of whether an entity is carrying on an enterprise is examined in 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.

The Goods and Services Tax Determination: Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 159 of MT 2006/1 states that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. The following indicators of carrying on a business are listed at paragraph 178 of MT 2006/1, with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

·   a significant commercial activity;

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

·   an intention to make a profit from the activity;

·   the activity is or will be profitable;

·   the recurrent or regular nature of the activity;

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

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

·   the activities are of a reasonable size and scale;

·   a business plan exists;

·   commercial sales of product; and

·   the entity has relevant knowledge or skill.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 180 of MT 2006/1 discusses that an enterprise may be carried on a small scale stating:

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

In this case you acquired Property 1 in 20xx and have used the Property as your principal place of residence since that date. Due to your personal circumstances you have commenced the process of subdividing your Property into a x-acre lot containing your main residence and the remaining y acres into a number of lots.

You have engaged a third party to carry out the necessary actions to effect the subdivision. You have not engaged in such activities in the past.

We consider that you are not carrying on an enterprise in the form of a business because your activities by themselves were not a commercial activity nor was your intention to undertake a commercial activity. The activities you have undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. This is a one-off project that is not considered to being carried out in a manner similar to other property development businesses.

Next we will consider whether your activities are an activity in the form of an adventure or concern in the nature of trade.

In the form of an adventure or concern in the nature of trade

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. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including:

·   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.

As discussed previously, the Property has, and continues to be, your primary place of residence. You have not acquired additional land to add to the Property. Your activities will be limited to meeting the basic council requirements to subdivide being the erection of a boundary fence between the x-acre lot containing your home and the newly created lots, and establishing electricity, water and sewage connections to the lots. No further works will be undertaken on the newly created lots.

Your situation is similar to Example 33 at paragraphs 291-293 of MT 2006/1:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion your intention for holding the Property was not for the purpose of trade.

Whilst the sale of the subdivided lots will be profitable, our view is that this fact, on its own, is not sufficient to regard your activities as being a commercial-like undertaking.

In weighing up all the facts of this case, we do not consider your activities to constitute an adventure or concern in the nature of trade.

Your activities of subdividing a portion of your Property, engaging a third party to carry out the Council requirements to effect the subdivision and ensuing sale of the lots are not considered to be done in the course of an enterprise that you carry on for GST purposes.

We consider the sales of the subdivided lots to be the mere realisation of a capital asset.

Conclusion

As you are not carrying on an enterprise, paragraph 23-5(a) is not satisfied and you are not required to register for GST.

Question 3

Section 9-5 of the GST Act states that 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 to the indirect tax zone (Australia); and

(d)  you are registered or required to be registered for GST.

However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case you are not registered for GST and as discussed above, you are not required to be registered. Therefore, your sale of the subdivided lots will not constitute a 'taxable supply' as defined above.

Question 4

Division 75 provides that under certain circumstances a vendor of real property may choose to apply the margin scheme in working out the GST payable on a 'taxable supply' of the property.

As discussed above, your supplies of the vacant lots do not fall within definition of a taxable supply. Consequently, the margin scheme provisions will have no application to your sales of the lots.