Edited version of private advice

Authorisation Number: 1051785382228

Date of advice: 16 December 2020

Ruling

Subject: Capital gains tax - property subdivision - mere realisation

Issue 1 - Capital Gains Tax (CGT)

Question 1

Will the profit from the sale of subdivided blocks of land be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Based on the information provided, the proceeds from the sale of the subdivided lots will not be ordinary income and not assessable under section 6-5 of the ITAA 1997as either:

•                     the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or

•                     a profit-making or commercial transaction in accordance with Taxation Ruling TR 92/3.

Therefore, any proceeds received on the disposal of the subdivided lots will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997.

Issue 2 - Goods and Services Tax (GST)

Question 1

Is GST payable on the sale of the subdivided blocks of land?

Answer 1

No.

GST is not payable on the sale of the subdivided lots because you are not making a taxable supply.

For the sale of real property to be a taxable supply the supply must satisfy all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

In your case, although the sale of the subdivided lots is for consideration and connected with Australia and hence satisfies paragraphs 9-5(a) and 9-5(c) of the GST Act, the requirements of paragraphs 9-5(b) and 9-5(d) are not satisfied. This is because:

•                     the sale is a mere realisation of a private asset and hence, is not made in the course or furtherance of an enterprise that you carry on and

•                     you are neither registered nor required to be registered for GST.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 19XX Person A and Person B (you)purchased a block of land.

The land was zoned rural residential. It has not been rezoned.

You funded the purchase with a home loan.

You built your family home on this block.

You are currently subdividing your existing block into three blocks.

You will retain one block with the attached family home (Lot 3).

Your child will purchase one block (Lot 2) for $X to build their own home.

The third block (Lot 1) will be placed on the market. It was recently valued at $X.

Person A has multiple health conditions. By decreasing your yard size this will assist Person A by not having such a large yard to maintain and allow you to remain living in your home for longer.

The development application was approved on XX May 20XX.

Operational works were approved on XX December 20XX.

The survey plan was approved XX November 20XX.

You engaged a contractor to complete operational works as approved by council.

Development activities commenced XX April 20XX.

The market value of the land just prior to the subdivision was $X.

Total development costs were $X. You contributed some of your own funds, and obtained finance through a bank for the balance.

Development activities were completed on XX August 20XX and titles for the two new blocks issued on XX November 20XX.

The titles were issued in the names of Person A and Person B.

Lot 1 will be sold during the financial year. It was placed on the market recently and as Town A is in a high growth area you expect to receive around $X.

The sale of Lot 2 has settled. You received $X from the sale.

You have not undertaken any subdivision activities or any business of land development in the past.

You will not undertake subdivision activities or any business land development in the future.

Your land as a whole has not been on the market for sale.

You are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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