Edited version of private advice

Authorisation Number: 1051800307709

Date of advice: 9 February 2021

Ruling

Subject: GST and sale of a divided plot of land

Question 1

Should your share of the gain or profit from the sale of the subdivided lot be included in your assessable income as ordinary income a result of carrying on a business of property development or as a result of an isolated profit-making transaction?

Answer

No. It is considered that the sale will be a mere realisation of a capital asset and therefore the gain will only be assessed under the capital gains tax (CGT) provisions.

Question 2

To calculate the capital gain/loss on the subdivided assets do you use the cost base of the original asset divided between the subdivided blocks?

Answer

Yes. The cost base of the original land is divided between the subdivided blocks on a reasonable basis.

Question 3

Is the purchase date of XX/XX/XXXX relevant for the CGT General Discount of 50%?

Answer

Yes.

Questions 1 to 3

Having regard to your full circumstances, you are not considered to be carrying on a business of property development, or to be carrying on or carrying out a profit-making undertaking or plan. You are merely realising your capital asset. As such, the proceeds or profit from the sale of the subdivided lot will not be assessable under section 6-5 of the Income Tax Assessment Act 1997 as ordinary income from either carrying on a business of property development or as a result of an isolated profit-making transaction. Rather the gain will be assessed under the CGT provisions.

When you subdivide a block of land the original parcel of land is divided into two or more separate assets for CGT purposes. You make a capital gain or capital loss only when you sell the subdivided blocks. The cost base of the original land is divided between the subdivided blocks on a reasonable basis. The acquisition date for CGT purposes of each subdivided block is the date you acquired the original parcel of land.

Further information on subdividing land can be found by searching 'QC 23640' on ato.gov.au

Question 4

Did the isolated transaction of subdividing a main residence block constitute carrying on an enterprise under MT 2006/1 and Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), taking into consideration of precedent case laws FC of T v NF Williams and Casimaty v FC?

Answer

No. You are not considered to be carrying on an enterprise in relation to the subdivision.

Section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) defines enterprise to include:

an activity, or a 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.

The following paragraphs have been extracted from 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 indicators of carrying on a business.

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. The issue to be decided is whether the activities 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.)

264. The cases of Statham & Anor v. Federal Commissioner of Taxation 105 (Statham) and Casimaty v. FC of T 106 (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.

Paragraph 178 to 179 of Miscellaneous MT 2006/1 provides indicators of carrying on a business.

Based on the facts provided and applying the above, you are not carrying on an enterprise.

Question 5

Does the sale of the lot XX situated at xxx Australia attract GST under section 9-5 of the GST Act 1999?

Answer

No. You will not need to pay GST on the sale.

An entity is required to pay GST on any taxable supply that it makes.

An entity makes a taxable supply under section 9-5 of the GST Act if it makes the supply for consideration, in the course or furtherance of an enterprise it carries on, the supply is connected with the indirect tax zone (Australia) and the entity is registered or required to be registered for GST.

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

All the elements under section 9-5 of the GST Act have to be satisfied for a supply to be taxable.

In this case you are not considered to be carrying on an enterprise. Therefore, the supply of the subdivided land is not taxable, and you do not need to pay GST on the supply.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The real property in question is situated at XXX and was originally purchased several years ago.

You and your family established the property as your principal place of residence and lived in the property from inception.

The dwelling itself was an old build and it has since deteriorated over time. It is unsafe, unsanitary and no longer ideal for human habitation given neither improvement nor development has been done since then.

Over the years, you considered your family and foresaw that over the coming years, there will only be two persons living in the house.

In light of the above with an old built house, and a smaller family unit, you decided to downsize the family land with a new building for a smaller unit in view of ease of maintenance and upkeep.

You then vacated the property and demolishing work took place.

The land was then subdivided into two lots with no dwellings in either subdivided plots.

You are currently selling one lot at the going market rate, then use the proceeds to build your home that will see you into retirement. It is a mere subdivision.

Your aim is to use the proceeds of the lot to be sold to fund for your building costs on the lot to be retained to re-establish your main residence again.

The said property was never used for income generating purposes (rental or business) by you. It was always intended to be your main residence.

You are the registered owner of the land prior to the subdivision as well as following the subdivision.

No finances were undertaken from financial institutions for the property since purchased until subdivided and eventual disposal.

You have engaged an accounting firm and a real estate agent for this sale.

The land will be sold as vacant block. Everything was done through as per council requirements and guidelines.

You have not previously dealt in subdivision or development activities.

You do not have any intention to be engaged in property subdivision and sale for the future.

There has never been a change of purpose for which the land is held. It has always been used for main residence purposes.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sections 9-5; 9-20;

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 112-25