Edited version of private advice

Authorisation Number: 1051805517294

Date of advice: 26 August 2021

Ruling

Subject: Sale of real property

Question 1

Were you required to register for goods and services tax (GST)?

Answer

Yes.

Question 2

Were the sales of your new dwellings assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 97) as a profit-making undertaking?

Answer

Yes.

Question 3

Were the sales of your new dwellings the mere realisation of a capital asset for capital gains tax (CGT) purposes?

Answer

No.

This ruling applies for the following periods:

26 August 20XX to 25 August 20XX, in relation to the GST decision

Year ended 30 June 20XX, in relation to the IT and CGT decisions

Relevant facts and circumstances

In 20XX, you entered into a contract for the purchase of a residential property in Australia (the property). Settlement of the property purchase took place in 20XX.

The property was acquired with 'vacant possession' of the single storey dwelling that was on the lot at the time of purchase.

Also included as part of the purchase were council endorsed building plans for multiple new dwellings.

An agreement was entered into in 20XX in relation to redeveloping and selling the property. Relevant clauses from the agreement state that:

•         the project is to be conducted as a commercial venture and in accordance with good commercial business practices;

•         the building contract will include all things necessary to put the dwelling in a state to be marketed for sale;

•         activities in relation to the property will include subdivision of the property into individual allotments, construction of dwellings on the subdivided allotments, and sale of the newly constructed dwellings.

After you had acquired the property, the building plans for the multiple new dwellings were amended further.

In 20XX you had the existing dwelling on the property demolished and the site cleared.

In 20XX you entered into a building contract for the construction of multiple new dwellings on the property.

You advised that the abovementioned building contract was entered into to allow for the construction of the new dwellings to begin. From there, the coordination of each stage occurred in consultation between you and the builder, which involved engaging various tradespeople.

In 20XX you obtained an opinion from a local real estate agent on the rental values obtainable for the new dwellings once they were completed. The rental appraisal mentions that demand for well-maintained properties, offered at an accurate and realistic market rental, continues to be strong.

You advised that you did not end up advertising any of the new dwellings for rent or renting any of them out.

Marketing of the multiple new dwellings for sale commenced in 20XX.

In 20XX the individual lots were registered as shown on the certificate of title.

You were issued with a final inspection letter in 20XX which gave final approval for the construction of the multiple-dwelling development. A copy of the occupancy permit was attached.

The property acquisition and redevelopment were funded mostly by borrowings; however, no new loan applications had to be completed to obtain the funding.

All of the multiple new dwellings were sold.

You claimed input tax credits in relation to the costs associated with redeveloping the property. You also remitted GST in relation to the sales proceeds from the multiple new dwellings.

Your financial statements include in the trading statement under cost of sales 'land held for resale'; and in the balance sheet under current assets 'land held for resale' and under current liabilities 'provision for GST'.

After selling the final new dwelling, you cancelled your GST registration and your ABN, as well as also dissolving your entity. You had voluntarily registered for GST prior to the purchase of the property having settled.

On average you spent in excess of XX hours per week dealing with matters pertaining to the property, which at times required attention 24 hours/7 days a week. As part of the construction process, you coordinated efforts with the builder in acquiring quotes, booking in tradespeople, etc.

No formal costings, budgeting or planning (such as having a business plan drawn up) were undertaken by you due to the familiarity between the parties involved and the property redevelopment being on a small-scale. Such things were also not warranted or needed, particularly given that no construction loan was specifically applied for.

There was extensive verbal communication between the parties in relation to the redevelopment of property, however no minutes were taken, nor were any of the discussions or decisions documented. You did not provide anything further when asked if you could recall a bit more precisely the timeframes during which each of the more significant decisions relating to the property were made.

The types of records that you did keep, included the building contract, invoices and bank statements, which you provided to your accountant to process through their accounting software. You also kept a copy of the abovementioned agreement.

Relevant legislative provisions

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

Section 9-20

Section 23-5

Section 23-15

Section 40-65

Section 40-75

Section 188-10

Section 188-15

Section 188-20

Section 188-25

Section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999

Regulation 23-15.01

Income Tax Assessment Act 1997

Section 6-5

Section 6-10

Section 102-5

Section 102-20

Section 104-10

Section 108-5

Section 112-25

Section 118-20

Section 995-1

Reasons for decision

Detailed reasoning

Question 1

In accordance with section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), you are required to be registered for goods and services tax (GST) if:

(a)  you are *carrying on an *enterprise; and

(b)  your *GST turnover meets the *registration turnover threshold.

(* a term defined in the GST Act)

Carrying on an enterprise

The term 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise; while the term 'enterprise' has the meaning given by section 9-20 of the GST Act (refer to section 195-1 of the GST Act).

Section 9-20 of the GST Act provides that an 'enterprise' is 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)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

...

However, subsection 9-20(2) of the GST Act contains some exclusions to the definition of enterprise. Of those exclusions, only those in paragraphs 9-20(2)(b) and 9-20(2)(c) of the GST Act could be of any relevance to your circumstances.

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity, or series of activities, done as a private recreational pursuit or hobby. Paragraph 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity, or series of activities, done by an individual or a partnership (whose members are all, or mostly, individuals) without a reasonable expectation of profit or gain.

Miscellaneous Taxation Ruling 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) provides guidelines on the meaning of enterprise for ABN purposes.

MT 2006/1 provides, at paragraphs 122 to 124, that given the definition of 'carrying on an enterprise', it follows that activities done that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. Doing anything in the course of the commencement of an enterprise describes the kind of activities undertaken. If the activities have the character of those ordinarily undertaken to commence an enterprise, they will be accepted as falling within the statutory definition.

Paragraph 1 of Goods and Services Tax Determination 2006/6 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 MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

Paragraph 10 of GSTD 2006/6 provides that 'an activity or series of activities' means any act or series of acts that an entity does. The acts can range from a single act or undertaking, to groups of related activities, to the entire operations of the entity.

An enterprise could therefore incorporate a single or one-off transaction such as the building and sale of real property.

Based on the facts, the purchase of the property, its redevelopment by constructing multiple new dwellings on it and their sale would amount to an isolated or one-off real property transaction rather than being part of any regular or continuous activity or part of any activity done in the form of a business.

Paragraph 13 of GSTD 2006/6 provides 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. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

Isolated transactions with a commercial flavour would thus amount to an adventure or concern in the nature of trade and be of a revenue nature.

As such, it is necessary to determine whether your real property transactions have a commercial flavour that goes beyond the mere realisation of an investment or private asset.

MT 2006/1 discusses, amongst other things, whether an isolated activity such as the sale of real property is done in the form of an adventure or concern in the nature of trade. Relevant paragraphs from MT 2006/1 are included below:

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

233. There is no definition of 'in the form of an adventure or concern in the nature of trade' in the ABN Act. However, the concept of 'an adventure or concern in the nature of trade' has arisen in the context of Australian and United Kingdom (UK) revenue law...

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

240. Taxation Ruling TR 92/3 sets out the Commissioner's views of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature.

241. The meaning of the phrase, 'in the form of an adventure or concern in the nature of trade' has at its foundation the concept of 'an adventure or concern in the nature of trade' which is discussed above.

242. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

Characteristics of trade, including the 'badges of trade'

243. Trade takes its ordinary meaning... The word 'trade' is used with its accepted English meaning: traffic by way of sale of exchange or commercial dealing... The commercial character of trade was mentioned more recently by Lord Reid in Ransom v. Higgs (1974) 1 WLR 1594. His Lordship there said: 'As an ordinary word in the English language 'trade' has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation but is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services (1974) 1 WLR, at p 1600'...

244. 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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

245. The (Radcliffe) Royal Commission on the Taxation of Profits and Income (UK) in 1954 identified six badges or identifying features of trade. The United Kingdom courts have seen the 'badges of trade' as providing 'common sense guidance' in reaching a conclusion on such matters.

246. The badges of trade have also been referred to by the High Court in FCT v. Myer Emporium Ltd and more recently by the Full Federal Court in the decision in Puzey v. Federal Commissioner of Taxation.

The 'badges of trade', as mentioned in MT 2006/1, include the following:

•         the subject matter of realisation - this badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

•         the length of period of ownership - a trading asset is generally dealt with or traded within a short time after acquisition.

•         the frequency or number of similar transactions - the greater the frequency of similar transactions the greater the likelihood of trade.

•         supplementary work on or in connection with the property realised - improving the property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

•         the circumstances that were responsible for the realisation - trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered.

•         motive - if the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. Motive is also important in cases if there is a change in character of the asset.

•         trade v. investment assets - assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. Assets can change their character but cannot have a dual character at the same time.

Paragraphs 258 to 260 of MT 2006/1 also provide that certain types of assets, such as rental properties, business plant and machinery, the family home, family cars and other private assets are considered as investment assets. These assets are purchased with the intention of being held for a reasonable period of time, as income-producing assets or for the pleasure or enjoyment of the person. The mere disposal of these investment assets does not amount to trade. Assets can change their character from investment to trade, however these assets cannot be held at the same time for both purposes.

Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated or one-off real property transactions.

The issue to be decided is whether the activities of the entity 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.

A list of factors ascertained from cases provides assistance in determining whether activities are a business or an adventure or concern in the nature of trade. If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. 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.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case.

This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative, rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Also, no two cases are likely to be exactly the same.

In order to reach a proper factual assessment, it is necessary to ask what the venture was and what gave it its commercial character.

Specifically, in relation to land bought with the intention of resale, paragraph 270 of MT 2006/1 provides as follows:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade.

In relation to profits from isolated transactions, Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides, at paragraphs 7 and 38, that the relevant intention or purpose is not the subjective intention or purpose of the taxpayer, rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraphs 40 to 42 of TR 92/3 also provide that it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose of entering into the transaction. It is sufficient if profit-making is a significant purpose. Further, if a transaction involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property; however, that is not always the case (for example, if the taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction).

Application of the above to the facts in your case

We consider the sale by you of the multiple new dwellings was done in the form of an adventure or concern in the nature of trade and was not done as a private recreational pursuit or hobby, nor was it done without reasonable expectation of profit or gain.

After having objectively considered and weighted all of the facts and circumstances of your case, we have concluded that your intention always was to sell the multiple new dwellings once they had been constructed. You have produced no evidence to the contrary although you were given the opportunity to do so.

Whilst the rental appraisal undertaken for you in 20XX might indicate that you wished to know the rental values obtainable for the new dwellings once they were completed, that in itself is not evidence of an intention, as you contend, to rent the new dwellings. In any case, you never followed through with this.

Rental appraisals can be obtained and used for various purposes. For example, a rental appraisal might be useful information to provide to a potential buyer, such as an investor. It might also provide useful information regarding a short term fallback option, just in case the property cannot be sold immediately after it is completed.

On the other hand, there are a number of factors which indicate that your intention all along was to sell the multiple new dwellings. There is also documentary evidence to support such a conclusion (refer below).

The agreement, which was executed in 20XX just prior to settlement of the property acquisition the following month, indicates in two places that the intention at that time was to build new dwellings on the property and to then sell those newly constructed dwellings. Further, there is nothing mentioned in the agreement about any intention to rent the new dwellings once they are completed.

The agreement also states that the project "shall be conducted as a commercial venture and in accordance with good commercial business practices". This further supports the conclusion that the property redevelopment had the characteristics of a business deal.

The multiple new dwellings built on the property were never advertised for rent or rented; nor was the dwelling that was on the property at the time of purchase. Rather, the intention for the property was to demolish the existing dwelling and construct multiple new dwellings on it, and then sell those new dwellings as indicated in the agreement. Such intention was followed through with, as shown by your actions which are summarised below:

•         the purchase of the property settled on 20XX, several months after the purchase contract had been entered into.

•         various activities related to the property redevelopment commenced after that.

•         the building contract for the multiple new dwellings was entered into in 20XX.

•         the multiple new dwellings were first advertised for sale in 20XX.

•         the titles for the multiple new lots were registered in 20XX.

•         the final inspection of the completed multiple new dwellings occurred in 20XX and an occupancy permit was issued the same month.

•         the sale of the first of the multiple new dwellings to sell, settled in 20XX (the same month as the dwellings were completed), with the contract for that sale having been entered into the previous month.

•         the sales of the rest of the multiple new dwellings followed, with the sale of the final new dwelling settling in 20XX.

Input tax credits were claimed for the GST included in the price of acquisitions relating to the property redevelopment.

The financial statements prepared for the entity also point to you having an intention to sell the multiple new dwellings, with the property being shown in them as a 'trading asset'.

You made a number of comments in support of your contention that you had always intended to rent the multiple new dwellings, and that it was only due to changed circumstances that they ended up being sold. We disagree with your suggestion that the matters you have raised prove that you had originally intended to rent the multiple new dwellings.

One of the comments that you made was in relation to how long it took to build and sell the multiple new dwellings after the property had been acquired. You consider this to support your contention that you had intended to rent the multiple new dwellings once they were constructed, otherwise you would have been in more of a hurry to complete and sell them.

We do not consider there to be any direct link between the length of time it took you to redevelop the property and what your original intention was for the property. Although there was quite a bit of time between you entering into the purchase contract and you selling the last of the multiple new dwellings, the period of time was not exceptionally long. Also, there were several explainable reasons for the delays.

An additional comment that you made was that the agreement had been drafted to cover all possible scenarios, including the possibility of the multiple new dwellings having to be sold, and hence that was the only reason why the agreement had references to the new dwellings being sold once they had been constructed. We do not agree with you on this.

The agreement was drawn up by a lawyer and was executed by you. It is, therefore, an important document and as such it is reasonable to conclude that what is stated in it regarding what is to be done with the property, would reflect your intention for the property at the time.

It is also noted that the agreement makes no reference at all to renting the multiple new dwellings once constructed. Based on your logic, this would presumably mean that the agreement should have also covered the possible scenario of the dwellings being rented once constructed.

Further to the above, the first time that you appear to have mentioned anything about your contention that you had intended for the multiple new dwellings to be rented once they were completed, is in the ruling application.

Regarding your comment that the rental appraisal was based one person's opinion at a particular point in time, we would simply note that the rental appraisal indicated that the outlook in 20XX for renting the multiple new dwellings once completed, appeared good. Despite this, only approximately three months after you had obtained the rental appraisal, the multiple new dwellings were advertised for sale.

Finally, regarding your comment that if your intention had been for the multiple new dwellings to be sold, you would have sold them off-the-plan prior to commencing construction. While we are aware that multi-unit property is often sold off-the-plan, this is often because financiers insist on this before lending money. Not all unit developments are sold off-the-plan, thus what you suggest is not necessarily always the case.

Therefore, having objectively looked at the facts and circumstances, taken all of the above into consideration and weighing everything up, we have concluded that you were carrying on an enterprise in relation to the sale of each of the new dwellings.

Paragraph 270 of MT 2006/1 and paragraph 46 (refer below) of Goods and Services Tax Ruling 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) make it clear that property purchased with the intention of sale, even in the case of an isolated/one-off transaction, will be an activity in the form of an adventure or concern in the nature of trade and thus an enterprise. As such, paragraph (a) of section 23-5 of the GST Act is satisfied.

GST turnover

Subsection 188-10(1) of the GST Act provides that you have a GST turnover that 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.

The terms 'turnover threshold', 'current GST turnover' and 'projected GST turnover' are defined in section 195-1 of the GST Act by reference to the meaning given for those terms in subsection 188-10(3) and sections 188-15 and 188-20 of the GST Act respectively.

Paragraph 188-10(3)(b) of the GST Act provides that, amongst others, the turnover threshold includes the 'registration turnover threshold', which according to section 195-1 of the GST Act, relevantly has the meaning given by section 23-15 of the GST Act (currently $75,000, as specified in the regulation 23-15.01 of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)).

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover and projected GST turnover, the following supplies (amongst others) are not included in the calculation:

(a)  supplies that are input taxed (which includes financial supplies, residential rent and the sale of residential premises which are not new residential premises);

(b)  supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act); and

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

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or likely to be made, by you solelyas a consequence of either ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

GSTR 2001/7 discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. For the purposes of section 188-25 of the GST Act the character of an asset must be determined at the time of expected supply.

Regarding isolated transactions and projected GST turnover, paragraphs 46 and 47 of GSTR 2001/7 state as follows:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Application of the above to the facts in your case

It is therefore now necessary to look at whether your GST turnover met the registration turnover threshold and, as such, whether paragraph (b) of section 23-5 of the GST Act is also satisfied.

As previously discussed, input taxed sales are excluded from the calculation of current and projected GST turnover.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). However, none of the sales of your multiple new dwellings is an input taxed supply because paragraph 40-65(2)(b) of the GST Act provides that the sale of real property which is residential premises is not input taxed to the extent that the real property is 'new residential premises'.

Each of your new dwellings were new residential premises at the time of their sale, as they were built to replace demolished premises on the same land, had not previously been sold as residential premises, were not previously the subject of a long-term lease, and had not been rented for at least five years after being completed and prior to their sale (refer to section 40-75 of the GST Act).

Goods and Services Tax Ruling2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) provides guidance on when a sale of real property is a sale of new residential premises. This ruling is available from our website (www.ato.gov.au).

Further to the above, as we have already determined that the sale of each of the multiple new dwellings was not the mere realisation of a capital asset, the sale proceeds are also not excluded from the calculation of projected GST turnover under either paragraphs 188-25(a) or 188-25(b) of the GST Act.

Hence, the consideration received/expected to be received by you from the sale of each of the multiple new dwellings would have, at the relevant time, needed to be included in the calculation of the entity's current/projected GST turnover.

You were required to register for GST on the date that your current or projected GST turnover reached $75,000. Given the facts in your case, the earliest date that you would have been required to register for GST was the time during a particular month when the sum of the values of all new dwellings sales made, or likely to be made, during that particular month and the next 11 months, totalled at least $75,000. Such date would clearly have been prior to the first sale of your multiple new dwellings, given that each new dwelling sold for much more than $75,000.

However, if you wished to do so, you were able to voluntarily register for GST on the date that you commenced carrying on your enterprise, which presumably would have been prior to the date when you would have been required to be registered.

It is noted that you voluntarily registered for GST effective from a date prior to settlement of the property purchase, just prior to execution of the agreement, and more than 12 months prior to the first of the sales contracts for the multiple new dwellings being entered into. You cancelled your GST registration after the last of the sales of the new dwellings had settled.

Questions 2 & 3

Generally, an amount received in relation to subdividing and/or developing land would be assessable either as:

•         ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as business income,

•         ordinary income under section 6-5 of the ITAA 1997 as an isolated commercial transaction with a view to a profit, or

•         statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 of the ITAA 1997 as a mere realisation of a capital asset.

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) outlines some factors that indicate whether or not a business of primary production is being carried on.

These factors equally apply to other types of businesses. The question of whether a business is being carried on is a question of fact and degree. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators should be considered in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is regularity and repetition of the activity

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•         the size, scale and permanency of the activity, and

•         whether the activity is better described as a hobby, a form of recreation or sporting activity.

Whilst not free from doubt, although one of the members of the entity has carried on previous property development, based on the information provided and above factors, we do not consider that the proceeds from the current activities and sale of the multiple new dwellings would be derived in the course of carrying on a business.

Profits from an isolated transaction

Profits arising from an isolated commercial transaction will be ordinary income if the 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 a taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693).

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

The term isolated transaction refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•         those transactions entered into by non-business taxpayers.

If a taxpayer not carrying on a business makes a profit from an isolated transaction or operation, that profit is assessable ordinary income if both of the following elements are present:

•         the intention or purposes of the taxpayer in entering into the 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.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

In this situation, the property was purchased, with settlement in 20XX. The existing dwelling was demolished and multiple new dwellings were constructed. Following subdivision, the multiple new dwellings were sold.

To decide if any profit made is ordinary income, we need to consider if the transactions are made in a commercial manner.

TR 92/3 lists the following factors which are relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

1. the nature of the entity undertaking the operation or transaction;

b.    the nature and scale of other activities undertaken by the taxpayer;

3. the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;
4. the nature, scale and complexity of the operation or transaction;
5. the manner in which the operation or transaction was entered into or carried out;
6. the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;
7. if the transaction involves the acquisition and disposal of property, the nature of that property; and
8. the timing of the transaction and the various steps in the transaction.

In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not ordinary income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Paragraphs 41 and 42 of TR 92/3 outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, MT 2006/1 aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on.

The factors listed in paragraph 265 of MT 2006/1 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 will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Numerous cases have considered the assessability of profits or proceeds from the sale of land including the following cases:

Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer's activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land.

Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 (Statham's case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property.

Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income.

Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 where the taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970's he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land.

As displayed in the above cases, a taxpayer can embark on a profit-making scheme after property was acquired for a different purpose.

In determining whether activities relating to isolated transactions are a profit-making undertaking, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Application to your circumstances

In this case, you acquired the property in 20XX, with settlement in 20XX.

In the context of considering the above authorities and factors when determining whether your project would be viewed as a profit-making undertaking, the following general observations have been made:

•         there is a coherent plan for the development and subdivision of the property and construction of the multiple new dwellings, which is more complex than buying and later selling the property without demolishing and construction activities;

•         one of the entity's members has been involved in property development business activities in prior years;

•         you amended the acquired building plans;

•         the subdivision and construction costs will be relatively substantial;

•         there is an intention to profit from the development and subdivision of the property;

•         the transactions have been undertaken in a commercial manner; and

•         you engaged relevant parties to undertake the various activities.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion the intention for holding the property included a profit-making undertaking.

Although you advised that the property was purchased for long term rental, this never occurred and all new dwellings were sold after construction. The decision to demolish, construct, subdivide and sell the multiple new dwellings shows a choice to engage in exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the multiple new dwellings.

It is acknowledged that the property development and subdivision is not on the same scale as the above cases, however, the entity had a coherent plan and a profit-making purpose in the activities.

With the demolition of the existing dwelling and the construction of multiple new dwellings, it cannot be said that minimal development work will be undertaken as in Statham's case and Casimaty's case.

Although the entity didn't do the subdivision and the construction work, the entity has undertaken the organisation and management of the activities. A number of entities were engaged to demolish, construct the new dwellings and subdivide the property. It is viewed that your property development and subdivision activity have the characterisations of a commercial or profit-making undertaking. The activities go beyond a mere realisation of a capital asset.

Based on the facts of this situation, the project is considered to be a profit-making commercial undertaking and the profits from the sale of the multiple new dwellings are considered to be ordinary assessable income under section 6-5 of the ITAA 1997.

Capital gains tax

Under section 6-10 of the ITAA 1997, assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose a CGT asset.

When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event (subsection 112-25(2) of the ITAA 1997). Each new subdivided lot will be viewed as having been acquired on the same date that the original asset was acquired. The cost base of the original asset is apportioned between the newly created assets on a reasonable basis.

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sale.

Application to your situation

Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner's view that the subdivision and sale of the multiple new dwellings is more than a mere realisation of a capital asset.

As highlighted above, the disposal of the multiple new dwellings is an isolated transaction and any profit made on the sales is included in your assessable income under section 6-5 of the ITAA 1997.

Any capital gain made on the disposal of the multiple new dwellings will be reduced to the extent that the profit from the sales is included in your assessable income under section 6-5 of the ITAA 1997.