Edited version of private advice

Authorisation Number: 1051847764613

Date of advice: 11 June 2021

Ruling

Subject: Sale of subdivided land

Question 1

Is the sale of the subdivided land a mere realisation of a capital asset with any receipts from the expected sale proceeds or any profit that arises assessed only as net capital gains?

Answer

No.

Question 2

Will the profits/gain made on the sale of the subdivided land constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Will any capital gain arising from the sale of the subdivided lots be reduced by the amount of profits included in assessable income under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 4

Will the sales of the subdivided lots be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Relevant facts and circumstances

•         You purchased a vacant block of land (the land) that is owned solely in your name.

•         The land is situated in Australia.

•         Your loan application to obtain finance to purchase the land stated the purchase of the vacant land was for investment purposes.

•         X months later, you engaged a real estate agent to sell the block of land. The agent highlighted the potential to subdivide and develop the land to maximise the sale value. You decided to go ahead with developing and subdividing the land instead of selling the land as one block.

•         In that same month, you engaged Entity X to discuss the proposed development of the land. The content of this meeting was around maximising the sale price of the lots based on minimum land size, zoning allowance and minimum land frontages. Based on this meeting a final design was drawn up for development of multiple lots on the land.

•         A month later, Entity X submitted the development application (DA) to the Council outlining the proposed development for the land. Entity X provided an invoice for the scope of work that would be undertaken by them.

•         After receiving DA approval, you engaged Entity Y to discuss the subdivision.

•         Entity Y provided a fee proposal for their scope of work for engineering, project management and construction. At that time, you did not have or were able to borrow the funds. You also did not have confidence around the sale prices and took the next X months to research the profitability of the project and arrange family loans.

•         Entity Y then commenced the project management of the initial works involved in the subdivision and a construction certificate application was lodged.

•         The construction certificate was approved for initial works required of the DA for the curb and gutter, water, storm water and sewer.

•         The subdivision and construction costs are being financed by savings and loans repayable on the sale of the developed lots.

•         The total amount required for the development is more than the acquisition cost of the land.

•         The subdivision is expected to be completed soon.

•         The subdivided lots will be sold as vacant land.

•         The lots will be sold separately. The marketing and sales of the lots will be done through a real estate agent.

•         The price for the sale of each subdivided lot will exceed $75,000.

•         You are currently not registered for the goods and services tax (GST).

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-1

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 section 25-1

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

In general, proceeds from the sale of land will be taxed for income tax purposes in one of the following ways:

•         as ordinary income, where the land is held as trading stock and sold as part of carrying on a business of property development;

•         as ordinary income, where land is not trading stock and is sold as part of an isolated commercial transaction entered into with a profit-making intention;

•         as statutory income under the CGT provisions, where the land is neither trading stock nor the subject of an isolated profit-making scheme or undertaking and the proceeds of sale are the mere realisation of a capital asset.

Where the land is sold as part of carrying on a business of property development or as part of an isolated profit-making scheme, the proceeds will be included in your assessable income in accordance with subsection 6-5(1) of the Income Tax Assessment Act (ITAA 1997).

Where the sale of the land is considered to be the mere realisation of a capital asset, only the net capital gain will be included in your assessable income in accordance with subsection 6-10(1) of the ITAA 1997.

Isolated commercial transaction

Taxation Ruling TR 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.

Paragraph 1 of TR 92/3 refers to 'isolated transactions' as:

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

•         those transactions entered into by non-business taxpayers.

Whether a profit from an isolated transaction is ordinary income depends on the individual circumstances of the case.

Paragraph 6 of TR 92/3 provides that profits from an isolated transaction is generally income when both of the following elements are present:

•         the intention or purpose in entering into the transaction was to make a profit or gain, and

•         the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Profit-making intention

If the 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, as the High Court decision in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; [1982] HCA 8; 82 ATC 4031; 12 ATR 692 (Whitfords Beach) demonstrates, that is not always the case. For example, if a taxpayer acquires an asset with an intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the profit is income even though the taxpayer did not have the purpose of profit-making at the time of acquisition.

Business operation or commercial transaction

Factors listed in paragraph 13 of TR 92/3, which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

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

CGT

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997.

Where subdivision activities are assessable as ordinary income, section 118-20 of the ITAA 1997 will operate to reduce any capital gains by any amounts which are included in your assessable income as ordinary income.

Application to circumstances

The sale of the subdivided land will be an isolated profit-making commercial transaction and the profits received will be assessable on revenue account.

Based on the facts, it can be concluded that the development and subsequent sale of the subdivided lots, occurs with the intention of profit as a commercial transaction.

It is the Commissioner's view that the subdivision and sale of the land is more than a mere realisation of a capital asset.

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

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

GST

GST is payable on taxable supplies.

Taxable supply

The requirements of a taxable supply are set out in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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 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.

(*Denotes a term defined in section 195-1 of the GST Act)

The sale of the subdivided lots will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale will be a supply made for consideration and the land is in Australia.

We need to establish whether the sale is made in the course or furtherance of an enterprise that you carry on. Moreover, you are currently not registered for GST. Therefore, we also need to determine whether you would be required to be registered for GST at the time of settlement of the sale of the subdivided lots.

GST registration

Section 25-1 of the GST Act provides that you must make your application to be registered for GST within 21 days after becoming required to be registered.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold.

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 of the GST Act defines 'enterprise' to include, amongst other things, an activity or series of activities done:

•         in the form of a business

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

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

The ATO view on the meaning of the term 'enterprise' is explained in detail 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' (MT 2006/1).

Goods and Services Tax Determination 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.

Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

It is also relevant to consider the length of time the property had been held and to what purpose it had been put to in that time.

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.

An enterprise can be conducted in a small way. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

Paragraph 178 of MT 2006/1 lists a number of indicators to be considered when determining whether an activity or series of activities amount to a business.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one-off transaction may fall into the category of 'an adventure or concern in the nature of trade' where the activities being undertaken do not amount to a business but are commercial in nature and have 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.

We consider that your activities involving the acquisition, subdivision of the land into multiple lots and the sale of the subdivided lots amount to 'carrying on an enterprise' of property development for GST purposes.

GST Turnover

The applicable registration turnover threshold in this case is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

Goods and Services Tax Ruling GSTR 2001/7 explains the meaning of GST turnover and the effect of section 188-25 of the GST Act on the calculation of projected GST turnover. GSTR 2001/7 is available on our website at www.ato.gov.au

In calculating your GST turnover under Division 188 of the GST Act, certain supplies are excluded.

Section 188-25 of the GST Act requires you to disregard the following when calculating your projected annual turnover:

(a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise.

Paragraph 35 of GSTR 2001/7 states the following regarding capital and revenue assets.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction.

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.

Application to circumstances

On the facts provided, we consider that, at the time of settlement, the subdivided lots will not be capital assets. The subdivided lots will be of a revenue nature and connected to the enterprise of the property development. We also consider that the sale of the subdivided lots is not made only as a result of the ceasing of an enterprise or the substantial and permanent reduction in size or scale of an enterprise. Rather, the development enterprise ceases as a result of the sale of the subdivided lots. Therefore, when calculating the projected turnover, the sale is not disregarded under section 188-25 of the GST Act.

Therefore, the proceeds from the sale of the lots are included when calculating whether your turnover meets the GST registration turnover threshold.

As the proceeds from the sale of each subdivided lot will exceed $75,000, your turnover will meet the GST registration turnover threshold. You will be required to be registered for GST at the time of supply of the subdivided lot.

The sale is neither GST- free nor input taxed in the given circumstances. Therefore, all of the requirements of a taxable supply under section 9-5 of the GST Act will be met at the time of settlement, and the sale will be a taxable supply. Consequently, GST is payable on the sale of the subdivided lots and you will be liable to remit the GST payable on the sale.