Edited version of private advice

Authorisation Number: 1051862986660

Date of advice: 7 July 2021

Ruling

Subject: Property development

Question 1

Will the proceeds received from the sale of the land be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development or as a result of an isolated profit making transaction?

Answer

No.

Question 2

Will the capital gain made from the sale of the land be assessable under the capital gains tax provisions under Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes.

Question 3

Will the costs of holding the land, including rates, land tax, insurance, mowing and the costs associated with obtaining the Development Approval be included in the cost base of the land?

Answer

Yes.

Question 4

Will the sale of the land be a taxable supply for GST purposes in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commences on:

1 December 2017

Relevant facts and circumstances

The landowners own land.

The landowners propose to sell the vacant blocks of land together with a current Development Approval for a residential subdivision of xx blocks to an unrelated third party.

The landowners are not registered as a Partnership with an Australian Business Number.

None of the landowners are registered or required to be registered for GST purposes in relation to other activities they carry on.

The landowners are tax residents of Australia.

The landowners have acquired their interests in this Land through a series of inheritances from family members.

The philosophy and intention of the family members in relation to the land has been long term property ownership.

Since the specified activities ceased, as outlined below, the land has not been used for any other enterprise purposes.

The Land was purchased in xxxx.

In xxxx the landowners approached local town planning consultants with a view to obtaining approval development of the land into residential blocks to enhance the value of the land.

The relevant authority granted a Development Approval for xx residential lots on xxxx.

Costs incurred in relation to the development application and approval were $xxxx.

The acquisition and maintenance of the land and the costs of obtaining Council Development Approval have been funded through existing available capital of the landowners.

After obtaining the Development approval, the landowners did not undertake further activity to progress the development on the land for the given reasons.

The landowners have not erected any structures on the land.

After considering the matter, the landowners came to the conclusion that sale of the land would be the best course of action in light of financial, health and family considerations.

The landowners had not actively tried to sell the property.

After the gaining of the subdivision approval, the landowners did not undertake any further action to sell the property due to disagreements concerning the process that should be taken and the pricing of the land. The delay in further action was also impacted by the onset of Covid-19 and the uncertainty that it brought.

The Land was not listed with an agent for the purpose of sale. This is because the landowners were approached directly by an interested purchaser with an offer to purchase in xxxx.

A contract for sale of the Land to an unrelated third party was executed by the landowners. This contract is conditional on the completion of satisfactory due diligence by the purchaser. The sale price of the land is $xxxx. This price does not include GST as the vendors are not currently registered for GST.

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 110-25

Income Tax Assessment Act 1997 section 995-1

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 9-40

Reasons for decision

Generally, an amount received in relation to subdividing 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 TR 97/11 Income tax: am I carrying on a business of primary production? 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.

Based on the information provided and the above factors, we do not consider that any proceeds from your activities and sale of the land is derived in the course of carrying on a business.

Profits from an isolated transaction

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

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

b)    those transactions entered into by non-business taxpayers.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will generally be income when:

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

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

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;
2. 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 Taxation Ruling TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not 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.

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.

After considering your full circumstances, it is not considered that you were carrying on an isolated commercial transaction.

Capital gains tax

A capital gain or a capital loss may arise if a CGT event happens to a CGT asset you own. Land, or an interest in land, is a CGT asset.

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

Cost base

Section 110-25 of the ITAA 1997 provides general rules about cost base. The cost base of a CGT asset consists of five elements. The first element of the cost base includes the money you paid or are required to pay, in respect of acquiring it. Other elements of the cost base include incidental costs incurred, costs of owning the asset, as well as capital expenditure incurred to increase or preserve the asset's value.

Under subsection 110-25(4) of the ITAA 1997, the third element of the cost base includes costs of maintaining, repairing or insuring it and rates or land tax, if the asset is land.

Application to your situation

You are not considered to be carrying on a business of property development, or to have been carrying on or carrying out a commercial profit-making undertaking or plan. Therefore, any proceeds received from the sale of the land will not be ordinary assessable income under section 6-5 of the ITAA 1997.

The sale of the land will be considered to be the mere realisation of a capital asset. CGT event A1 will happen when the land is sold. You will make a capital gain at that time.

As you have owned the land for more than 12 months, you are entitled to a 50% discount on the capital gain under Division 115 of the ITAA 1997.

When calculating the capital gain, the cost base will include costs incurred for rates, land tax, insurance, mowing and the costs associated with obtaining the Development Approval.

Please note, that if the current contract is not completed and the land is listed for sale with a qualified real estate agent, the above conclusions do not change.

Goods and Services Tax (GST)

Under section 9-40 of the GST Act, you must pay the GST payable on any taxable supply that you make. For the sale of real property to be a taxable supply, it must satisfy all the requirements under section 9-5 of the GST Act.

Section 9-5 states that you make a taxable supply if:

(a) you make a 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 the indirect tax zone (Australia); 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)

Based on the information that you have provided, your sale of the land will be made for consideration, and the supply is connected with Australia as the land is located in Australia. However, you are not currently registered for GST. It is necessary to consider whether your sale of the land will be made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST.

An enterprise is defined in subsection 9-20(1) of the GST Act, and includes 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 ...

The Tax Office view on what constitutes an enterprise is contained 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 2006/6Goods 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? provides that the principles contained in MT 2006/1 apply equally to the terms entity and enterprise as used in the GST Act and can be relied on for GST purposes.

The phrase 'in the form of a business' is broad and requires a focus on and an understanding of the concept of a business. The meaning of 'business' is considered in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? The principles discussed in that Ruling apply to any business.

Paragraph 234 of MT 2006/1 considers the term business and states:

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.

Paragraph 13 of GSTD 2006/6 states:

13. 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 asset is not, without other factors being present, an adventure or concern in the nature of trade.

It is appropriate in your case to determine whether the sale of the land is an activity done in the form of an adventure or concern in the nature of trade.

Paragraph 265 of MT 2006/1 provides guidance on the subdivision of land and determining whether activities amount to a business or adventure or concern in the nature of trade. It states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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.

Considering each of those factors in turn as they apply to your circumstances:

•         there is a change of purpose for which the land is held;

You inherited your share of the land and have passively held the land throughout your period of ownership. In xxxx you lodged a development application, which was approved on xxxx. You now plan to sell the land with the subdivision approval in place in order to maximise the value of the land to the purchaser.

•         additional land is acquired to be added to the original parcel of land;

No additional land has been added to the two original parcels of land.

•         the parcel of land is bought into account as a business asset;

You have not used the land for any business purpose.

•         there is a coherent plan for the subdivision of the land;

You have obtained development approval for a xx-lot subdivision of the land.

•         there is a business organisation - for example a manager, office and letterhead;

Due to various family and financial circumstances you have no intention to undertake development of the land.

•         borrowed funds financed the acquisition or subdivision;

You do not intend to borrow funds to undertake development of the land.

•         there will be a level of development of the land beyond that necessary to secure council approval for the subdivision;

You have secured council approval for the subdivision.

•         buildings have been erected on the land.

There is no evidence of residential or commercial buildings being erected on the land.

In addition, we note that you will be selling the whole of the land to a purchaser who approached you however if the sale fails to proceed to completion you will list the property for sale with a real estate agent and sell your interest in the land in the same condition as set out above.

As outlined above, you are not considered to be carrying on a business of property development. Taking into consideration the history of your ownership of the land and the factors outlined above, your sale of the land with development approval is also not considered to be an adventure or concern in the nature of trade whether or not you sell the land, in its present condition, to the existing purchaser or a new purchaser.

Accordingly, your sale of the land does not fall within the definition of an enterprise for the purposes of GST under subsection 9-20(1) of the GST Act. As you are not carrying on an enterprise for GST you are not required to be registered for GST under section 23-5 of the GST Act.

Therefore, your sale of the land is not considered to be made in the course of furtherance of an enterprise. As not all the requirements of section 9-5 of the GST Act are satisfied your supply of the land will not be subject to GST.

We do not consider that your sale of land is a taxable supply as your activities in relation to the land were not undertaken in the course or furtherance of an enterprise for GST.