Edited version of private advice

Authorisation Number: 1051896947764

Date of advice: 7 October 2021

Ruling

Subject: CGT - disposal of a property

Question 1

Will the profits from the sale of the residential property be considered ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2:

Was the sale of the new residential property a taxable sale under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore subject to GST?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Neither spouse individually nor as a partnership is registered for GST.

In joint names you purchased the property around X decades ago.

The Property had an existing house on it which was used as the family home (main residence) with the intention to remain as the family home indefinitely with no immediate or near-term plans to subdivide.

Several years ago, you both started to think about subdividing your property mainly because:

•                    the block of land was too large for what you needed

•                    the house you were living in was an old house, so you wanted a new modern family home, and

•                    you wanted to realise the investment potential of the property and earn a passive rental income stream to supplement your income.

Council rezoning of the area occurred quite some time before the decision to subdivide was made by you both.

Several years ago, you approached a builder and explored many options over several years of deliberations.

The builder advised that you both were able to build up to several dwellings on the property, which was what was eventually agreed to.

A contract to build the dwellings was signed with the builder. Details of the dwellings were:

•                    a new family home

•                    some units to be held as investment properties.

Coupled with the intention to earn rental income, another motivation for building the investment properties and hold these as investment properties was so that you both could provide assistance to your children later in life.

The original home was demolished a few months after signing the contract. This demolition was arranged by you both.

All other aspects of the development were carried out by the builder, with minimal involvement (if anything at all) from you both.

The builder also arranged for the installation of the utility services including power, water, communications, gas and common driveway. You both were charged $X each lot for the provision of the utility services.

Construction of the dwellings began later that year and were completed within a short time.

The loans for the investment properties were structured as investment loans with an Australian bank, while the loan for the new family home was structured as a standard home loan.

The Y property was rented in in the following year, within weeks of placing it on the rental market.

The X property was sold in the following months and the borrowing on the property has subsequently been repaid. Reasons for the sale are outlined below.

No development of any kind was performed on this property and you both are not in the business of property development.

Sale of the X property

After the completion of the X property, it was sold to a relative.

While the property development was being carried out you both resided with the relative and their spouse in their home.

While staying with the relative, their spouse passed away and you both assisted the relative with the maintenance of their property which was on a large block.

You both relocated to your new family home when the construction was completed. The relative, due to their age and ill heath could not maintain their property on their own. The relative had the option of moving to an aged care facility or move to one of the new units you have constructed in order to remain close to the family who could provide them with ongoing care and support when needed.

The relative was given the option of renting, but declined, with a preference to purchase the unit.

The X property was never put on the market to sell publicly as it was always intended to remain an investment property. If you both had put the unit on the market for sale to the public, your asking price would have been closer to the approximate market value.

Other properties

You previously owned another property which was your main residence before purchasing the current property. You sold the other property many years ago.

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

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

Reasons for decision

The assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

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.

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.

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.

Disposal of a CGT asset - CGT event A1

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2)). However, a capital gain or loss you make is disregarded if you acquired the CGT asset before 20 September 1985 (subsection 104-10(5).

Application to your situation

You both are not carrying on a business of property development, or carrying on or carrying out a profit-making undertaking or plan.

The subdivision, development of the land and sale of the X property will be considered to be the mere realisation of a capital asset because the original property was your main residence prior to the development and your original intent was keep the two smaller properties for generating rental income for the future. The Y property being immediately rented out after completion is evidence of this.

Therefore, the profits from the sale of the X property will not be ordinary income.

Goods and Services Tax

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act provides that an entity makes a taxable supply if:

(a)          The entity makes the supply for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise that the entity carries on; and

(c)          the supply is connected with the indirect tax zone (Australia); and

(d)          the entity is registered or required to be registered for GST.

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

All the requirements in section 9-5 of the GST Act need to be satisfied for the sale to be subject to GST

You both sold the X property for consideration and the sale was connected with Australia as the X property is located in Australia. In this instance paragraphs (a) and (b) in section 9-5 of the GST Act are satisfied.

We will now consider the remaining paragraphs in section 9-5 of the GST Act.

Paragraph 9-5(b) of the GST Act

Under subsection 9-20(1) of the GST Act an enterprise is defined as an activity or series of activities which includes :

•                    in the form of a business (paragraph 9-20(1)(a); or

•                    in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)b).

However under paragraph 9-20(2) (c) of the GST Act enterprise does not include an activity or series of activity done by an individual (other than a trustee of a charitable fund or of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN) or a partnership (all or most of the members of which are individuals) without a reasonable expectation of profit or gain.

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) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 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? 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.

In the form of a business

As advised in question 1, you both were not carrying on a business of property development or a profit-making undertaking or plan. The subdivision, development of the land and sale of the X property were the mere realisation of a capital asset.

The activities you have undertaken in regard to the construction of the X property and its subsequent sale are not considered to be done in the form of a business; and thus, is not an enterprise as defined in paragraph 9-20(1)(a) of the GST Act.

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

Paragraph 234 of MT 2006/1 provides that 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.

Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the badges of trade as referred to in a number of judicial decisions:

•                    the subject matter of the realisation;

•                    length of period of ownership;

•                    frequency or number of similar transactions;

•                    supplementary work on or in connection with the property realised;

•                    circumstances that were responsible for the realisation;

•                    motive

Based on the information given, you both did not intend to engage in a profit-making venture therefore the activities undertaken in building and selling the X property is not an enterprise for GST purposes. Factors that we considered include;

•                    The X property was built for investment.

•                    You both have not previously engaged in similar activities.

•                    Due to unforeseen circumstances the relative, due to ill health and being on their own needed to be close to you both so that you both can provide them with ongoing care and support. The relative would move to the X property on condition you both sold it to them.

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion your intention for building the X property was not for the purpose of trade. Whilst there has been a change in your intentions, that is to sell the X property as opposed to use the property for lease, our view is that this fact, on its own, is not sufficient to regard your activities as being a commercial-like undertaking.

As such we do not consider your activities of constructing of the X property and its sale to the relative as being done in the form of an adventure or concern in the nature of trade. The activities do not amount to an enterprise as defined in paragraph 9-20(1)(b) of the GST Act.

Paragraph 9-20(2) (c )of the GST Act

From the facts given you both mainly sold the X property so that your relative could be near you both and for you both to be able to provide them with ongoing care and support when needed. Your sale was not motivated to make a profit or gain when selling the property since the price for which you sold it was near the market value of properties sold in your area. Thus, we do not consider that you were carrying on an enterprise when selling the property to your relative in accordance with paragraph 9-20(2)(c) of the GST Act.

You both are carrying on a leasing enterprise when you rent out the Y property; however, your sale of the X property was not made in the course of the leasing enterprise.

As the sale was not made in the course of an enterprise that you carried on, paragraph (b) in section 9-5 of the GST Act was not satisfied.

Paragraph 9-5(d) of the GST Act

You are required to register for GST under section 23-5 of the GST Act if you both are carrying on an enterprise and the annual turnover of your enterprise meets the GST registration turnover threshold of AU$75,000 (AU$150,000 for non-profit organisation).

We have determined that you both were not carrying on an enterprise when selling the X property and therefore the proceeds of the sale are not included in the calculation of annual turnover for GST registration purposes. Further the rental income you both receive from the lease the Y property are consideration for an input taxed supply which is not included in the calculation of your annual turnover for GST registration purposes. As your turnover did not meet the threshold, you were not required to register for GST.

Paragraph (d) in section 9-5 of the GST Act was not satisfied.

Summary

Since not all the paragraphs in section 9-5 of the GST Act were satisfied at the time the sale was done, your sale of the X property was not a taxable sale under section 9-5 of the GST Act. Thus, your sale was not subject to GST.