Edited version of private advice

Authorisation Number: 1051899288815

Date of advice: 17 September 2021

Ruling

Subject: Sale of subdivided land

Question 1

Will the sale of Lot B be subject to capital gain tax (CGT) rather than assessable under ordinary concepts?

Answer

Yes. The proceeds from the sale of Lot B will be subject to the CGT provisions in Parts 3-1 and 3-3 of the Income Assessment Act 1997 (ITAA 1997).

Question 2

Will GST be payable on my sale of vacant Lot B created from the subdivision?

Answer

No.

Question 3

Is the Landowner required to be registered for GST for the purpose of selling Lot B?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired a property in 20XX to be used as an investment property and have been renting it out. Your activities in acquiring the property were consistent with buying a property tor renting out. However, you have not worked for the past X years and the difference between loan repayments and income was not financially sustainable in order to continue holding the property as a rental property.

You have now decided to subdivide the property X into two, keeping the existing house at the front and sell the back land.

You have made many applications to the local council but the applications have been consistently denied.

The local council stated that in order to get an approval that you have to forgo the existing house. You have proceeded with the recommendation provided by the local council where the existing house located on Property X was demolished and the land was subdivided into two lots, being Lot A and B. You are in the process of selling Lot B with the proceeds being applied to fund the building in Lot A.

You propose to then rent out the new investment property and have not undertaken substantial activities or planning to sell this property as part of the subdivision.

The amount of work undertaken by you in order to prepare the land for sale did not require any specific professional expertise or significant time or expense in order to secure approval by the council for the subdivision and to arrange the demolishing of the existing house so as to create two new lots.

A real estate agent will be engaged to sell Lot B.

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 112-25

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-5

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

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

Based on the facts, it can be concluded that the sale of Lot B is a realisation of a capital asset and the proceeds will be subject to the CGT provisions in Parts 3-1 and 3-3 of the Income Assessment Act 1997 (ITAA 1997).

The disposal of Lot B is not considered an isolated transaction, profit-making undertaking or business. Accordingly, it is not on revenue account as income according to ordinary concepts.

Any capital gain made on the disposal of Lot B will need to be 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.

Application to circumstances

We consider that your activities involving subdivision of the land does not amount to 'carrying on an enterprise' for GST purposes.

As such we consider that you did not make a taxable supply of Lot B and therefore there is no GST applicable. On this basis you are not required to be registered for GST as a result of the supply of Lot B.