Edited version of private advice

Authorisation Number: 1051907930179

Date of advice: 11 October 2021

Ruling

Subject: GST and income tax ramifications of a subdivision and sale of real property

Issue 1: Goods and Services Tax Issues

Question 1

Is the partnership the appropriate entity making supplies of real property and is that entity engaged in an enterprise in relation to the subdivision and sale of that property?

Answer

Yes. The partnership is engaged in an enterprise of making supplies of real property in the course of its enterprise.

Question 2

Does the partnership have a responsibility under Schedule 1 of the Taxation Administration Act 1953 to provide notice to the purchaser to withhold GST in relation to the supply of any of the lots to be sold in the course of their enterprise?

Answer

Yes.

Issue 2 Income tax issues

Question 1

Will the sale of the land and unit be treated on revenue account?

Answer

Yes.

Question 2

If the remaining three lots are sold as vacant land, will the sale be treated on revenue account?

Answer

Yes.

Question 3

If you built one house on average per year on each of the vacant lots and then sold, will the sale be treated on revenue account?

Answer

Yes.

Question 4

If you engaged a volume builder to build a new house on each block at one house per year and then sold the house and land, will the sale be treated on revenue account?

Answer

Yes.

This ruling applies for the following periods:

From the financial year commencing 1 July 20XX until the financial year ending 30 June 20XX

The scheme commences on:

16 January 20XX

Relevant facts and circumstances

The parties requesting this private ruling are related as husband and wife, (you). You purchased a house and land (the original property) before 20XX.

You are not registered for GST as a partnership.

Both of you do not have any background in property development.

You provided a subdivision map which shows the total land area was approximately more than 3000m².

You borrowed funds from a commercial lender to purchase the original property prior to subdividing it, securing the loan against your personal residence. The purpose stated to the lender was simply to purchase the property.

When you purchased the original property, you intended to renovate and rent the existing house. You also were aware of its subdivision and sale potential. As one of you is a builder, they had in mind to build and rent or sell as required and this intention has not changed.

One partner is registered for GST as a sole trader as he does some building work and has another enterprise. They currently hold a builder's licence.

One partners' building income has been negligible and they are now working for wages outside of the building industry.

The house and land at the original property was used as a rental property. Post 20XX you subdivided the existing house and some land. This is shown on the subdivision map differently but for convenience in this ruling it is referred to as Lot 1.

After 20XX you subdivided the rest of the land into four vacant blocks within the Council region under Plan XX. These remaining 4 lots are set out on the subdivision map as:

•         Lot 2 area XXm2

•         Lot 3 area XXm2

•         Lot 4 area XXm2

•         Lot 5 area XXm2

Lots 1 to 5 are held by you as joint tenants and are all zoned residential.

Total costs for the vacant blocks including holding costs is over $XXX each.

Lots 2, 4 and 5 are vacant land.

On Lot 3 you built a transportable unit and a shed later.

The transportable unit arrived on a truck in two halves which you assembled.

Total cost for the purchase of unit and shed is approximately $X.

Your original intention for the transportable unit was to remove it from the land and sell it separately.

You changed your mind about selling the transportable unit separately and instead intend to sell them together.

The transportable unit and land are now under a contract of sale. The particulars of sale under that agreement are:

•         The contract is undated but is signed by the purchaser

•         The property address is XX

•         You are the stated vendor.

•         The land is also described as XX.

•         Goods specified as sold with the land are floor coverings, window furnishings and all fittings and fixtures of a permanent nature.

•         The price is $XX.

•         The price under a general condition is to include GST if the words unless the words 'plus GST' appear in the box. The box does not contain that term. It says 'not applicable'.

•         The contract shows that the sale is not made under the margin scheme as that box also says 'not applicable'.

•         Under the heading 'GST - residential withholding' it says:

•         if the property being sold is new residential premises or potential residential land, and the Vendor is making a taxable supply, then special condition X applies

•         Settlement is stated as XX.

•         There is no lease over the property.

•         It is not a terms contract.

•         The contract was subject to finance up to XX.

•         The sale allows for special conditions.

An occupancy certificate was only granted by XX on XX date in accordance with the relevant Building Act and Regulations. The permit was granted to you as both owners and builders. Since then, the unit has been vacant.

You provided photos of the transportable unit which show that it has all the characteristics of basic residential premises. It has an open kitchen, dining and lounge, two bedrooms with walk in robes, a combined bathroom/laundry and separate toilet.

The transportable unit is sitting on top of timber stumps that were only ever installed as temporary stumps as the taxpayers believed the unit would be sold and removed from the land. The unit has been constructed in two halves for easy removal by truck. The transportable unit has water and sewerage and electricity connected recently, but not gas.

Due to the bushfires and the pandemic and the shortage of rental accommodation you decided to rent the transportable unit, however at that time new pandemic related laws came in favouring tenants, so you elected to leave the property untenanted and recently decided to sell it collectively as a unit and the land.

You have always accounted for the Lots as a capital account asset and never as trading stock.

You did not prepare a business plan for the purchase of the original property.

In attending to the subdivision, you engaged professionals to complete the necessary work. You entered into contracts for the surveyors, plumbing and electrical contractors. Under those agreements:

•         land surveyors were retained to prepare plans and peg out the boundaries for each lot.

•         a plumbing contractor installed stormwater and sewer points for each lot to comply with local water authority and shire regulations.

•         Power suppliers were engaged to provide underground power to the boundary of each new lot.

•         A contractor also installed new concrete driveways from street to boundary as required for each new lot (Lots 2,3,4, and 5).

Relevant legislative provisions

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 23-15

A New Tax System (Goods and Services Tax) Act 1999, Section 40-65

A New Tax System (Goods and Services Tax) Act 1999, Section 40-75

A New Tax System (Goods and Services Tax) Act 1999, Division 72

A New Tax System (Goods and Services Tax) Act 1999, Section 75-5

A New Tax System (Goods and Services Tax) Act 1999, Section 75-10

A New Tax System (Goods and Services Tax) Act 1999, Section 75-14

A New Tax System (Goods and Services Tax) Act 1999, Section 75-15

A New Tax System (Goods and Services Tax) Act 1999, Section 184-1

A New Tax System (Goods and Services Tax) Act 1999, Section 188-15

A New Tax System (Goods and Services Tax) Act 1999, Section 188-20

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

Taxation Administration Act 1953, Schedule 1, Section 14-250

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 995-1

Issue 1 Goods and Services Tax issues

Reasons for decision

Question 1

Is the partnership the appropriate entity making supplies of real property and is that entity engaged in an enterprise in relation to the subdivision and sale the lots the subject of the ruling?

Detailed reasoning

The test for determining whether you make a taxable supply is section 9-5:

Section 9-5 provides that 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 the 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.

The taxable supply test may apply differently to each of the supplies of any of the lots and must be applied for each supply. Of the 5 lots, Lot 1 was a residence that was not new, Lot 3 has a transportable unit on it, and Lots 2, 4 and 5 are vacant.

The supply of Lot 1, assuming you met the conditions of a taxable supply under section 9-5 (a) to (d), would have been an input taxed supply of residential premises under section 40-65 as they were not new residential premises:

(1)  A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

(2)  However, the sale is not input taxed to the extent that the *residential premises are:

(a)  *commercial residential premises; or

(b)  *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

You advised the residence had been lightly renovated and this would not meet the requirements for a substantial renovation. Section 40-75 sets out the definition of new residential premises. The sale of Lot 1 will not meet this definition as it previously sold as a residence and it had not been renovated to the point that it could be said to be new again. On this basis Lot 1 was not a taxable supply of new residential premises.

As stated above, in applying the taxable supply test to all Lots covered by this ruling, it is assumed that:

•         you sell the Lots at arms' length and as such you and the buyers are not associates per Division 72.

•         Lots 1-5 were, or will be, supplies for consideration.

Under the taxable supply test, it is clear that those supplies will be made in the indirect tax zone (Australia) and none of those supplies will be GST free based on the current facts.

On this basis, we consider paragraphs 9-5(a) and (c) are satisfied and the principal analysis is focused on:

•         ascertaining the correct entity status of the entities making the supplies of the Lots and whether those supplies are made in the course or furtherance of an enterprise by supplier per paragraph 9-5(b) and

•         whether the supplier is registered or required to be registered under paragraph 9-5(d).

What is the status of the entity making the supply?

The supplies are the sale of real property being Lots 1 to 5. The suppliers are the parties and they are making the supply in a single contract per lot. Section 9-5 has a primary step requiring identification of the entity making the supply as it states that "you make a taxable supply if...".

'You' is defined in s.195-1 as:

you: if a provision of this Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

Note: The expression you is not used in provisions that apply only to entities that are not individuals.

'You' appears in paragraph 9-5(a): 'you make a supply' and 'you' is also connected to any identifiable enterprise and in the course or furtherance of whose enterprise are the supplies being made under paragraph 9-5(b). Additionally, 'you' is tied to the entity that is registered or required to be registered.

Section 184 sets out the definition of 'entity':

184-1 Entities

(1) Entity means any of the following:

(a) an individual;

(b) a body corporate;

(c) a corporation sole;

(d) a body politic;

(e) a *partnership;

(f) any other unincorporated association or body of persons;

(g) a trust;

(h) a *superannuation fund.

You entered into the acquisition of the property before 2010. The stated purpose was to advance a property subdivision project in order to both rent and sell properties. Of the entities listed in the definition only a partnership is the best fit based on the facts.

Are the parties making supplies as a partnership?

'Partnership' is defined in the section 195-1 picking up the definition of that term in section 995-1 of the Income Tax Assessment Act 1997. It is:

an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly but does not include a company.

The first limb of the definition considers general law partnerships and the second limb, making reference to receipt of income jointly, refers to tax law partnerships. In our view, based on the level of activity between the parties, a tax law partnership is not indicated in this case. This would be the case if you were merely holding to collect rents but, in our view, the level of activity is commensurate with a general law partnership for GST purposes for the reasons discussed below.

In assessing whether the parties are in a partnership for GST purposes, the correct level of analysis is not whether the parties are 'in business' but whether they are 'engaged in an enterprise'. If the parties are engaged in an enterprise and the circumstances and actions of the parties suggest the other elements of the definition are present, in our view the entities are making supplies as a partnership for GST purposes.

Paragraph 44 of GSTR 2004/2 sets out some of the key features of a partnership for GST purposes:

Whether a partnership exists is a question of fact determined having regard to the agreement between the parties and the circumstances surrounding the formation of the agreement. There will usually be an entitlement to a share of net profits. Evidence of the parties' intention to act as partners will be relevant. Consequences of a partnership relationship will usually include mutual trust and confidence so that the partners must act in the interests of the partners as a whole. There will also be joint and several liability of partners. Where there is evidence of these circumstances a Court may find that arrangements described as joint ventures are actually partnerships. [Footnotes excluded].

In this case, there is no written partnership agreement. However, you have agreed to act together in pursuit of your stated intention to subdivide, build, rent and sell the five lots. You are joint tenant holders of the property in equal shares. Further, you have entered into a mortgage of your personal residence in order to acquire the original property and together took the requisite steps to subdivide the property including entering into contracts to ensure the subdivision works were completed. This points to mutual trust and confidence between the partners to take on risk to advance their subdivision.

Goods and Services Tax Ruling GSTR 2003/13 Goods and Services Tax General Law Partnerships (GSTR 2003/13)sets out that the position in relation to general law partnerships under the GST law is different at paragraphs 16 and 17:

16.  Under general law, a partnership is not an entity. The general law regards the business as being carried on by the persons that are in partnership. The term 'partnership' is merely descriptive of the relation between persons carrying on business with a view of profit.

17.  The position under the GST Act is different. The definition of an entity includes a partnership. A consequence of this is that the GST Act applies to partnership transactions, in particular dealings between partners and the partnership, in a manner that does not reflect the general law treatment of those transactions. Against this background, we have applied the GST law to general law partnerships in a way that best promotes the purpose or object of the GST Act and produces a sensible result. [Footnotes omitted]

At paragraph 20 of GSTR 2003/13, it states that at the time a general law partnership is formed it becomes an entity for GST purposes. We consider this around the time you mortgaged your own personal residence to acquire the property with an intention to build and sell the lots in the subdivision.

In our view, this is sufficient to establish that you were acting in the capacity of partners in pursuing the subdivision. The next issue is whether you as the partnership were engaged in an enterprise.

Are you carrying on an enterprise of subdivision and land development?

For GST purposes, if the entity is carrying on an enterprise and if it is required to be registered it will be making taxable supplies. Subsection 9-20(1) defines 'enterprise':

(1) 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; ...

Subsection 9-20(2) sets out all the activities carved out of that definition. The principal carve outs are acts by employees, private or domestic arrangements and activities by individuals or partners without expectation of profit or gain. In our view, none of the exceptions to the definition of enterprise apply as your stated purpose at all times to build and rent and sell the subdivided lots.

The ATO view on the meaning of the term 'enterprise' is also 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). As stated above, the term 'business' is a wider definition as section 9-20 precedes with the words 'in the form of'.

It is necessary to consider whether the parties' activities are 'in the form of a business or an adventure or concern in the nature of trade; that is, they carried out their activities in a business-like and commercial manner.

Paragraph 178 of MT 2006/1 lists a number of indicators considered when attempting to determine whether an activity or series of activities amount to a business:

•         a significant commercial activity;

•         a purpose and intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•         activity is systematic, organised and carried on in a businesslike manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business plan exists;

•         commercial sales of product; and

•         the entity has relevant knowledge or skill.

Significant commercial activity

These factors are relevant to the question whether you are operating 'in the form of' a business. We note that the size or scale of the commercial activity is relatively small scale. However, despite that, to bring about the conclusion to the subdivision to date your interaction with a number of third parties to ensure the success of the project including surveyors, concrete contractors, plumbers and electricity suppliers is significant. You raised the issue of whether there is a difference between selling them vacant or building on them. We consider that irrespective of whether the lots are vacant or have houses on them will not change the outcome as they still amount to a repetition of activity. As a builder you have the requisite knowledge to conduct your activities as an enterprise.

Purpose and intention to engage in commercial activity and intention to profit

The heart of the assessment of determining a commercial nature is whether the facts indicate that there is an intention to make a profit. Your stated aim from the very beginning was to subdivide, build rent and sell.

The subdivision activities are operated in a businesslike way. You assessed the viability of the project, obtained finance, purchased the land, and took all the steps necessary to subdivide it.

Systemic activity

You stated you did not make a business plan to obtain the finance but viability must follow the loan. The steps outlined above indicate the activity was systemic. You have a project that is effectively staged with the first stage being the subdivision and sale of Lot 1 with the existing residence. Subsequent staging is tied to the remaining lots. The current stage is the subdivision of the remaining lots and the sale of Lot 3.

Additionally, the activity is or will be profitable, you are selling lots gradually, and it is being conducted in a similar way to other businesses in the same or similar trade. You advised you are accounting for the lots as capital. In our view, they should be trading stock as you are running it as an enterprise for profit. The fact that you are accounting for the Lots and are monitoring their exact holding costs indicates that you are keeping records.

The entity has relevant knowledge or skill

As stated above you are a partnership with a partner that has the relevant skills as you have knowledge of the building trade. The builder stated on the subdivision plans and documentation is the partnership.

Commercial sales of product

You are currently considering selling a lot with a demountable unit situated on it. The unit sale will be arms' length and at commercial rates.

You have stated that the sales of future lots are intended to be sold with the intention to build and rent and sell.

Even if you chose to sell the remaining lots as they are, the steps taken above are sufficient levels of activity to meet the requirement of 'carrying on an enterprise in the form of a business'.

Alternatively, it is arguable that the activities you are undertaking instead fall under the second limb of the enterprise definition in subparagraph 9-20(1)(b) and are 'in the form of an adventure or concern in the nature of trade'. That is, they may be a series of activities more akin to a one-off arrangement and are transactions of a commercial nature but do not have the characteristics of an ongoing business.

Paragraph 244 to 261 of MT 2006/1 explains 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. It refers to 'the badges of trade' and outlines a number of factors that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes or held as an investment asset or for personal enjoyment.

The badges of trade are considered below.

The subject matter of realisation and Trade v. investment assets

Where the asset provides income or personal enjoyment it is more likely to be an investment rather than capital. The family home is an example of an investment asset. In your case, you rented the property on Lot 1 in the shorter term and sold it. In the current phase, you have constructed a residence on Lot 3 with the intention of sale. You have stated that your intention at all times was to rent and sell. Where you have an intention to sell, at the time of acquisition it is more likely a revenue asset and in the form of an adventure in the nature of trade.

MT 2006/1 at paragraph 260 states that assets can change their character but cannot have a dual character at the same time. The facts indicate that you are not holding to rent. Your actions to date point to sales as you have a contract pending on Lot 3 and you sold Lot 1 within 3 years of acquiring it. This is consistent with trading stock.

The length of period of ownership and frequency of similar transactions

You acquired the property in 2008. You subdivided and sold Lot 1 in 2011 and you rented it in the meantime. In 2012, you subdivided the remaining land into 4 lots. This element points to the land as potentially a capital asset if the frequency of sales is the measure. This factor would be less weighted if you retained a 'volume builder' to build a house on each vacant lot each year.

Supplementary work on or in connection with the property realised

Improving the property beyond preparing it as an asset for sale to bring it into a more marketable condition to gain a better price suggests an element of trade. You stated you intended to renovate and sell the residence on Lot 1. Additionally, you did not simply sell the remaining land, you subdivided it into 4 lots with a view to sale. Lot 3 currently has a demountable unit on it. Selling the land with the unit will amount to improving it beyond the sale of the land.

The circumstances that were responsible for the realisation

The reason for sale is a key factor. If a poor financial outlook forced the sale, the prospects are the sale was not commercial. This was not the case for the sale of Lot 1. In relation to Lot 3, you stated that one of the partners' income has been quite low. Looking at it as a single undertaking it points to the sale of the lots developed beyond the bare land. Building on the lots points to an organised systematic sale of trading stock over time.

Motive

This is a factor most relevant in situations where the evidence is not conclusive. You advised that your intention from the beginning was to subdivide, rent and sell depending on the prevailing circumstances. In relation to Lot 3 you stated you were going to rent it but laws were introduced due to the pandemic tipping the balance in favour of tenants who cannot pay, preventing their eviction. You see sale as the safer option in these market conditions. You did not have a stated motive for the sale of Lot 1, but the outcome was a sale.

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. Paragraph 263 states that the issue to be decided is whether the activities being conducted 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.

Paragraph 264 of MT 2006/1 sets out the guidance to be taken from the cases of Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070; 20 ATR 228 (Statham) and Casimaty v. FC of T 97 ATC 5135; (1997) 151 ALR 242 (Casimaty) in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme):

•         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.

As the assessment is one of fact and degree, the factors need to be balanced and the more that are present, the more likely it indicates a business or an adventure in the nature of trade. You have stated a dual purpose in holding the land in this respect it is matter of what conditions are best at the time. With Lot 3 you are arguing that sale is the better outcome.

Considering the abovementioned factors, you have not obtained additional land, but you did acquire a house with significantly large land area suitable for subdivision and sale. You took on the risk of borrowing funds and used the sale of the first Lot to defray the loan. You have undertaken the works necessary for subdivision. Finally, you have erected a residence on Lot 3 of the land.

Paragraph 270 of MT 2006/1 provides that 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 in the form of 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 the recent matter of McCarthy and Commissioner of Taxation (Taxation) [2021] AATA 1511 (28 May 2021) (McCarthy) co-owners of property in a small scale, one off, two lot subdivision, the Tribunal held the parties to be making a sale of land for profit rather than capital applying the principles set out in The Commonwealth of Australia v The Myer Emporium Limited (1987) 163 CLR 199. In McCarthy, it did not matter that they had stated they purchased the property to originally rent to tenants, the evidence showed that there was a primary aim of subdividing and selling for profit as that intention was based on knowledge that a subdivision would be profitable but the plan to hold the property long term of itself would not be profitable. In this case, there is clear evidence you intend to hold the property for sale.

The Tribunal at paragraph 43 quoted Collier J in Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 45 AAR 196.at 27 where he found:

In determining whether a sale receipt is generated as a profit component of a profit-making scheme, and therefore income in accordance with ordinary usages, it is only necessary that the intention or purpose of profit-making by sale was one aspect of a profit-making scheme in existence at the time of the acquisition of the asset (or, as was the case in FCT v Whitford's Beach Pty Ltd, coming into existence during the course of the taxpayer's ownership of the asset and remaining in existence at the time of the sale)

You advised you do not have the experience as did the parties in McCarthy. In that case, even though almost none of the indicators for an isolated one-off transaction of a commercial nature in Tax Ruling TR 92/3 Income tax: whether profits on isolated transactions are income were not evident did not change the outcome on the facts it was not capital. Deputy President Boyle found:

The test is not whether the transaction was carried out in an efficient or business-like manner, the test is whether the transaction is of the sort that a person in business would undertake. In this case, is the purchase and subdivision of a block and the sale of the resulting lots the sort of transaction that a person in business would undertake? Clearly the answer is yes.

In this case, more indicators are present than absent; you do not have a stated aim, for example, of constructing a personal residence but do have a stated intention to sell and the facts indicate you have already sold a stage and are near settlement of the second one. The activities you undertook were the sort of transaction a person in business would make. Objective evidence of profit making intention is a critical factor.

In our view, it does not matter at this point whether you sell the three vacant lots as they currently are, as based on the above factors we consider the activities you have undertaken to date and your intention at the time of acquisition of the property is sufficient to find that you are engaged in an enterprise.

Is the sale of Lot 3 the sale of new residential premises?

Lot 3 contains a transportable unit that is sitting on stumps. The premises are habitable as an occupancy permit has issued.

The dwelling is a fixture. As a fixture, it is clear you intended it to lose its character of a chattel and become part of the land. The unit is under sale via a standard form contract. It states that all goods sold with the land are:

All fixed floor coverings, light fittings, window furnishings and all fixtures and fittings of a permanent nature

The sale contract does not mention the unit specifically as a chattel. In our view there is nothing setting this transaction apart from the sale of any other premises fit for habitation.

The dwelling meets the definition of new residential premises where the conditions are met in section 40-75:

The relevant parts of 40-75

When premises are new residential premises

(1)          *Residential premises are new residential premises if they:

(a)          have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or

...

(2) However, the *residential premises are not new residential premises if, for the period of at least 5 years since:

...

(c)           if paragraph (1)(c) applies-the premises were last built; the premises have only been used for making supplies that are *input taxed because of paragraph 40-35(1)(a).

Subdivisions etc. may not result in new residential premises

(2AA) Despite subsection (1), the *residential premises are not new residential premises if:

(a)          they are created from residential premises that became the subject of a *property subdivision plan; and

(b)          the residential premises referred to in paragraph (a) were not new residential premises immediately before they became the subject of that plan.

(c)           This subsection has effect subject to paragraphs (1)(b) and (c).

The definition in 40-75 ensures premises that have been rented for at least 5 years since completion for occupancy are no longer new. As the premises were only granted occupancy recently, have been vacant since then and have not been sold previously, the sale of lot 3 will be new residential premises. Additionally, subsection 2(AA) ensures that the supply of Lot 1 remains not new residential premises after the initial subdivision occurred.

Is the partnership registered or required to be registered?

The partnership is required to be registered for GST if the GST turnover meets the registration turnover threshold under section 23-15. The registration turnover threshold for the partnership is $XXX. To date, you made the sale of Lot 1.

However, as that lot was an input taxed supply under section 40-65, it is not considered as part of your current turnover under section 188-15 or projected turnover under section 188-20. As a result, you were not required to be registered for GST at that time.

There are potential ramifications for you in relation to the sale of Lot 3 and the vacant lots (Lot 2, 4, and 5). You may meet the registration turnover threshold depending on the outcomes of the sales.

In relation to Lot 3, you have a 516m² lot with a demountable home on it. Goods and Services Tax Ruling GSTR 2012/5 Goods and Services Tax: residential premises, from paragraph 49 discusses transportable buildings. It says:

A transportable building such as a demountable dwelling or moveable home that is designed as a residence, or to provide residential accommodation, is residential premises when placed on land and installed ready for occupation.

Based on the facts provided, where you make a supply of the transportable unit affixed to the land via plumbing and sewerage lines, this meets the definition of residential premises. If the residential premises are new residential premises, they will be not be input taxed and will be taxable supplies.

As the sale price of Lot 3 exceeds the registration turnover threshold you will be required to register for GST.

Conclusion

Consequently, in our view the supplies of the lots will be made pursuant to the enterprise conducted by a general law partnership consisting of you as partners. The activities outlined above suggest the parties were not mere co-owners and moved beyond a tax law partnership. As the requirements of section 9-5 are all present, the supply of the lots, whether or not constructed upon, will be a taxable supply by the partnership in the course of its enterprise and as a result it is required to be registered for GST.

Question 2

Does the partnership have a responsibility under Schedule 1 of the Taxation Assessment Act 1953 to provide notice to the purchaser to withhold GST in relation to the supply of any of the lots to be sold in the course of their enterprise?

Detailed reasoning

On or after 1 July 2018, under section 14-250 of Schedule 1 of the Taxation Administration Act 1953, if the partnership supplies new residential premises or potential residential land it is required to notify purchasers in writing as to whether or not they have a withholding obligation.

'Potential residential land is defined under section 195-1 as:

land that it is permissible to use for residential purposes, but does not contain any buildings that are *residential premises" - other than land which contains any building that is in use for a commercial purpose.

Lots 2, 4 and 5 under the subdivision falls under this definition. If they are sold vacant notice is still required under this limb. If they are constructed upon, they will be the sale of new residential premises and notice is required under that definition.

As purchasers will have a withholding obligation, you must provide additional information, in writing, to the purchaser. The standard rate a purchaser withholds is 10 percent however, if the partnership determines it can sell under the margin scheme, the withholding rate will be 7 percent. Detailed information can be found in Law Companion Ruling LCR 2018/4 'Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property'.

Issue 2 Income tax issues

Question 1

Will the sale of the land and unit be treated on revenue account?

Question 2

If the remaining three lots are sold as vacant land, will the sale be treated on revenue account?

Question 3

If you built one house on average per year on each of the vacant lots and then sold, will the sale be treated on revenue account?

Question 4

If you engaged a volume builder to build a new house on each block at one house per year and then sold the house and land, will the sale be treated on revenue account?

Detailed reasoning

Broadly, there are three main ways profits from a land development, subdivision and sale can be treated for income tax purposes:

1. As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;
2. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;
3. As statutory income under the capital gains tax legislation.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. 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.

No one factor is decisive. The indicators must be considered in combination and as a whole.

Isolated transactions

Alternatively, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income where:

• the intention or purpose of a taxpayer 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 operation or commercial transaction.

Taxation Ruling TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, 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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

At paragraphs 56 and 57, Taxation Ruling TR 92/3 explains that a profit is income where it is made in any of the following situations:

• a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or
• a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or
• a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

Application to your circumstances

The factors to consider when determining if a business is being carried for income tax purposes are similar to those considered for GST purposes. Therefore, as discussed previously with regards to GST, an analysis of the factors points towards the carrying on of a business.

Alternatively, the Commissioner is satisfied that if you are not carrying on a business, the proceeds from the sale of the properties will be those from an isolated profit making transaction. As discussed, it can be concluded that the development and subsequent sale of the subdivided lots, occurs with the intention of profit from a commercial transaction.

Consequently, the sale of the subdivided lots is considered to be on revenue account regardless of whether they are sold as vacant land or if a house has been built on the land.