Edited version of private advice

Authorisation Number: 1051944095760

Date of advice: 25 February 2022

Ruling

Subject: Assessable income - mere realisation of asset

Issue 1 Goods and Services Tax (GST)

Question 1

Is the sale of the subdivided lots of XX (the Property) a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of the subdivided lots is a taxable supply made by the partnership of the Trustees for XX (the Trustees) and XX (the Developer).

Issue 2 Income Tax

Question 2

Will your share of the proceeds from the sale of subdivided lots treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Commissioner considers the Trustees and the Developer formed a general law partnership carrying on the land development business. The sale of the subdivided lots will constitute the sale of the partnership trading stock, with proceeds assessable as ordinary income under section 6-5 of the ITAA 1997.

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

X XX 20XX

Relevant facts and circumstances

The Trustees of XX (the Trust) are:

•         A; and

•         B.

The Trust's Australian Business Number (ABN) is XX, and the Trust is accepted as registered for ABN and GST from X XX 20XX.

Purchase of the Property - The land contained in Certificate of Title Volume XX.

On XX X 19XX, C and D purchased a holiday house, the Property.

At the time of purchase, the Property was zoned Rural and removed from the township of XX. The dwelling had X bedrooms on X hectares.

It was planned that in the longer term, the Property could be used as C and D's retirement home. However, the retirement plans did not eventuate for C and D, and they passed away in 19XX and 20XX respectively.

Upon the death of C, their interest in the Property was transferred to D. Upon the death of D, their interest in the Property was transferred to the Trustees as executors.

The Trustees retain ownership of the Property in that capacity. A land title search report shows the Registered Proprietor is:

Joint Proprietors

•         A; and

•         B.

After the deaths of C and D, the Property continued to be used by the extended family as a holiday house.

Planning reports

During this time, the area around XX was the subject of considerable growth, with a number of residential developments and rezoning of land.

Various planning reports were published in the 19XX's for the future growth of XX. These reports were undertaken by various consultants on behalf of the XX Shire. The Trustees had no involvement in those reports. Nor did C or D.

As the population of XX increased, the XX Shire instigated a planning workshop in around 20XX involving the XX landowners in XX, a study area of approximately XX hectares to discuss potential planning outcomes. As very minority landowner, the Trustees had little involvement in it.

To meet the expected population growth, XX Shire commenced a Planning Amendment XX; and subsequently approved and gazetted it by the Planning Minister around 20XX.

A planning permit XX was issued on X XX 20XX for the Property and XX neighbouring properties. While the neighbouring property is being developed by another developer, at their request, the Trustees joined in with their application and offered no objections to what they proposed to the planning permit.

Land Swap with adjacent development

In around 20XX, the Trustees were approached by an adjoining land owner's planning consultants, to discuss a boundary adjustment and subsequent Land Swap. The adjoining land was in the process of being developed. The purpose of the boundary adjustment was to create a better buffer zones between the existing house on the Property from the proposed adjoining land's development. The Trustees agreed to this arrangement.

The Trustees had no involvement in the design of the traffic flow that connects with the buffer zones.

A Boundary Adjustment Deed was entered on X XX 20XX for the Land Swap. The land of the Property remained at X hectares after the Land Swap.

Decision to sell part of the Property and entry into an agreement

Since the Property was rezoned in 20XX, the holding costs, in particular Land Tax and Council Rates have raised due to the increase in site value. Notwithstanding that, the Trustees decided to retain the Property as a holiday property. However, while the holding costs are expected to continue rising in the future the capital expenditure for maintenance of the house on the Property has been neglected due to the increasing holding costs. The Trustees therefore considered selling a part of the Property to raise funds to retain the remaining part of the Property and to fund the refurbishment/renovation of the holiday house.

In 20XX, the Trustees were approached by a family friend to undertake a development 'on the Trustees' behalf'. To give effect to the arrangement, the Trustees entered into a Development Agreement with the Developer, this was executed on X XX 20XX (the Agreement).

The Trustees have not been involved in any residential property development or subdivision in the past.

Planning Application

A Planning Application titled 'XX Report' by 'XX Planners', date of issue: X XX 20XX, in relation to the subdivision and removal of vegetation for the Property, along with its covering letter and application report were provided. The Planning application was prepared on behalf of XX Pty Ltd on behalf of the Trustees, which was signed on X XX 20XX.

This is an extract of the XX Report:

...

The approved Development Plan

•         The Planning Permit is for XX lots, in which Stage 1 refers to all civil works to create XX lots including the substantial allotment, where the holiday house locates (the substantial allotment); Stage 2 is potentially developing the substantial allotment into X new lots as per the Planning Permit. To create the X new lots, the existing house would need to be demolished.

•         There is no requirement for the Trustees to undertake development of Stage 2. It could be developed based on the Planning Permit prior to its expiry, but the house would need to be demolished.

•         This Planning application does not cover the subdivision of other land in addition to the Property which belongs to the Trustees.

The Development

It was difficult to undertake an accurate feasibility study by the Trustees prior to entering into the Agreement as costings such as civil, planning, engineering, surveying etc were unknown. The largest cost was the Civil contract which was executed a substantial period after the Agreement was signed. For the same reasons, it was not feasible for a detailed project budget to be prepared. Hence neither was prepared.

No dwellings are to be constructed on the lots. This means the lots are to be sold as vacant land.

The Trustees did not implement any formal business structures for the purpose of the development of the Property.

The size of total developable area is XX square meters, equals total site area less roads, reserves, etc and the substantial allotment.

The development subdivided the Property into XX saleable lots in varying sizes, in which XX of the XX lots have been presold but the holiday house with the substantial allotment, will be retained by the Trustees. The size of the substantial allotment is X square meters.

The XX lots were sold as GST taxable supplies using the Margin Scheme.

Out of the XX lots, a few of them were sold to family members and direct relatives of D, whose Estate is now the vendor.

The expected gross sales proceeds from the sale of the XX lots are multi-million inclusive of GST. The Trustees expect to receive final distribution of approximately XX (subject to change from varied costs) under Clause XX of the Agreement.

When carrying out this development, the Developer did not carry out development project on any other land adjacent to the Property.

According to Annexure X of the Agreement, the Trustees have given the Developer the Power of Attorney to subdivide and sell the subdivided lots on behalf of the Trustees, but the Trustees remained as the owner/vendor of the subdivided lots at the time of sale. The Power of Attorney is designed to enable the Developer to perform its obligations under the Agreement which includes entering into documents for the sale of individual lot as specified in the Power of Attorney.

The Contract of Sale for Lot XX, Stage 1, XX provides that

•         The Vendor is A and B

•         Purchaser is an individual, XX is the family relative of D.

•         The land is described as Volume XX, Folio XX, Lot X

•         The sale price is $XX.

•         It was signed by the purchaser on X XX 20XX and signed by XX under Power of Attorney on X XX 20XX.

The Developer and the Trustees are not 'associates' as defined in the GST law or within the meaning of Section 318 of the Income Tax Assessment Act 1936. The Developer's Related Entities (as referred by Clause XX of the Development Agreement) are not 'associates' with the Trustees on the same basis. The Trustees neither own shares or are Directors in the Developer or any potential Related Entities of the Developer.

The Trustees have not previously considered selling the land which was marked for the subdivision project to the Developer before entering into the Agreement with the Developer. The Trustees are not aware of the Developer entering into any similar agreements with the neighbouring landowners to carry out the project at the same time.

Clause XX of the Agreement requires the parties (the Trustees and the Developer) to remain registered for GST for the purpose of the GST Act throughout the term of the Development Agreement. The Trustees applied for ABN and GST registration in XX 20XX.

Clause XX of the Agreement provides that the Trustees charge the Land in favour of the Developer effective from the date of the Agreement to protect the 'Developer's interest' under the Agreement. The term 'Developer's Interest' has not been defined elsewhere in the Agreement, but given the context of the clause it would refer to the rights or entitlements of the Developer in the Agreement, which entitles the Developer to payment. The rights or entitlements of the Developer includes the following:

•         The development fee payable pursuant to clause XX of the Agreement;

•         The outstanding projects costs payable pursuant to clause XX of the Agreement; and

•         Amounts payable on termination of the Agreement, if applicable pursuant to clauses XX or XX of the Agreement.

The Developer will incur development expenses and is entitled to payment for the services it provides. The effect of Clause XX of the Development Agreement is to give the Developer security over the land being developed, to better secure the payment to it of the amounts due pursuant to the Development Agreement. If the owner failed to pay the Developer, then this security could be utilised. The nature of the charge is a form of security which gives the Developer rights to seek payment of amounts due to it through the land, but to do this the Developer would require a XX. This clause would also entitle the Developer to lodge a XX on the title to the Property.

Clause XX of the Agreement provides for the distribution of the proceeds of the sale of the lots to ensure that there is no dispute between the Parties. The Developer is required to fund the costs of the development; the sales proceeds are not used to fund those development costs. Rather, the sale proceeds are to reimburse the Developer for those costs. It is also envisaged that the development will be completed as a single stage, with all the sales taking place at the same time, not progressively. The structure of Clause XX is broadly as follows:

•         First, if GST is payable, that GST is paid first.

•         Second, the proceeds are paid to the Developer for the Development Fee (X% of gross Sales Proceeds)

•         Third, to reimburse the Developer for the costs of the development

•         Last, the remaining proceeds are divided between the Developer and the Trustees in proportions depending on the various milestones set out in the Agreement.

The Agreement does not provide for the Developer to charge or invoice the Trustees for Project costs/works undertaken on the Property. The Developer will pay the expenses for the development, which will then be reimbursed at the end of the development from the sale proceeds. There is no requirement for the Trustees to make progress payments.

The Developer funded the development using its own finance arrangements, which could have involved borrowing. However, the Property was not used as security for the Developer's borrowing, if any.

Clause XX of the Agreement provides, the Trustees must not sell, transfer or otherwise dispose of its interest in any part of the Property without first offering it to the Developer on the same terms.

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 Paragraph 9-5(b)

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

A New Tax System (Goods and Services Tax) Act 1999Section 9-20

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

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

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 Subsection 70-10(1)

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Paragraph 70-30(1)(a)

Income Tax Assessment Act 1997 Subsection 104-220(1)

Income Tax Assessment Act 1997 Subsection 104-220(2)

Income Tax Assessment Act 1997 Subsection 104-220(4)

Income Tax Assessment Act 1997 Paragraph 118-25(1)(b)

Income Tax Assessment Act 1997 Part 3-1 and Part 3-3

Reasons for decision

Issue 1 Goods and Services Tax (GST)

Question 1

Is the sale of the subdivided lots of XX (the Property) a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

The Trustees formed a general partnership with the Developer (the Partnership) in carrying on a business of land development.

The Partnership's supply of the vacant lots is a taxable supply because:

•         the Partnership makes a supply of the vacant lots for consideration;

•         the supply is made in the course of an enterprise of land development that the Partnership carries on

•         the vacant lots are in the indirect tax zone;

•         the Partnership is required to be registered for GST; and

•         the supply of vacant lots of land is neither GST-free or input-taxed.

Detailed reasoning

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act 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 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

(* denotes a defined term under section 195-1 of the GST Act)

The term 'you' in section 9-5 of the GST Act applies to 'entities' generally. An entity is defined in section 184-1 of the GST Act to include (amongst others) a partnership.

We first need to examine whether the supply of the vacant lots is done by the Trustees or by a partnership of the Trustees and the Developer for GST purposes.

Partnership carrying on a development business

Section 184-1 of the GST Act specifically includes a partnership in the definition of entity (paragraph 184-1(1)(e) of the GST Act) and excludes non-entity joint venture (subsection 184-1(1A) of the GST Act. Both 'partnership' and 'non-entity joint venture' are defined terms.

Section 195-1 of the GST Act contains relevant definitions including the following:

non-entity joint venture has the meaning given by subsection 995-1(1) of the *ITAA 1997.

partnership has the meaning given by section 995-1 of the ITAA 1997.

Section 995-1 of the ITAA 1997 contains these definitions:

non-entity joint venture means an arrangement that the Commissioner is satisfied is a contractual arrangement:

a)    under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

b)    that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

partnership means:

a)    an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

b)    a limited partnership.

The Commissioner's view on partnerships and joint ventures are contained in various rulings including:

•         Goods and Service Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships

•         Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property

•         Goods and Services Tax Ruling 2004/2 Goods and services tax: What is a joint venture for GST purposes?

•         Taxation Ruling TR 94/8 Income Tax: whether business is carried on in partnership (including 'husband and wife' partnerships)

•         Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Paragraphs 8-10 of GSTR 2003/13 states:

8. A partnership is defined in section 195-1 of the GST Act by reference to the definition of 'partnership' in subsection 995-1(1) of the ITAA 1997. That definition states:

partnershipmeans:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

9. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. We refer to this type of partnership as a general law partnership.

10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership.

A general law partnership is formed when persons commence carrying on business together with a view of profit under an agreement, either written or oral. The 'relation' or the 'association' is one that arises under an agreement. Under general law, a partnership is not an entity and the term 'partnership' is merely descriptive of the relationship between persons carrying on business with a view of profit.

However, the GST law specifically includes a partnership as an entity in section 184-1 of the GST Act and deems the acts of the partners to be acts of the partnership under subsection 184-5 of the GST Act:

(1)  For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a *partnership in her or her capacity as a partner:

(a)    is taken to be a supply, acquisition or importation made by the partnership; and

(b)    is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.

In Yacoub v Federal Commissioner of Taxation [2012] FCA 678 (Yacoub), Jagot J considered whether parties in a joint property development were a general law partnership, and therefore an entity, for GST purposes. At paragraphs 23-28 Jagot J summarised the relevant case law:

23.   "The existence of a partnership is determined by reference to the true contract and intention of the parties as appearing from all of the facts and circumstances relevant to the relationship of the parties" (Amadio Pty Ltd v Henderson (1998) 81 FCR 149 at 172).

24.   The indicia of the existence of a partnership include: - (i) a mutual interest in the carrying on of the business for the purpose of profit or gain (in this regard, it has been said that all partnerships involve a joint venture but not all joint ventures involve a partnership, for example, Whywait Pty Ltd v Davison [1997] 1 QdR 225 at 231), (ii) mutual confidence that the parties will engage in the venture for joint advantage only (for example, Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 407-408), (iii) sharing of profits and losses from the venture or a so-called community of profit and loss (Fenston v Johnston (1940) 23 TC 29 at 34), and (iv) mutual agency in the sense that each party is a principal of the business and may bind the other (for example, Momentum Productions Pty Ltd v Lewarne (2009) 174 FCR 268; [2009] FCAFC 30 at [36]-[44] (Momentum Productions)).

25.   Statements of intention by the parties may be relevant but do not determine whether a partnership exists, as the issue is determined by reference to the "substance and reality of the transaction being adjudged to be a partnership" (Fenston v Johnston at 35-36).

26.   In United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 15-16 Dawson J said:

Perhaps in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. Enterprises of the latter kind are common enough in the exploration for and exploitation of mineral resources and the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit.

27.   In A.R.M. Constructions Pty Ltd v Federal Commissioner of Taxation (1987) 87 ATC 4790 Yeldham J said at 4805:

I am clearly of the opinion that...there was merely a joint venture between the appellants to construct buildings, in contrast to an agreement to make profits for sharing, and it was the intention of the parties at all material times to retain the units and town houses so erected, except to the extent that sales might be necessary to repay moneys borrowed from lending institutions...In my view the parties associated together to produce a product, a building of units capable of partition between them, so that each could hereafter go their own respective ways. Their expressed intention so to do was duly manifested in what they thereafter did and achieved, and their agreement constituted in law something in the nature of a joint venture to construct the building, in contrast to an agreement to make profits for sharing, inter se. The only partnership for tax purposes related to such rental income as was received jointly before the date of the deed of partition...

28.   According to Lindley & Banks on Partnership (19th ed, Sweet & Maxwell Ltd, 2010) at 5-23:

...persons who agree to share profits and losses will normally find themselves treated as partners, whether or not they have themselves used that word. However, it is not the necessary corollary of such an agreement that each party will enjoy all the rights and privileges normally associated with partnership, e.g. a right to participate in the management of the business, to dissolve the firm, or to share in the value of goodwill on a dissolution.

Rather, the partners' rights and duties will in each case be determined by the terms of their agreement...

In concluding that the parties were in a general law partnership, Jagot J stated at paragraph 39:

...the real difficulty for the applicants remains cl 2 of the 18 July 2007 agreement and the agreement between the parties to the venture to "share equally all costs, liabilities, mortgages and proceeds derived from any sale arising from the property". By this provision the parties to the 18 July 2007 agreement placed themselves in a legal relationship by which they had: - (i) a mutual interest in the carrying on of the business for the purpose of profit or gain, (ii) mutual confidence that the parties will engage in the venture for joint advantage only, and (iii) sharing of profits and losses from the venture or a so-called community of profit and loss. As a matter of substance the parties thereby created between themselves a partnership both at general law and a tax law partnership as defined in s 995-1 of the ITAA 1997.

The ATO view on tax law partnerships is set out in GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property. GSTR 2004/6 at paragraph 19 provides:

19. If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership.

Therefore, if the venture fits the definition of a tax law partnership and the definition of a general law partnership, it will be a general law partnership.

Paragraph 20 of GSTR 2003/13 provides:

20. However, an express intention not to form a partnership, although a strong indicator that the relationship is not a partnership, will not be determinative in all cases. Even a declaration in an agreement between the parties not to form a partnership will be ineffective if all the indicia of a partnership are present. Nevertheless, such a declaration may be used to rebut inferences that could otherwise be drawn from other clauses of any agreement the parties have between themselves. If there is no written agreement, then the intention of the parties may be implied by their words and conduct.

Ownership of the legal title of an asset by only one partner is also not determinative of whether there is a general law partnership. As a partnership is not a legal entity, it, the partnership, cannot hold title to an asset. It is the partners who will have the legal ownership. In examples in GSTR 2004/2 it is demonstrated that parties can be in a partnership where the land is only owned by one party (example 2 at paragraphs 56-59) and that parties could be in a joint venture, and not a partnership, despite having co-ownership of the asset (example 1 at paragraphs 53-55).

The indicia of a partnership are therefore not solely determined by statements made by the parties nor on the ownership of the asset. In this case, a declaration in an agreement between the parties not to form a partnership or setting out the extent of liabilities for each party as per clause X in the Development Agreement dated X XX 20XX, will be ineffective if all the indicia of partnership are present.

As can be seen from the extract from Yacoub above, parties who are in an arrangement to share profits and losses will normally find themselves treated as partners. As found in Yacoub, after considering the agreement there will be a partnership where the parties have:

•         a mutual interest in the carrying on of the business for the purpose of profit or gain,

•         mutual confidence that the parties will engage in the venture for joint advantage only, and

•         sharing of profits and losses from the venture or a so-called community of profit and loss.

In this case, the Commissioner considers the Trustees and Developer are carrying on a business in common with a view of profit, and therefore a general law partnership as:

1. Considering the project and project objectives, the parties are venturing in a property development business.

•         There is a purpose and intention to engage in commercial activity which is supported by the following clauses in the Agreement:

Clause X of the Agreement (Definitions) defines:

'Project': means undertaking and managing the development and sale of the land in accordance with the Project Objectives, consents, all laws and this Agreement.

'Project Objectives' means obtaining Consents to develop the Land generally in accordance with the Development approval, subject to the requirement of any Authority, and provide for:

a)    High standards of development quality and innovation in urban design, environmental solutions and housing designs;

b)    The best urban design outcome with the house being retained;

c)    Optimal sale prices for sales of the Lots on the open market;

d)    Maximise project profits, and

e)    Efficient and timely implementation of the Project.

Clause XX - The Parties agree that the objective of the Project is to maximise the value of the Land by meeting the Project Objectives.

Clause XX - The Developer shall be entitled at all times to brand any promotional, advertising or marketing material associated with the Project with the Developer's own logo, designs and other insignia.

•         The activity is planned, organised and carried on in a businesslike manner. The Agreement is a sophisticated document that sets out the plan for the development. It provides for (but not exhaustive):

a)    Detailed drawings based on development approval plans consisting stage 1 and stage 2, and includes numbering of lots, lot sizes, lot layout and roads to access newly created lots

b)    Funding of project costs

c)    Works to be performed

d)    Tenders and engagement of contractors

e)    Project costs and payment thereof

f)     Return on costs

g)    Sales

h)    Sales proceeds

i)      Insurances

j)      Payments on termination

•         There is size, scale and significant commercial activity.

An Agreement had been entered into to develop the land into XX lots and retain 1 lot containing the holiday home. Based on indicative sales proceeds and distributions, the project costs could be estimated to be multiple millions. This is not an insignificant investment resulting in total revenues of $XX million.

The amount to be distributed to the Trustees is approximately $XX to $XX million.

•         There is requisite skill brought into the project. A development manager is appointed to implement the Project. A Development Fee is paid to the Developer for services.

2.    The purpose of the Development Agreement provides for the Parties to work in collaboration and trust with each other for commercial advantage and mutual benefit, according to clause XX and XX of the Agreement.

Other than the Agreement to bind the parties to carry out this Project, there is also charge over the land in favour of the Developer.

Clauses XX of the Agreement provides for the Developer to take out Insurances in the name of the Developer with the interest of the Owner noted, or in the name of the applicable Principal Contractor with the interest of the Developer and Owner noted.

There is a mutual interest in the development being successful. According to the agreement, the Developer (in their own right) does not separately charge the Trustees for Project costs. Whilst Project costs are funded by the Developer, the parties by virtue of this agreement are working together to ensure the development is successful to the extent of maximising the value of the Land.

Once the land been developed and subdivided ready for sale, the Developer does not step away after payment of the development fee based on X% of total proceeds. The Developer and Trustees are 'tied' together until Project Costs are paid and all lots sold - this is how the parties receive their share of the proceeds.

With respect to Project Costs, clause XX of the Agreement: 'Payments on Termination - Owner Breach' requires the owner to pay the developer an amount equal to outstanding project costs at the time of termination and an amount of 25% of the total project costs at the time of termination', and clause XX 'Payments on Termination - Developer Breach' requires the developer to pay the owner an amount equal to the outstanding project costs at the time of termination'.

Clause XX of the Agreement makes it clear that proceeds from each lot sale are distributed in a way such that any GST applicable is paid first, then the development fee, then any outstanding project costs.

Whilst the Developer funds the Project Costs and is responsible for the payment of the Project Costs in the course of the Project, by virtue of Clause XX, any GST, development fee and project costs are in effect shared between the parties, to then calculate any share or profit to be distributed.

Where a Developer is acting in their own right throughout this Project, then outstanding liabilities for Project Costs would rest with the Developer alone, being the entity that has acquired these costs. Clause XX and XX indicate that these Projects Costs are costs of the Partnership and any distribution and return on respective investment is not realised until Project Costs are paid in full.

3. Whilst clause XX of the Agreement stated that 'Nothing stated or implied in this Agreement makes a Party the partner, agent or legal representative of the other Party for any purpose or creates any partnership, agency or trust', the Parties to this Agreement are making a capital contribution in return for profit. The Trustees are contributing Land and the Developer is contributing the funding and the success of the Project results in a balance of 'sale proceeds' shared between the Trustees and the Developer on a 50/50 basis in two of the three 'milestone' stages as pursuant to clause XX of the Agreement.

Whilst partnerships typically are such that they are undertaken on an ongoing basis, Jagot J stated at paragraph 42 in Yacoub:

I do not accept the Trustees' submission that the short-term or isolated nature of the activity precluded it from being a partnership. In National Insurance Company of New Zealand Limited v Bray [1934] NZLR 67 at 70 Smith J saw no reason not to find a partnership in respect of an arrangement relating to the mere purchase of a single piece of land. It is not apparent to me why the nature of the venture in question in this case - the development and sale of 30 strata subdivided villas - should be seen as an indicator against the existence of a partnership. Nor is the fact that the parties may have created one legal relationship in 2005 and another in 2007. In fact, the development was carried out and completed pursuant to the arrangements between the parties as varied by the 18 July 2007 agreement.

The circumstances set out in the development agreement is an arrangement where land is owned by one party, not both. As explained included in GSTR 2004/2 at paragraphs 56-59, the arrangement can be a partnership.

In summary, with reference to paragraphs 30 and 47 of GSTR 2003/13, whilst the agreement provides for 'No Partnership' at clause X, based on an analysis of the Development Agreement as a whole together with the comments of Jagot J in Yacoub, we consider that the better view is that the relationship between the Trustees and the Developer are in a general law partnership. There is an association of persons (other than a company or a limited partnership) carrying on business as partners for profit making purposes as they:

•         have a mutual interest in the carrying on of the property development business for the purpose of profit from the sale of the developed residential lots,

•         have a mutual confidence that the parties will engage in the Project as defined for joint and mutual advantage, and

•         are sharing profits and losses in line with their contributions.

The arrangement does not have appearance of just a fee for service arrangement. The parties have come together for the common purpose of developing the land into subdivided residential lots (vacant lots) for the purpose of sale. The agreement has a start and finish date where both parties are committed and invested in the project through to completion. The structure of the agreement in relation to the project costs is such that the developer, funds the costs and attends to all payments of those costs. The order in which proceeds are disbursement, provides, that after all costs have been paid, the two parties share the proceeds on a 50/50 basis in two of the three 'milestone' stages. The basis for this share is the Trustees contributes the land to the development and the Developer contributes the funding for the Project.

Note: The Developer charges the Partnership a fee in their own right for development services at X% of total proceeds.

Timing of partnership's formation

The entity undertaking this development is the partnership, therefore we need to consider when the Partnership formed, otherwise referred to as time of formation. In accordance with GSTR 2003/13, the best evidence of when a partnership commenced is the date of the agreement. Our view is the time of formation was on or before the X XX 20XX.

We consider that the Property became a partnership asset upon the parties entering into the Agreement. Whilst the parties to the Agreement agreed that Trustees continued to own the Property right up to the time it was sold as subdivided lots, the case law Federal Commissioner of Taxation v. Everett, High Court of Australia (Full Court), 27 February 1980 (Everett Case) is authority for the view that each partner has a beneficial interest in the partnership assets. This view is supported by Clause XX of the Agreement, as this clause provides that the Trustees must not at any time during the term of the Project, consider, or accept any offers from anyone else without giving the Developer the option first and on the same terms.

Clause XX of the Agreement also provides that the Trustees charge the Land in favour of the Developer effective from the date of the agreement to protect the Developers interests under the Agreement. The Trustees explain that the Developer will incur development expenses and is entitled to payment for the services it provides. The effect of Clause XX of the Agreement is to give the Developer security over the land being developed, to better secure the payment to the Developer of the amounts due pursuant to the Agreement. If the Trustees failed to pay the Developer, then this security could be utilised. The nature of the charge is a loose form of security which gives the Developer rights to seek payment of amounts due to it through the Property, but to do this the Developer would require a Court Order. This clause would also entitle the Developer to lodge a caveat on the title to the Property.

We would suggest that according to clause XX of the Agreement, the Developer has an underlying interest in the Property and the Property forms part of the partnership assets.

GST Treatment

GSTR 2003/13 and GSTR 2009/1 set out the tax treatment for supplies and acquisitions made by the Partnership, including the possible application of margin scheme.

Application of section 9-5 of the GST Act:

As concluded above, the Trustees carry on an enterprise of land development in a general law partnership (partnership) with the Developer. Accordingly, the application of section 9-5 of the GST Act will apply from the perspective of the partnership (you), who will be the supplier of the vacant lots.

You satisfy paragraphs 9-5 (a), 9-5 (b) and 9-5 (c) of the GST Act because you make the supply of the vacant lots for consideration, you make the supply in the course of furtherance of an enterprise of land development that you carry on, and the vacant lots are located in the indirect tax zone respectively.

You are not registered for GST. We need to discuss whether you are required to be registered.

Paragraph 9-5 (d) of the GST Act -Whether you are required to be registered for GST

As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to your supply of the vacant lots.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. Subsection 23-15(1) of the GST Act provides that your registration turnover threshold (other than a non-profit body) is $75,000.

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

a)    your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

b)    your projected GST turnover is at or above $75,000.

Your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

In calculating current GST turnover (section 188-15 of the GST Act) and projected GST turnover (sections 188-20 and 188-25 of the GST Act), the following supplies (amongst others) are not included in the calculation:

• supplies that are input taxed (which includes financial supplies, residential rent and sale of residential premises).
• supplies that are not for consideration.
• supplies that are not made in connection with an enterprise that you carry on.
• supplies that are not connected with the indirect tax zone.

In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or are likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of capital assets. Paragraph 33 of GSTR 2001/7 provides that an asset which is acquired and used for resale in the course of carrying on an enterprise is not a capital asset for the purposes of paragraph 188-25(a) of the GST Act.

Paragraphs 34 to 36 of GSTR 2001/7 further provide that a revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. If the means by which you derive income is through a disposal of an asset, the asset will be of a revenue nature rather than a capital asset, even if this disposal is a one-off transaction. Where an asset is held by an entity over a period of time, its character may change from capital to revenue (that is, trading) or from revenue (trading) to capital. 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.

As discussed above, your activities of developing and selling the vacant lot constitute the carrying on of an enterprise. At the time of your supply, the nature of your assets (the vacant lots) is changed from a capital to a revenue (trading) asset. The sale of the vacant lots does not constitute the transfer of a capital asset and paragraph 188-25(a) of the GST Act does not apply. You are deriving income from the disposal of a revenue (trading) asset even if the disposal is part of a one-off transaction of this project.

Therefore, your supply of the vacant lots is not excluded from the calculation of your projected GST turnover. Hence, the value of the sale must be included in the calculation of your current and projected GST turnovers.

Ceasing or reducing the size or scale of an enterprise

Further, in working out your projected GST turnover, paragraph 188-25(b) of the GST Act requires that you disregard any supply made or are likely to be made, by you solely as a consequence of ceasing to carry on an enterprise, or substantially and permanently reducing the size or scale of an enterprise.

Paragraphs 46 and 47 of GSTR 2001/7 discuss isolated transactions. GSTR 2001/7 states at paragraphs 46 and 47:

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

Following the principles in paragraphs 46 and 47 of GSTR 2001/7, it considered your supply of the vacant lots does not satisfy paragraph 188-25(b) of the GST Act, and the consideration received from the sale of the vacant lots is included in the calculation of your projected GST turnover.

Accordingly, prior to the supply of the vacant lots, you are required to be registered for GST because you are carrying on an enterprise and your projected GST turnover would be above the GST registration turnover threshold of $75,000. Hence, paragraph 9-5(d) of the GST Act is satisfied.

Even if a supply satisfies paragraphs 9-5(a) to (d) of the GST Act, it is not taxable if it is GST-free or input-taxed.

GST-free and input taxed supply

The supply of vacant lots of land is not GST-free or input taxed under any provisions of the GST Act or any other legislation.

Conclusion:

Your supply of the vacant lots is a taxable supply under section 9-5 of the GST Act.

Additional Information - Margin scheme

Where you make a taxable supply of real property by selling a freehold interest in land, or selling a stratum unit, or granting or selling a long-term lease, you may be eligible to apply the margin scheme in working out the amount of GST on the supply. For further information on the margin scheme, refer to the: GST and the margin scheme guide (NAT 15145), and the list of relevant public rulings/publications which areavailable on our website at www.ato.gov.au

Additional Information - Claiming input tax credits

When you are registered or required to be registered for GST, you are liable for the GST on all taxable supplies that you have made, or will make. However, you will be entitled to claim input tax credits (ITCs) for any creditable acquisitions that you have made, or will make, provided you hold the relevant tax invoices.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

•         you acquire anything solely or partly for a creditable purpose; and

•         the supply of the thing to you is a taxable supply; and

•         you provide, or are liable to provide, consideration for the supply; and

•         you are registered, or required to be registered.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

•         the acquisition relates to making supplies that would be input taxed; or

•         the acquisition is of a private or domestic nature.

Additional Information - GST at settlement

From X XX 20XX, purchasers of residential properties may be required to withhold an amount from the contract price and pay it directly to the ATO. The remainder of the sale price is paid to the property supplier. This potentially applies to:

•         New residential premises

•         Land that could be used to build residential buildings

Suppliers must notify purchasers in writing as to whether they have a withholding obligation or not when they sell (subject to certain exceptions).

More information on GST at settlement is available at ato.gov.au

All public rulings and publications are available on the ATO website at www.ato.gov.au

Issue 2 Income Tax

Question 2

Will your share of the proceeds from the sale of subdivided lots treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Commissioner considers the Trustees and the Developer's activities went beyond the mere realisation of a capital asset. It is concluded that the Trustees and the Developer formed a general law partnership carrying on the land development business. The sale of the subdivided lots will constitute the sale of the partnership trading stock, with proceeds assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

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

•         as ordinary income on revenue account, as a result of carrying on a business of property development, involving the sale of land and buildings as trading stock;

•         as ordinary income 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, where the land was acquired or subsequently held for the purpose of profit making; or

•         as statutory income under the capital gains tax legislation on the basis that a realisation of a capital asset has occurred.

Change of intention

While holding an asset for a long period of time may seem to indicate that it is a long-term capital investment asset, the intention of the taxpayer at the time of acquiring the asset and throughout the ownership period that the taxpayer owns that asset is an important factor to consider.

In circumstances where there has been a change of intention in respect of a property from holding the asset as a long-term capital asset, to one of selling the asset for a profit, the question which arises is whether the sale was a 'mere realisation' of capital asset.

The doctrine of 'mere realisation' was first developed in the Full High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 (Scottish Australian Mining) and has been relied upon by numerous cases since. The Full High Court in Scottish Australian Mining found that based on the facts of that case, the subdivision of the land was considered no more than a mere realisation of a capital asset, and its subdivision was merely an enterprising way to realise an asset to its best advantage. For many years it was felt that the doctrine of 'mere realisation' was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income.

However, the decision in FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 (Whitfords Beach) has narrowed the scope of the 'mere realisation' doctrine. In this case, Justice Mason stated that:

"37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case." (at page 385).

The decision in Whitfords Beach also highlights that the requirements of modern-day residential subdivision, which involve much more development and improvement of land than was formerly the case, makes it far more difficult for contemporary residential subdivisions to satisfy the 'mere realisation' doctrine.

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? (TR 97/11) at paragraph 13, provides the general indicators of a 'business' established by the courts. The Ruling deals with carrying on a primary production business, however, the principles discussed in the Ruling apply to any set of operations. The indicators 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.

While no single indicator is decisive. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551).

In this case, the Commissioner needs to determine whether the Trustees' activities in dealing with the Land, amount to carrying on the business of property development and sale, either on their own or jointly in partnership with the Developer.

Carrying on a business of property development in partnership

The Commissioner's views on partnership are contained in various rulings including:

•         Goods and Service Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships

•         Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property

•         Goods and Services Tax Ruling 2004/2 Goods and services tax: What is a joint venture for GST purposes?

•         Taxation Ruling TR 94/8 Income Tax: whether business is carried on in partnership (including 'husband and wife' partnerships)

•         Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

As discussed in Question 1, short-term or isolated nature of the activity does not preclude it from being a partnership. In addition, some other relevant considerations are listed below:

Taxation Ruling TR 94/8 Income Tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8)

The Commissioner, in TR 94/8, sets out what is to be considered in deciding whether persons are carrying on business as partners.

At paragraph 4 of TR 94/8, the following are provided:

We look at the following factors in deciding whether persons are carrying on business as partners:

•         Intention

-the mutual assent and intention of the parties

•         Conduct

(a) joint ownership of business assets

(b) registration of business name

(c) joint business account and the power to operate it

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlements to a share of net profits

(g) business records

(h) trading in joint names and public recognition of the partnership

Paragraph 5 of TR 94/8 provides that the weight given to these factors varies with the individual circumstances of a case. The factors are not exhaustive, are considered objectively, and no single factor is decisive, although the entitlement to a share of the net profits is essential. Some factors are discussed below:

Intention to enter into a partnership

Paragraph 10 of TR 94/8 provides that the essential element when considering whether a partnership exists is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties.

Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. However, it will not be determinative in all cases. Even a declaration in an agreement between the parties not to form a partnership will be ineffective if all the indicia of partnership are present.

Paragraph 12 of TR 94/8 provides that a written or an oral agreement is accepted as prima facie evidence of an intention to act as partners. However, a written and signed agreement is not necessary to demonstrate an intention, as this agreement can be inferred from a course of conduct agreed to by all parties.

In this case, the intention to enter a partnership is supported by the following clauses in the Agreement:

Clause X of the Agreement (Definitions) defines:

'Project': means undertaking and managing the development and sale of the land in accordance with the Project Objectives, consents, all laws and this Agreement.

'Project Objectives' means obtaining Consents to develop the Land generally in accordance with the Development approval, subject to the requirement of any Authority, and provide for:

a)    High standards of development quality and innovation in urban design, environmental solutions and housing designs;

b)    The best urban design outcome with the house being retained;

c)    Optimal sale prices for sales of the Lots on the open market;

d)    Maximise project profits, and

e)    Efficient and timely implementation of the Project.

Clause XX - The Parties agree that the objective of the Project is to maximise the value of the Land by meeting the Project Objectives.

Clause XX provides, the Parties will share profits in various 'milestone' stages.

Joint ownership of business assets

Paragraph 34 of GSTR 2003/13 confirms an interest in a partnership includes a right to a proportion of the surplus after the realisation of the assets and payment of the debts and other liabilities of the partnership and is inclusive of a partner's entitlement to a share in the capital of the partnership.

Ownership of the legal title of an asset by only one partner is also not determinative of whether there is a general law partnership. As a partnership is not a legal entity, it cannot hold title to an asset. It is the partners who will have the legal ownership. Example 2 of GSTR 2004/2, shows that parties can be in a partnership where the land is only owned by one party (paragraphs 56-59).

Although the Trustees retain legal ownership to the Land, under the Agreement, the Developer is entitled to a beneficial ownership interest in the Land, on the basis that it is to receive the relevant share of the proceeds of the sale proceeds net of the relevant liabilities. Both parties share this right to a proportion of the surplus proceeds after the realisation of the asset net payments of liabilities.

Extent to which parties involved in the conduct of business

Although the Developer does bulk of the work of the development, it is noted:

Clause XX of the Agreement provides, Each Party must act in good faith and assist the other Party in the performance of its obligations.

...

The Commissioner therefore considers that

•         The Trustees' involvements are also critical in order for the property development to operate,

•         The parties are working together to ensure the development is successful to the extent of maximising the value of the Land.

Extent of capital contributions

Paragraph 32 of GSTR 2003/13 states...the consideration for those interests can encompass capital contributions and the mutual obligations that each partner undertakes, including promises to provide labour, skills or services in the conduct of the partnership business.

In this case, the Trustees contribute the Land to the partnership while the Developer contributes the funding, their skill, expertise and knowledge for the Project.

Entitlements to a share of net profits

In this case, the arrangement is not just 'a fee for service'. The Developer does not step away after payment of the development fee based on X% of total proceeds. Instead, after all liabilities/costs have been met, the two parties share the proceeds on a 50/50 basis in XX of the XX 'milestone' stages.

TR 94/8 conclusion

Most of the important indicators of TR 94/8 are present, which aligns with the reasoning in Question 1: the three critical indicia of a partnership as outlined in Yacoub are exist under the Agreement:

•         mutual interest in the carrying on of the business for the purpose of profit or gain

•         mutual confidence that the parties will engage in the venture for joint advantage only

•         share of the profits and losses

It is therefore the Commissioner's view that there is an enduring commercial relationship or association between the Parties; the Trustees and the Developer are carrying on the development in their capacity as partners in the partnership, and not in their own right.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11)

With reference to the indicators in paragraph 13 and 18 of TR 97/11, the Commissioner's view is that the Trustees and the Developer's activities in dealing with the Land amounts to a business:

A significant commercial activity (size and scale of activity)

The subdivision involves the development of the Land into a relatively large number of lots for sale. This is a significant project that may involve a Project Manager and multiple contractors, such as conveyancers, real estate agent, etc. with works that may possibly include roads, drainage, water, a footpath on each side of the roadway, and some street lighting.

There is a purpose and intention to engage in commercial activity:

•         There is the intention by entering into the Agreement, that both parties have come together to achieve a joint goal as expressed in the Agreement.

•         The agreement to conduct themselves in good faith.

•         The association is for the entire period of the Project.

•         Develop the land and subdivide into XX lots over the period of the Project.

•         Engage in pre-sales of lots and other marketing.

•         The development is considered economically viable.

•         There is a plan for distributing the proceeds in a specific order.

The intent to make a profit from the activity and the profit to be shared between the parties

The Agreement provides that one of the 'Project Objectives' is to maximise project profits. The Agreement also provides a mechanism for profit share between the Parties.

The activity is likely to be profitable

The sales proceeds estimation and the estimated Trustees' share of proceeds figures provided by your representative indicate that the development is highly likely profitable.

Repetition and regularity of activity

While there is only one Project, you have divided the Land into XX lots with infrastructure built on them to enhance their value. The activity will be repetitious and regular and is expected to take up multiple years to complete.

Activity is carried on in a similar manner to that of the ordinary trade

The work done by the partnership in this case will be carried on in a similar manner to other property development business. The Developer is able to obtain the funding and contribute their skill, expertise and knowledge for the Project.

The activity is planned, organised and carried on in a businesslike manner, including:

•         The agreement itself is a sophisticated document and sets out the plan for the development.

•         Potential engagement of Project Manager and contractors.

•         The Agreement considers how proceeds are to be distributed to pay GST liabilities, meet development costs and sharing profits.

Not a hobby, recreation or sporting activity

The size and scale of the operation and amount of money involved indicate it is more than a hobby or recreation.

A business plan exists

The size and scale of the operation indicates it would be reasonable for the Trustees and the Developer to have a plan on how to prepare, develop and sell the Land. The commerciality of the subdivision has been considered by the Parties prior to the commencement of the activity, with the Parties proceeding only after the Project was determined to be viable. This indicates commercial planning of the Project.

Commercial sales of product

Most of the subdivided lots have been sold to the public via the engagement of a real estate agent.

Developer has knowledge or skill

The Developer provides the expertise and skill to the partnership.

Furthermore, the engagement of the contractors including a real estate agent means there are a number of other people involved in the operation who have the skills and knowledge.

Income Tax conclusion

The above indicates the partnership activities went beyond a mere realisation of capital asset. The sale proceeds of the subdivided lots will be proceeds from sale of the partnership trading stock, and therefore assessable to the partners as ordinary income under section 6-5 of the ITAA 1997.

Additional Information - Capital gains tax implication

Any capital gain or loss made on the sale of the subdivided lots by the partners will be disregarded under paragraph 118-25(1)(b) of the ITAA 1997 on the basis that the subdivided lots will be trading stock of the partnership

Additional Information - Trading stock consideration

Under Section 70-30 of the ITAA 1997, when the partner(s) of the partnership start holding as trading stock an item they already own, but do not hold as trading stock, they are treated as if:

(a) just before it became trading stock, they had sold the item to someone else (at arm's length) for these amounts they elect:

•         its cost

•         its market value just before it became trading stock; and

(b) they had immediately bought it back for the same amount.

In the above paragraph (a), if the Trustees/partner(s) elect the 'market value', the 'sale' may or may not give rise to a capital gain or a capital loss.

You may apply for another private ruling on these or any other matters.