Edited version of private advice

Authorisation Number: 1051945801713

Date of advice: 10 February 2022

Ruling

Subject: Subdivision - property

Question 1

Will the sale of the individual subdivided lots that were originally part of the property be taxable supplies in accordance with section 9-5 of the A New Tax System (Goods and services Tax) Act 1999 (GST Act)?

Answer

Yes. The sale of the individual subdivided lots will be a taxable supply under section 9-5 of the GST Act.

Question 2

Will the sale of the lots be considered a mere realisation of an asset?

Answer

No.

Question 3

Will the sale of the lots be considered on revenue account?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You hold pre-CGT interests in a property.

The land was originally purchased by your parent and used for private purposes. It has not been used for any purpose for at least the last X years.

The land has been the subject of several rezonings. All rezonings have been as a result of new town planning schemes initiated and undertaken by the local government authority.

You engaged a Planning Consultant to develop a subdivision plan and to obtain the necessary planning approvals. Planning approval was obtained, however the property market at the time was very subdued and you didn't have sufficient funds to proceed with the subdivision.

The property was listed with a real estate agent who sought expressions of interest locally and nationally.

During the course of the listing the agent advised of interest from a few land developers suggesting a purchase price in the range of $X to $X however no formal offers were received.

Prior to listing the property, the agent had advised it would likely achieve a price in excess of $X. On this basis you decided it would be worthwhile exploring the market to determine what price could be achieved.

Having had preliminary advice from a development consultant, you were aware the property could realise significantly more if subdivided and therefore considered it would be worthwhile knowing what the market would pay.

Indications from the market were well below what the agents advised would be likely before it was listed and below your expectations. Consequently, it seems to you that you will need to proceed with the subdivision to receive what you consider to be fair value for the property.

You have now engaged development consulting engineers to look at the current feasibility of proceeding with a staged subdivision utilising your own funds to develop the first stage, with proceeds from the sale of lots created in the first stage used to fund the next.

Subdivision approval is for X lots. The engineers' preliminary estimates are that an average development cost of $X per lot will be required.

A local real estate agent has indicated that the lots could sell for approximately $X.

If feasible, you envisage development proceeding in X stages over X years.

Development consulting engineers and property surveyors would be engaged to undertake all aspects of the development. A real estate agent would be used to market and sell the lots.

Works to be undertaken on the land include clearing surface vegetation, excavation, clean fill and levelling, construction of retaining walls, provision of sewerage and drainage, road/path construction and upgrades, provision of water, power and NBN, surveying, and landscaping of public open space.

The lots will be sold as vacant lots.

You have not been involved in land subdivision developments in the past and do not plan to undertake such activities in the future.

You are not registered for GST.

Excluding consideration of the subdivision you do not undertake any business activities.

You are not intending on keeping any of the subdivided lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

Reasons for decision

Question 1

All legislative references below are to A New Tax System (Goods and Services Tax) Act 1999.

Under section 9-5, an entity makes a 'taxable supply' where the supply:

1. is made for consideration; and
2. is made in the course or furtherance of an enterprise that you carry on; and
3. is connected with the indirect tax zone; and
4. is made by a supplier who is registered, or required to be registered, for GST

If the individual lots were to be sold, the supplies would consist of properties which are located in the indirect tax zone and the supplies would be for consideration. Therefore, the sale of the lots would satisfy two elements outlined above (1 & 3). Accordingly, we need to determine whether the other two elements (2 & 4) would be satisfied. If this were the case, the supply of the lots would satisfy all requirements of section 9-5 and would be taxable supplies.

Are you carrying on an enterprise?

The term enterprise is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done:

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

The phase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 (MT2006/1) provides the Tax Office view on the meaning of 'entity' and 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: does MT 2006/1 have equal application to the meaning of 'entity' 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production, lists indicators of carrying on a business:

• a significant commercial activity;
• an 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 systematic, organised and carried on in a business-like 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.

Paragraph 179 of MT 2006/1 states, that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Application in your case

Given the facts of this case, we consider that the activities you have undertaken in engaging engineers, applying for subdivision of the property, undertaking feasibility studies with the intention of subdividing your property and selling the lots, meets the requirements of an adventure or concern in the nature of trade (paragraph 9-20 (1)(b)) and are indicators of a 'business' as listed above.

Paragraph 244 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.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have characteristics of 'trade' and are held for income producing purposes, or either as an investment asset or for personal enjoyment.

Paragraphs 247 to 257 consider the six badges of trade being:

•         The subject matter of realisation

•         The length of period of ownership

•         The frequency or number of similar transactions

•         Supplementary work on or in connection with the property realised

•         The circumstances that were responsible for the realisation; and

•         Motive.

The subject matter of realisation

You inherited the property from your parent. The property was used for the family hobby farm but has not been used in this manner for at least X years.

The length of time of ownership

You and your family have owned the property for decades. This property was primarily a family hobby farm but has not been used in this manner for at least X years.

The frequency and number of similar transactions

You have not previously undertaken a development of this nature and you are not intending to do any future developments of this nature. However, this development is substantial in size and scale.

Supplementary work on or in connection with the property realised

You have consulted with council and received council approval for the subdivision of the property.

You have engaged engineers and property surveyors and consulted with real-estate agents in relation to the proposed subdivision of the property and the costs that would be incurred in relation to this development.

The circumstances that were responsible for the realisation

After consulting with engineers as to the costs to subdivide and with a real estate agent as to the best manner in which to market the property, either selling the property as a whole or selling the individual lots after completing the subdivision, the decision was made to proceed with the subdivision.

The circumstances behind this decision and the time and effort that has been applied to this decision indicates it to be commercial in nature.

The scale of the development and cost of outgoings in relation to this development will be considerable. The projected returns on the sale of this development are also considerable.

Motive

Your motive in relation to the subdivision of the property appears to initially be to ascertain the feasibility based on the options available to you. However, the deciding factor as stated by was to maximise your return in relation to the sale of the property.

This is showing that you were motivated by profit and maximising your return.

MT 2006/1 provides examples in relation to subdivisions of land that would be seen as enterprises. In particular, example 31 (paragraphs 284 to 287) provides:

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decided they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

•         their house to be demolished;

•         the land to be subdivided;

•         a builder to be engaged;

•         two houses to be built;

•         water meters, telephone and electricity to be supplied to the new houses; and

•         a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

Given the scale of your development, with costs of $X and the activities you are undertaking to sell the subdivided lots, we consider you will be going beyond the minimal activities needed to sell the property.

Weighing all of the factors above, we consider your activities to constitute an adventure or concern in the nature of trade and, as such, you and your brother would be carrying on an 'enterprise' for the purposes of GST in relation to the development and subsequent sale of the subdivided lots.

GST registration

Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed above, it is considered that the sale of the subdivided lots would constitute an 'enterprise' for GST purposes. As such you will be required to be registered for GST and the subsequent sales of the lots will be taxable supplies under section 9-5 of the GST Act.

Questions 2 & 3

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 from the mere realisation of a capital asset.

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.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'?provides that land will be treated as trading stock if it is held for the purpose of resale and a business activity which involves the dealing in land has commenced. Both the required purpose and the business activity must be present.

TD 92/124 further provides that the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

Land that was originally held for a purpose other than for resale may nevertheless become part of the carrying on of a business as trading stock if the purpose for which it is held changes to that of resale and a business activity involving the land commences.

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.

Paragraph 42 of TR 92/3 provides that if an asset is acquired with the intention of using it for a purpose other than profit, but is later ventured into a profit-making undertaking with the characteristics of a business operation or commercial transaction, the profit from the activity will be income although you did not have the purpose of profit making at the time of acquiring the asset.

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. In addition to the previous discussion, we also note the following:

•         The decision of the High Court 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 developed by Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188. The case of Whitfords Beach highlights that while 'mere realisation' may still be possible where an area of land is simply divided into several allotments with minimal activity, where the size and scale of the undertaking goes beyond this (such as by constructing roads and the provision of parklands and services), it amounts to a development and improvement of the land to such a marked degree that it is no longer possible to say it is a mere realisation of an asset. 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. In your case, the subdivision will go beyond simply a division of the land into allotments, as it will also involve the construction of a road; the provision and landscaping of a public open space; and the provision of water, power and NBN. This points to the subdivision development being more than a mere realisation of an asset.

•         Although no buildings will be constructed on the land, the value added to the land will be considerable given the estimated cost of the subdivision development ($X) is similar to the estimated value of the land if sold undeveloped ($X to $X). In fact, the estimated total sale proceeds of the lots ($X) is more than double the estimated value of the undeveloped land. The magnitude of the value that will be added to the land by the development indicates that it is a significant commercial undertaking.

•         The substantial cost of the development means that the level of commercial risk involved is considerable and all the risk will be borne by you. Taking on a significant level of risk does not indicate a simple mere realisation of an asset.

•         Although the land was not originally held for property development purposes, as discussed further above, land can be entered into a business activity if the purpose for which it is held, changes.

•         While you may not personally undertake many of the development activities, you are involved in organising the development, and by engaging others to perform the development tasks for you, you can still be considered to be carrying on a business or a profit-making activity.

•         The development will take place in stages and the entire undertaking will be carried out over a considerable period. This does not point towards the simple mere realisation of an asset.

Even if the Commissioner considered that the development would not amount to the carrying on of a business because it would not occur as part of repetitious or recurring transactions, the development would be considered an isolated profit-making transaction. This is because the development was entered into for the purpose of making a profit or gain and it has the characteristics of a commercial transaction. The sale of the subdivided lots will go beyond a mere realisation and will be on revenue account.

Additional information

Where the development amounts to the carrying on of a business, CGT event CGT K4 happens when you start holding the land as trading stock and you elect to value the trading stock at its market value at that time. There is a capital gain if the market value exceeds the land's cost base. However, where the land was acquired before 20 September 1985, that capital gain is disregarded. Any subsequent profit from the development business is assessed having regard to the trading stock rules.

Where the development amounts to an isolated profit-making transaction rather than a business, the calculation of the net profit from the sale of a lot will take into account an appropriate amount based on the market value of each lot at the time the land was ventured into the profit-making transaction.