Edited version of private advice

Authorisation Number: 1051951140285

Date of advice: 16 February 2022

Ruling

Subject: CGT - sale of subdivision lots

Issue 1

Question 1

Will the proceeds from the sale of subdivided lots be subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will any profit from the sale of the subdivided lots be assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Issue 2

Question 3

Are the sales of the subdivided lots a taxable supply?

Answer

No, they are not supplies made in the course of an enterprise that you carry on.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

26 October 19XX

Relevant facts and circumstances

You and your now deceased spouse purchased a property in Town A (the property) with intention to build a lifestyle block and hobby farm in retirement.

The property was acquired more than XX years ago (contracts exchanged) and settled shortly after. The consideration on the acquisition was a specified amount.

The acquisition was funded by you taking out a mortgage on your current residence and using your savings at the time.

You chose the location as you liked the area, and have family living not far from there in neighbouring towns. You have stayed with them from time to time whilst at the property. You also brought a caravan which is located on the property which you now use when visiting the property.

There is no permanent dwelling on the property.

You semi-retired in recent years, working casually before fully retiring sometime after.

You had no other plans for the property at the time you acquired it other than operating the hobby farm. You had not begun the hobby farm and your plans changed when your spouse passed away.

Over the years, you allowed an adjoining property owner to use the land to agist his livestock "rent" free.

You fenced the property and built a machinery shed in anticipation of moving to the property. You have at all times accounted for the land as a hobby farm.

You currently run some livestock on another property in Town B and you intended to move them to the property in Town A, however, these plans also changed after your spouse passed away. You decided to subdivide the property to help fund you during retirement.

Your only holding costs are council and water rates.

The land was originally zoned non-urban with a minimum lot size of 40 hectares.

The local council applied to the relevant authority to rezone the land as rural residential allowing subdivision of smaller lots.

The council rezoned portions of the property with the result that that part of the property was subject to a 200ha minimum until very recently. However, the other part of the property where newly subdivided lots will be located could be subdivided into smaller two hectare lots from earlier years. You only became aware of this when you received a letter from the local council.

After due consideration you hired a surveyor who drew up plans and submitted them to local council. The application was approved on to subdivide off a number of vacant lots into rural residential.

You intend to meet the council's standard minimum requirements for subdivision and conduct no further work before sale.

You have provided a copy of the plan of subdivision.

You intend that some of the currently approved lots, approximately two hectares each, will be completed in Stage 1 with other lots (again approximately two hectares) in stage 2. The residual lot will be stage 3.

You have provided the unsubdivided market value of the property, per a Valuer General valuation.

You have provided details of the expected total development costs.

You have provided details of each completed lots sale price.

You have provided details of your personal expenditure in relation to the lots.

You have no formal arrangement in place for funding to be provided. You have family who work in the construction industry.

The infrastructure works required to complete each lot up to the point of sale include roads to be completed, electrical supply to the lots and water mains constructed.

The work you personally undertook is limited to obtaining council approvals for the subdivision.

You engaged a real estate agent to sell the newly subdivided lots.

You have advised that council has now issued the construction works certificate for stage 1 and you have some pre-sales in receipt at this stage. It is anticipated that the sale of those lots will cover the development costs. You then intend to sell off further lots whenever as needed to fund your retirement.

This project does not require you to engage in a land swap with other landowners.

Neither you nor any related entities have been involved in property subdivision.

Neither you nor any related entities intend to be involved in property subdivision elsewhere other than this property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(2)

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

Reasons for decision

Issue 1

Question 1 & 2

The sale of the subdivided lots will be subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In your case, you do not carry on a business of buying, selling or developing land. You have held the property for substantial period of time during which time you did not consider its development and was used for domestic purposes. You had minimal involvement in the subdivision of the land and have not borrowed funds for the development. You have engaged other entities to complete the works on your behalf and contend that your role is passive.

Although there are some elements of the subdivision works which indicate a profit making undertaking, on balance, the sale of the subdivided lots is considered to be a mere realisation of a capital asset. The proceeds will be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997. Profits from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Issue 2

Question 3

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) requires you to pay GST on any taxable supply you make.

Section 9-5 of the GST Act provides that you make a taxable supply if:

a)    you make the supply for consideration

b)    the supply is made in the course or furtherance of an enterprise that you carry on

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

d)    you are registered, or required to be registered, for GST.

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

Based on the facts provided, there is no prospect that the supplies of the property will be GST or input taxed.

You currently hold a number of hectares of land you will subdivide into lots of approximately two hectares each consisting of vacant rural residential land which you advised you want to sell in stages to fund your retirement. These will amount to supplies. You will therefore satisfy the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act as you will make a supply of the subdivided lots of land in Australia for consideration.

In order for the sale of the property to be taxable supplies, they must meet all of abovementioned conditions of a taxable supply under section 9-5 of the GST Act which leaves two issues for consideration:

•         whether the sale of the vacant lot is being made in the course or furtherance of an enterprise that you carry on, and if so

•         as you are not currently registered for GST, whether you are required to be registered for GST.

After weighing up all of the information, we consider that you are not carrying on an enterprise of subdividing the land and the facts viewed as a whole indicate that you are selling the property to provide you the best outcome in realising the asset for your retirement.

As you are not making supplies in the course of your enterprise, you are not required to be registered for GST and the sales of the lots are not taxable supplies.

Additionally, you do not have any obligation to provide notice to any prospective purchaser under section 14-250 of Schedule 1 of the Taxation Administration Act 1953 as the recipient will not be in receipt of a taxable supply of potential residential land.