Edited version of private advice

Authorisation Number: 1051967760648

Date of advice: 9 May 2022

Ruling

Subject: CGT - sale of real property

Question 1

Will the profit from the proposed sale of the subdivided properties be assessable under the capital gains tax provisions as a mere realisation of a capital gains tax asset under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you required to apply GST on the proposed sale of the sub divided properties?

Answer

No.

Question 3

Are you eligible to apply the margin scheme on the proposed sale of the sub divided properties?

Answer

Unnecessary to answer.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased the land with your spouse.

The interest of your spouse was passed to you as part of your spouse's deceased estate. The land has been owned solely by you since then.

The land was unimproved vacant land with no services connected.

The property is not financed or mortgaged.

The land at purchase was not for residential housing, as stated in the purchase contract.

Your intention for purchasing the property was to support your local church community by securing a piece of land for a future school and church.

You had no history of buying and profitably selling developed land or land for development.

The school resides on approximately 30% of the land. The school buildings, roads and infrastructure were constructed on the land, at the cost of the school. You stated that you allow the school to use the land for free before the title transferring.

The local council prepared a Precinct Structure Plan and got approved by the Minister for Planning. The Plan was further amended by the Planning Authority and Council later, with the aim to unlock investment in the town centre. This led to the rezoning of the area where your property was located.

As part of your estate planning in relation to your personal assets, which include the land, you commenced a process with the local council to subdivide the land into three lots (Lot 1, Lot 2 and Lot 3) with a separated title for each lot, which is pending approval by the local council. You engaged a professional firm to handle the Plan of Subdivision Application.

You proposed to sell Lot 2 to a Trust (who run the Church, and you are the trustee of the Trust) and Lot 1 to the school. Lot 3 will be retained as vacant unimproved land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 995-1

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

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

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

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

Reasons for decision

Income Tax & CGT

Question

Will the profit from the proposed sale of the subdivided properties be assessable under the capital gains tax provisions as a mere realisation of a capital gains tax asset under Part 3-1 of the ITAA 1997?

Summary

Yes. The proposed sale of the subdivided properties will be a mere realisation of a capital asset, the gain is statutory income under the capital gain tax (CGT) provisions contained in Part 3-1 of the ITAA 1997.

Detailed reasoning

Generally, there are three ways profits from a sub-division can be treated for taxation purposes:

•         As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock

•         As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial 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 acquire by a profit making purpose.

•         As statutory income under the capital gains tax (CGT) regime (sections 10-5 and 102-5 of the ITAA 1997) on the basis that a mere realisation of a capital asset has occurred.

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) provides the Commissioners view on what constitutes the carrying on of a business. Although TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development.

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.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Profits from an isolated transaction

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

•         those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•         those transactions entered into by non-business taxpayers.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction is generally income when both of the following elements are present:

•         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 or in carrying on a business operation or commercial transaction.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case.

Paragraph 13 of TR 92/3 lists the following factors which are relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

•         the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•         if the transaction involves the acquisition and disposal of property, the nature of that property; and

•         the timing of the transaction and the various steps in the transaction.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Mere Realisation of capital asset

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit-making undertaking scheme.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme.

Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

In McClelland v FC o T [1970] HCA 39, for example, the Pricy Council held that the question can be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Lord Justice Clark, in distinguishing between proceeds that is mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

...What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ similarly said (at p. 4034) that:

When the owner of an investment chooses to realize it and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within the ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in California Copper ... 'what is done is not merely a realisation of change or investment, but an act done in what is truly that carrying on, or carrying out, of a business'.

From these and other cases, the Courts have established a number of factors in determining whether proceeds from the sale of subdivided land was income from carrying on a business, carrying out an isolated commercial transaction, or was from the mere realisation of a capital asset:

•         whether the landowner held the land for a considerable period of time prior to any subdivision and sale;

•         the purposes for acquiring the property, and whether it was used for any other purposes prior to sale;

•         whether the landowner conducted farming or other activities on the land prior to beginning the process of developing and selling the land;

•         whether the landowner originally acquired the property as an investment, such as long-term capital appreciation or to derive income;

•         whether the land was originally acquired near the urban fringe of a major city or town;

•         if the property has been rezoned, whether the landowners actively sought that rezoning;

•         whether a potential buyer made any offers to the landowners before they commenced discussion to enter into a proposed or final development agreement;

•         whether the landowners had tried to sell the land without subdivision;

•         whether the landowner had any history of buying and profitably selling developed land or land for development;

•         the extent to which the development goes further than that required to obtain council approval;

•         whether the operations will be planned, organised and carried on in a business-like manner;

•         the scope, scale, duration and degree of complexity of the proposed development;

•         the reasons for selling the land;

•         the level of involvement that the taxpayer had in the development, marketing and sale of the property;

•         the level of legal and financial control maintained by the landowners in the proposed or final development agreement;

•         whether any finance must be obtained in order to fund the development activities; and

•         the level of financial risk borne by the landowner in acquiring, holding and/or developing the land.

•         Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

Application to your circumstances

In deciding as to whether the sale of Lot 2 is assessable as income under section 6-5, or assessable as the sale of capital under Parts 3-1 and Part 3-3, the Commissioner has considered the following:

•         you held the land for XX years prior to any subdivision process and proposed sale.

•         It is accepted that your intention for acquiring the land years ago, was for securing a piece of land to support local church community. This is supported by the long period of ownership and the continuous and ongoing use for school and church purposes.

•         You stated that you haven't derived any income from the land prior to the proposed sale.

•         The property has been rezoned based on the Precinct Structure Plan prepared by the local council and approved by the Minister for Planning which later amended by the Planning Authority and the local council, you have not actively sought that rezoning.

•         You have not tried to sell the land without subdivision.

•         You stated that you have no history of buying and profitably selling developed land or land for development.

•         The scope, scale and complexity of the development activity is low and is merely what is required to obtain council approval for subdivision. Although you engaged a professional firm to conduct the process, it is not considered as being carried on in a business-like manner. You didn't engage real estate agents to sell the subdivided lots.

•         The financial risk involved with the subdivision rests solely with you. The property is not financed or mortgaged. You have proposed buyers - the school and the church, there is no significant risk in relation to the subdivision.

Based on the information provided and the above factors, it is accepted that your primary intention of acquiring the land was to support the local church community and it was not acquired with the intention of reselling it.

To dispose of the excess land as part of your estate planning, as you have no experience in property development, you engaged professional firm to undertake the subdivision of the land. You didn't engage any expert to sell the subdivided lots. The proposed size and scale of the activity does not reflect a business of land development.

The Commissioner considers that, on balance, you would not be undertaking a business operation or commercial transaction when developing the land.

The subdivision of the land and the proposed sale of the subdivided properties would be a mere realisation of a capital asset: it is the disposal of a CGT asset that is subject to capital gains tax. Upon the execution of the sale contract CGT event A1 will happen in relation to each lot.

GST

Questions 2 & 3

Are you required to apply GST on the proposed sale of the subdivided properties?

Are you eligible to apply the margin scheme on the proposed sale of the subdivided properties?

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

1. is made for consideration; and
2. is made in the 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

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

In your case, the property to be sold will consist of a school along with vacant land which if sold would be a property located in the indirect tax zone and the supply would be for consideration. Therefore, the sale of the property would satisfy two elements outlined above (1&3). Accordingly, we need to determine whether the other two elements (2&4) would also be satisfied. If this were the case, the supply of the property would satisfy all requirements of section 9-5 of the GST Act and would be a taxable supply.

Are you carrying on an enterprise?

The term 'enterprise' is defined for GST purposes in section 9-20 of the GST Act and includes, among other things, an activity or a 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 incudes 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 and enterprise for the purposes of entitlement to an Australian Business Number (MT2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an ABN.

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion on 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 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 kept;

•         the activities are of a reasonable size and scale;

•         a business 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 sale of the property by you does not display the characteristics of a 'business' as listed above.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' while 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

You acquired the property in XXXX. The property was vacant land from the time of purchase until around XXXX, when a school was built on part of the land.

The length of time of ownership

You have owned the property since XXXX.

The frequency and number of similar transactions

You have not previously undertaken a sale or development of this nature.

Supplementary work on or in connection with the property realised

You have commenced a process with the Shire Council to subdivide the land into three separate lots, however, no work has been undertaken.

The circumstances that were responsible for the realisation

It was always your intention to establish a school and a church on the land.

Motive

Although a profit may result from the sale of the property, your initial intention in relation to the original property and the subsequent application for subdivision of the property as a whole, does not show that your intention in relation to this property was to sell with an intention of making a profit.

Given the above, we do not consider your activities to constitute an adventure or concern in the nature of trade and as such, you would not be carrying on an 'enterprise' for the purposes of GST in relation to the potential sale of the property. Therefore, the sale will not be a taxable supply.

GST registration

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

It is considered that the sale of the property will be a mere realisation of a capital asset and does not constitute an enterprise for the GST purposes. As such you are not required to be registered for GST.

Conclusion

Your activity of selling the property will not be done in the furtherance of an enterprise. You are not required to be registered for GST. As such you will not be liable for GST on the sale of the property in accordance with section 9-40 of the GST Act and the withholding provisions will not apply to this sale.