Edited version of private advice

Authorisation Number: 1051969944108

Date of advice: 5 April 2022

Ruling

Subject: GST - property subdivision

Question 1

Will the income from the disposal of the xxxx be assessable as profits from an isolated transaction under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will any gain made on disposal of the xxxx be assessable under the capital gains tax (CGT) provisions?

Answer

No; any capital gain will be disregarded to the extent it has already been included as ordinary assessable income under section 6-5 of the ITAA 1997.

Question 3

Is the sale of the xxxx a taxable supply in section 9-5 of theA New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This private 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

The partnership registered for GST and they own land. This land had a xxxx in front and the rear part of the land was vacant.

A heads of agreement was entered into with other parties.

The parties agreed to construct xxxx on the land.

The land was transferred to another party to the agreement which held the land in trust. Another party built xxxx at their cost on the rear land area and on completion new strata titles were issued.

As per the head of agreement, on completion the xxxxs were allocated between the parties.

The partnership was allocated an xxxx which was transferred to the partnership and is currently owned by the partnership.

The land was not subdivided prior to the building of the xxxxs. The land was surveyed and the Development Application received approval from the relevant authority.

The xxxx is currently on the market but has not yet sold and none of the partners have lived in this xxxx before.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 40

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1 & 2

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income, and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 16 of TR 92/3 provides:

16. If a taxpayer not carrying on a business makes a profit, that profit is income if:

(a) The intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain: and

(b) The transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

TR 92/3 at paragraph 38 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. It is also not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Whether a particular transaction has a business or commercial character depends on the circumstances of the case. Paragraph 13 of the ruling outlines the following factors which may be relevant when considering 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 the property, and

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

Paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Application to your circumstances

In this case, the partnership entered into a heads of agreement to subdivide the land and build xxxxs for sale. Having considered the factors outlined above we consider that the steps undertaken are consistent with what would be expected from an entity involved in a commercial enterprise of subdivision and property development.

Therefore, as the activity was entered into, and any profits made, in the course of carrying out an isolated commercial transaction with a view to a profit, the proceeds will be considered ordinary assessable income under section 6-5 of the ITAA 1997.

Assessable under the capital gains tax provisions

Section 118-20 of the ITAA 1997 primarily exists to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains. In the absence of such a provision, it is conceivable that a receipt properly characterised as ordinary income and which has also been derived as a result of a CGT event could result in the receipt being taxed twice. Therefore, whilst CGT event A1 will happen when the xxxx is sold, any capital gain will be disregarded to the extent it has already been included as ordinary assessable income under section 6-5 of the ITAA 1997.

Question 3

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply you make. You make a taxable supply under section 9-5 of the GST Act if:

•                you make the supply for consideration

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

•                the supply is connected with the indirect tax zone, and

•                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.

The first requirement of a taxable supply is that the partnership make a supply for consideration.

Firstly, the land that was transferred (on which the xxxxs were constructed) would come within the definition of a supply; being the supply of land. Secondly, new xxxxs were built at the cost of another party to the heads of agreement. Further, the title was transferred to the partnership and is currently owned by the partnership.

Under section 40-65 of the GST Act the sale of real property is input taxed but only to the extent that the property is residential premises to be used predominantly for residential accommodation. However, the sale of residential premises is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

New Residential Premises

Whether GST is payable on a sale of real property will depend on many circumstances. One of these circumstances is whether or not real property is new residential premises. Goods and services tax ruling GSTR 2003/3: when is a sale of real property a sale of new residential premises deals with the circumstances in which residential premises are new residential premises.

Subsection 40-75(1) of the GST Act provides that residential premises are new residential premises if they:

•                have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

•                have been created through substantial renovations of a building; or

•                have been built, or contain a building that has been built, to replace demolished premises on the same land.

The xxxx, immediately after construction, was transferred from the other party to the partnership and this meets the requirements of subsection 40-75(1) of the GST Act as new residential premises.

The transfer or the sale of the xxxx by the other party will be the supply of a new residential premises. If that supply by the other party meets all of the requirements of s9-5 of the GST Act, then it will have been a taxable supply to the partnership.

Further, section 11-5 states that you make a creditable acquisition if:

(a)           you acquire anything solely or partly for a creditable purpose and

(b)           the supply of the thing to you is a taxable supply and

(c)            you provide, or are liable to provide, consideration for the supply and

(d)           you are registered or required to be registered.

Assuming the supply of the xxxx was a taxable supply by the other party, the partnership is able to claim input tax credits on the creditable acquisition.

Lastly, we will now consider if any future sale of the xxxx by the partnership is a taxable supply or an input taxed supply.

Section 40-65(2)(b) of the GST Act provides that the sale of residential premises, to the extent that they are new residential premises, will not be an input taxed supply of residential premises but will be a taxable supply.

Currently, the xxxx is owned by the partnership and it has been previously supplied as a new residential premise. As the xxxx is no longer a new residential premises, any future sale of the xxxx will be an input taxed supply and no GST is payable on that sale.