Edited version of private advice

Authorisation Number: 1052007592089

Date of advice: 20 July 2022

Ruling

Subject: Sub-division realisation of capital and taxable supplies

Question 1

Will the proceeds received from the sale of the subdivided blocks be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, the proceeds will not be assessable under Section 6-5 of the ITAA 1997.

Question 2

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

Answer

Yes, the sale of the subdivided lots will be subject to Capital Gains Tax.

Question 3

Will the supply of the vacant lots (to the general public) be taxable supplies under Section 9-5 of the A New Tax System (Good and Services Tax) Act 1999 (GST Act)?

Answer

No, the supply of the vacant lots will not be a taxable supply under section 9-5 of the GST Act.

This ruling applies for the following periods:

Year ended XX XXXX XXXX

Year ended XX XXXX XXXX

Year ended XX XXXX XXXX

The scheme commences on:

1 July 2021

Relevant facts and circumstances

XX XX (You) doesn't have an ABN and you are not registered for GST.

On XX XXX XXXX, you acquired XXX XXXX XX, XX (the Property) with your then spouse and have since used the Property as your main residence.

The total area of the Property is approximately XX hectares and was under rural zoning code when acquired.

You chose the Property as the rural landscape suited your lifestyle and was close to your workplace.

The acquisition was funded by taking out a mortgage on the Property and using personal savings.

Due to a XXX XXX, you became sole owner of the Property on XX XXXX XXXX following XX settlement.

After a few years of living on the Property, and particularly following the XX, you started to feel that it was too hard to maintain such a large property by yourself whilst working fulltime.

In XXXX, the local council changed the zoning code to semi-rural, which gave you the idea to subdivide the land and reduce the size of the Property to such an extent that you could comfortably look after it by yourself.

In XXXX XXXX, you hired an independent professional to draft up a plan to subdivide the Property into XX lots:

                                      I.        Your current home will remain on Lot XX, which has an area of XX hectares

                                    II.        The other XX vacant lots will each have an area of XX hectares, where:

                                   III.        You will reserve Lot XX for your own private use (keeping your XX)

                                  IV.        You will reserve Lot X and Lot XX for your children in the future

                                    V.        You will sell the remaining X vacant lots to the general public in order to cover the subdivision costs and pay off the mortgage

After the local council approved the subdivision plan, in XXXX XXXX an independent contractor started to execute the engineering works to meet the local council's standard minimum requirements for subdivision, being the construction of roads, electricity supplies and water mains to each of the lots. No further work will be made to the vacant lots before sale.

During the subdivision, you have no personal involvements other than obtaining council approval. The subdivision costs were funded by personal savings, private and bank loans.

Due to the strong demand in the local market, you didn't need to engage a real estate agent or undertake any effort in marketing, other than listing X lots in the XX as private sales.

You have since received multiple offers. Up to date no settlements have been made. You will hire independent professionals to deal with the final settlements.

You do not have any prior experience or involvements in property subdivision.

You do not intend to be involved in property subdivision elsewhere other than this property. You do not intend to further subdivide your home lot or vacant lots reserved for yourself and your children.

Margin scheme was not applied at acquisition nor do you intend to apply the margin scheme when selling the subdivided lots.

You have never used the Property for rental or other income producing purposes. You have not claimed any deductions related to the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 Division 38

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Land sale profits

Broadly, there are three ways profits from the subdivision and sale of land can be treated for taxation purposes:

1.    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

2.    as statutory income under section 15-15 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, where the land was acquired or subsequently held for a profit-making purpose, and

3.    as statutory income under the capital gains tax (CGT) legislation, (section 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

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? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. The question of whether a business is being carried on is a question of fact and degree. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators should be considered in conjunction with the other factors.

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.

Based on the information provided and the above factors, we do not consider that any proceeds from your activities and sale of the land is derived in the course of carrying on a business.

Profits on isolated transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will be income when:

A.    the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

B.    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 your case, you are not considered to be carrying on a business of property development, or to have been carrying on or carrying out a business operation or commercial transaction.

As you are not considered to be carrying on a business of property development, or to have been carrying on or carrying out a profit-making undertaking or plan, the profit or proceeds from the sale of the subdivided lots will not be assessable income under section 6-5 of the ITAA 1997.

Profits arising from a profit-making undertaking or plan

Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan (section 15-15 of the ITAA 1997).

However, subsection 15-15(2) of the ITAA 1997 provides that the section does not apply where the profit arises from the sale of property acquired on or after 20 September 1985.

As you bought the Property in XXXX, the profits or proceeds from the sale of the subdivided lots will not be assessable income under section 15-15 of the ITAA 1997.

Capital gains tax

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gain tax asset (CGT asset) you own. Land, or an interest in land, is a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2) of the ITAA 1997). However, a capital gain or loss you make is disregarded if you acquired the CGT asset before 20 September 1985 (subsection 104-10(5) of the ITAA 1997).

Application to your situation

You are not considered to be carrying on a business of property development, or to have been carrying on or carrying out a commercial profit-making undertaking or plan. Therefore, any proceeds received from the sale of the land will not be ordinary assessable income under section 6-5 of the ITAA 1997.

On a weighing of the facts of your case we find that the subdivision and the sales of the subdivided lots to be the mere realisation of a capital asset. CGT event A1 will happen when the land is sold. You will make a capital gain or loss at that time.

Taxable Supplies

Goods and services tax (GST) is payable on taxable supplies. Section 9-5 of the GST Act provides that 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. For the sale of the property to be a taxable supply, all the requirements in section 9-5 of the GST Act must be satisfied. The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 of the GST Act respectively.

In your case, there are no provisions in the GST Act under which your sale of the proposed vacant land lot would be a GST-free or input taxed supply. You will be supplying the vacant land lots for consideration. The supply will be connected with Australia. However, you are not registered for GST.

The primary issue to be resolved is whether the supply of the proposed vacant land lot will be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b) of the GST Act). If so, a further issue to be considered is whether you are required to be registered for GST.

Enterprise

Subsection 9-20(1) of the GST Act provides, amongst other things, that an enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade.

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 (MT 2006/1) provides guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does 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 guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes.

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. (These indicators can be found above under our ordinary income reasoning).

179. There is no single test to determine whether a business is being carried on.

Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

Given the facts of this case, we consider your proposed activities resulting in selling the vacant land lots does not display the indicators of a 'business' listed in TR 97/11.

In the form of an adventure or concern in the nature of trade

We now consider whether your activities will be in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)of the GST Act).

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. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade.

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 the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment.

While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset.

Paragraph 266 of MT 2006/1 provides in part that no single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade and there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Paragraphs 271 to 287 of MT 2006/1 set out examples of subdivisions that are enterprises whilst paragraphs 288 to 302 set out examples of subdivisions that are not enterprises.

We will consider paragraphs 291 to 293 (Example 33) in MT 2006/1, illustrating where a taxpayer has merely subdivided a property into two and sold the land without development, contains some features that are similar to your circumstances.

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Summary

We consider your proposed activities are not activities done in the form of an adventure or concern in the nature of trade. Your activities do not fall within the scope of an enterprise as defined in section 9-20 of the GST Act. Therefore, you do not satisfy paragraph 9-5(b) of the GST Act, as your sale of the proposed vacant land lots will not be made in the course or furtherance of an enterprise that you carry on.