Edited version of private advice

Authorisation Number: 1052044830431

Date of advice: 12 October 2022

Ruling

Subject: CGT and GST - subdivision of land

Question 1

Will the subdivision and sale of your land be a mere realisation of a capital asset and therefore subject to the capital gains tax provisions?

Answer

Yes.

Question 2

Is your capital gain a discount capital gain under subdivision 115-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Will you be liable for goods and services tax (GST) on the sale of the subdivided lots?

Answer

No. You are not carrying on an enterprise; therefore, you will not be liable for GST on the sale of the subdivided lots.

This ruling applies for the following periods:

30 June 20YY

30 June 20ZZ

The scheme commences on: 1 January 20XX

Relevant facts and circumstances

Applicant A and Applicant B (you) bought the property in 20BB.

At the time of purchase, the property was XX hectares of land and you intended to build a home and keep the land for personal use and enjoyment.

Your home was built on the property soon after you purchased it.

At the time of purchase, the land was not able to be subdivided at all due to Council restrictions dictating minimum lot size in the zone. More than xx years later, the Council reduced the restrictions for lot sizes in your zone to Y; however, subdivision at that time was not viable due to low demand.

In the last few years, the Council has again reduced the minimum lot size to X, which has coincided with increased demand for rural blocks.

The property has never been used for income producing purposes.

You intend to subdivide the property, comprising: a number of lots to be sold, roads, and a block to retain as your main residence.

Development costs will be approximately $XXX,XXX for the first Y lots and $XXX,XXX for the remaining lots.

The first X lots will be funded by you.

The remaining lots will be funded using the sale proceeds of the first X lots.

Due to their distance from the township, the lots will not be connected to mains water and will capture rainwater from roof runoff to be self-sufficient.

An existing powerline runs across the land for the new lots, which new dwellings built by purchasers can loop into.

You are not building any structures on the land, other than roads required by Council.

Each block is expected to sell for approximately $XXX,XXX.

You have no prior experience in property development, including subdivision or construction.

You did not apply to Council to have the property rezoned to enable subdivision.

You did not acquire any additional land for the purposes of the subdivision.

On DD Month 20XX, you signed a contract with an unrelated company to manage the subdivision process end-to-end, including engaging all contractors they deem necessary as your agent, arranging all inspections, planning the initial civil works (roadworks and culverts), and filing all applications and other paperwork with relevant authorities

You will not be involved in any subdivision activities, other than contracting with the unrelated company.

You have selected a real estate agent to manage the marketing and sale of the lots.

The lots will be marketed and sold individually on a lot-by-lot basis rather than being marketed as part of an estate or as part of a home and land package.

You expect sales of the lots to occur during the years ended 30 June 20YY and 30 June 20ZZ.

You will not be involved in the marketing or sale of the lots, other than to engage the real estate agent and the basic legal actions required of property owners to conclude settlement.

You will hold the title to the various parcels of land on the property throughout the subdivision and marketing processes until:

•         For the roads - the title is transferred to Council upon release of the linen plan, and

•         For each lot - the title is transferred to the purchaser upon settlement of a contract of sale.

You are not registered for goods and services tax (GST) and do not intend to claim any GST credits for expenses associated with the subdivision.

You are Australian residents for tax purposes.

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 9-20

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

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 100-35

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 subsection 112-25(3)

Income Tax Assessment Act 1997 Division 115

Reasons for decision

Mere realisation

When you enter into an arrangement to develop and sell your land, the issue of whether the activity amounts to a 'mere realisation' determines whether the proceeds from the sale of the subdivided land will be assessed for income tax as ordinary income, or subject to the CGT provisions as a capital receipt.

Disposal of subdivided land will not be a 'mere realisation' where the disposal occurs in the course of carrying on a business or as part of an isolated profit-making undertaking or scheme.

The proceeds from the sale of subdivided land that is not a 'mere realisation' will be assessed as ordinary income (ITAA 1997 section 6-5).

The courts have considered the principle of 'mere realisation' in various contexts and circumstances and established that each case will be a question of fact and degree, with no single factor being determinative. Taxation Ruling TR 92/3 provides guidance on whether profits from isolated transactions are assessable as ordinary income under section 6-5 of the ITAA 1997.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

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

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

Taxation Ruling TR 92/3 lists the following factors to be considered:

•         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 or the various steps in the transaction.

Further to this, Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are:

•         there is a change of purpose for which the land is held;

•         additional land is acquired to be added to the original parcel of land;

•         the parcel of land is brought into account as a business asset;

•         there is a coherent plan for the subdivision of the land;

•         there is a business organisation - for example a manager, office and letterhead;

•         borrowed funds financed the acquisition or subdivision;

•         interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•         there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•         buildings have been erected on the land.

No single factor is determinative; rather a weighing up of each of the factors is required to establish the character of the activities and thus the income.

In your case, the disposal of subdivided land will be treated as a 'mere realisation' and the proceeds will be subject to the CGT provisions for the following reasons:

•         The land was purchased for your personal use and enjoyment, not with a profit-making intention.

•         You have resided at the property for more than 20 years and, for most of that time, the property was unable to be subdivided in an effective way.

•         You are merely realising part of an existing asset, albeit by the most advantageous means.

•         You are not undertaking any works other than the minimum required by the local council to bring the land to market.

•         You have no prior history in property development; either subdividing or construction.

•         You have engaged professional firms to complete the subdivision, marketing and sale of the land; you will not be involved in the activities required to complete the process.

•         You are not borrowing funds to finance the subdivision.

•         You have not acquired any additional land to facilitate the subdivision.

Discount capital gain

Broadly, you have a capital gain when a CGT event happens to a CGT asset and the capital proceeds exceed the asset's cost base (ITAA 1997 section 100-35).

When an Australian tax resident individual has a capital gain that arises from the disposal of property that they have owned for more than 12 months, the capital gain can, subject to some exclusions, be reduced by 50%. This is referred to as a 'discount capital gain' or 'CGT discount' (ITAA 1997 Division 115).

Land is a CGT asset (ITAA 1997 section 108-5). When you sell land, CGT Event A1 happens (ITAA 1997 section 104-10).

For CGT purposes, when you subdivide land, each new lot becomes a separate asset and the date you are considered to have acquired each lot is the date that you acquired the original land (ITAA 1997 section 112-25).

The cost base of the original land is divided between the subdivided lots on a reasonable basis (ITAA 1997 subsection 1125-25(3)). Taxation Determination TD 97/3 provides guidance on what we view as 'a reasonable basis'.

As you are an Australian resident for tax purposes, you acquired the original asset more than 12 months ago, and none of the exclusions apply to you, you can reduce any capital gain you make on the sale of each lot by 50%.

Goods and Services Tax

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are liable for GST on any taxable supplies that you make.

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

(a)  you make the supply for consideration; and

(b)  the supply 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 a GST-free or input taxed.

When you will sell the subdivided lots, it will be for a consideration of approximately $XXX,XXX each. The sale will be connected with the indirect tax zone as the land is located in Australia. The requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act above will be satisfied.

We will now consider whether the sale will be made in the course of an enterprise that you will carry on and whether you will be required to register for GST when making the sale under paragraph 9-5(b) of the GST Act.

Section 9-20 of the GST Act provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•         in the form of a business;

•         in the form of an adventure or concern in the nature of trade;

•         on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Section 195-1 of the GST Act states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

According to paragraph 244 in Miscellaneous Tax 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), 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. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Paragraph 247 in MT 2006/1 further states that if the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset. Paragraph 259 in MT 2006/1 states that the mere disposal of investment assets does not amount to trade and provides examples of investment assets which include rental properties, business plant and machinery, family home, family cars and other private assets.

Further, the Commissioner considers that isolated transactions entailing the sale of land which was purchased with the intention of resale at a profit (which would be taxed as ordinary income) would constitute an enterprise.

From taxation ruling TR 92/3 Income tax: whether profits on isolated transactions are income, some key factors in considering whether a transaction is a business or commercial transaction are set out below:

•         The intention or motive of the taxpayer in acquiring the land and in disposing of land;

•         The amount of money involved in the operation or transaction;

•         The personal involvement in the transaction;

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

•         The nature of the property - if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and therefore the transaction was commercial in nature would be readily drawn.

•         The timing of the transaction or the various steps in the transaction - properties acquired and held for long term may indicate that the transaction was not 'commercial' in nature.

The Commissioner recognises that in some cases, practical difficulties may arise in deciding whether the activities involved in a particular subdivision amount to a business. The question is necessarily one of fact and degree. It requires a careful weighing of the various factors and exercising judgment in the light of decided case law and commercial experience. It is not a case of counting how many indicators represent a mere realisation or a business.

You did not have an intention to develop and profitably sell the land at the time of acquisition. Nor have you undertaken any previous development activities on the land for the purposes of subdivision and sale.

You did not acquire this property in close proximity to the urban fringe with the intention of resale, nor was it acquired at a time when proposed rezoning changes to land use were being discussed.

Due to the Council changes to rezoning laws you have, however, taken steps to realise the value of the land in a manner beyond outright sale.

You have sought advice, devised and implemented a coherent plan, including funding the development works and engaging professionals to carry out the works to be undertaken to secure approval by Council.

The land is still being used for private purposes whilst being scaled down; yet remains the family home. The land has not been applied or used to effect a significant change of purpose for which the land was originally acquired.

The land has been held for a long period of time and used as the family residence.

On balance, the Commissioner is satisfied that you will not be carrying on an enterprise as a business or in the form of an adventure or concern in the nature of trade under section 9-20 of the GST Act when selling the subdivided lots. Accordingly, paragraph 9-5(b) of the GST Act will not be satisfied.

Further the requirement in paragraph 9-5(d) of the GST Act will also not be satisfied as you are not registered for GST and will not be required to register.

GST is payable on any taxable supplies that you make. One of the requirements of a taxable supply is that you make the supply in the course or furtherance of an enterprise that you carry on.

In this case, you are not carrying on an enterprise. As such, you will not be making a taxable supply when you sell the subdivided lots.