Edited version of private advice

Authorisation Number: 1052051862385

Date of advice: 12 December 2022

Ruling

Subject: Subdivision - sale of 2 properties

Question 1

Will the profits from the disposal of Property 1 and Property 2 constitute ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the proceeds from the sale of Property 1 and Property 2 be subject to capital gains tax (CGT) under Part 3-1 and Part 3-3 of the ITAA 1997?

Answer

Yes.

Question 3

Will the sale of Property 1 and Property 2 be considered a taxable sale under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and therefore subject to GST?

Answer

No, the sale of Property 1 and Property 2 is not a taxable sale under section 9-5 of the GST Act and is not liable for GST.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired property (the Property) as joint tenants.

The Property had a house and was used as your main residence.

You are not in the property industry.

You decided to subdivide one Property into two, Property 1 (Property 1) and Property 2 (Property 2).

You wanted to subdivide the Property due to outgrowing the home, as well as the house being old and required renovations.

It was your intentions to construct a side-by-side duplex dwelling which would allow the joint owners to live in one of the properties for 5 years until their child started secondary school. Then they would move out of the family home.

The second property was to be used as a rental property. Your intention was to keep the existing investment property to leave to your family.

The initial building permit submitted to council was rejected.

After reapplying, you received approval to demolish the existing structure and start construction of the new residential dwellings.

You engaged relevant industry professionals to design the new dwellings and signed a contract to build.

Construction of the dwelling was in the midst of several COVID-19 lockdowns which impacted your family by change to home-schooling and working remotely.

The COVID-19 pandemic shifted plans and increased the construction costs which impacted the family financially.

The Property was demolished and construction of the dwellings completed.

Your initial intentions were to use Property 1 as an investment property, generating rental income.

Your initial intentions for Property 2 was to be used as your primary place of residence.

During construction, you relocated to a temporary location. Long-term this was not sustainable and you found a suitable rental.

After obtaining a rental property, you decided to relocate to this new location on a permanent basis.

You then came to the realisation that keeping both Property 1 and Property 2 was no longer feasible and decided to put them both on the market allowing sufficient funds to purchase a property in the new location.

Property 1 and Property 2 entered into a sale contract for in MM YYYY.

Property 1 and Property 2 were settled in MM YYYY.

You are part of a GST registered partnership. The partnership registered for GST effective 30 June 20YY. ATO records show the main business activity of the partnership is Property Development - Apartments, Duplex House, Flats, High Rise Flats, Townhouse or Home Units Construction.

You were unsure whether GST was to be withheld by the purchases and forwarded to the ATO on settlement of Property 1 and Property 2, in attempt to neglect any potential obligations.

GST was withheld on settlement of the properties.

Relevant legislative provisions

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

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

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

The proceeds received from the sale of Property 1 and Property 2 will not be ordinary income and therefore, not assessable under section 6-5 of the ITAA 1997. The sale of Property 1 and Property 2 are a mere realisation of a capital asset and subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997. The sale of Property 1 and Property 2 is not a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 and therefore is not liable for GST.

Detailed reasoning

In this ruling,

                      •                      legislative references are to either the Income Tax Assessment Act 1997 (ITAA 1997) or to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

                      •                      all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

                      •                      all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1 and 2

Generally, when an asset is sold, the key question to be determined is whether:

                      •                      the sale is a mere realisation of a capital asset,

                      •                      the disposal was made in the course of business, or

                      •                      the disposal is part of a profit making undertaking or scheme.

A sale that is more than a mere realisation will be on revenue account and proceeds will generally be assessable under section 6-5 of the ITAA 1997. Where the sale is a mere realisation, the sale is on capital account to which the capital gains tax provisions apply.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) discusses the Commissioner's view on whether a taxpayer is carrying on a business. Ultimately, the question of whether the activities of a taxpayer amount to a business is decided on the facts of each case.

Paragraph 13 of TR 97/11 considers that the following matters are relevant in determining whether a taxpayer is conducting a business of property development and sale:

                      •                      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 repetition and regularity of the activity

                      •                      whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

                      •                      whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit, and

                      •                      the size, scale and permanency of the activity.

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) 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 summarises the relevant authorities providing that a taxpayer is not carrying on a business makes a profit from an isolated transaction or operation and that profit is assessable ordinary income if both of the following elements are present:

                      •                      the intention or purposes of the taxpayer in entering into the 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.

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australia resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia and provides the meaning, income according to ordinary concepts.

Where the sale of property is held to be a mere realisation, the sale is on capital account to which the CGT provisions in Part 3-1 and Part 3-3 will generally apply. These proceeds are not ordinary income.

Application to your circumstances

The proceeds received from the sale of Property 1 and Property 2 will not be ordinary income and not assessable under section 6-5 of the ITAA 1997 as you are not carrying on a business or part of a profit making undertaking or scheme. Therefore, it is considered that the sale of both Property 1 and Property 2 is a mere realisation of a capital asset and subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Question 3

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 for GST.

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

Of relevance in this case is whether your supplies of Property 1 and Property 2 are made in the course or furtherance of an enterprise that you carry on.

Enterprise

Subsection 9-20(1) provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•                     'in the form of a business' (paragraph 9-20(1)(a))

•                     'in the form of an adventure or concern in the nature of trade', (paragraph 9-20(1)(b)).

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 provides the meaning of enterprise for the purposes of entitlement to an ABN. 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 discussion in MT 2006/1 equally applies to the term enterprise as used in the GST Act and can be relied on for GST purposes.

Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise:

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Paragraph 178 of MT 2006/1 discusses, with reference to TR 97/11, the main activities to consider where an enterprise is done in the form or a business for the purposes of paragraph 9-20(1)(a).

Paragraph 179 of MT 2006/1 provides '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'.

Application to your circumstances

Weighing up all of the facts and circumstances, with no one test being determinative, it is the Commissioner's view, you are not carrying on a property development business. The following facts have been considered:

•                     The size of the activity was small. You had subdivided the property into two houses.

•                     You originally intended to live in one of the properties being constructed and rent out the second property. You changed intention when you decided to sell the properties to allow sufficient funds to purchase a property in another area.

•                     The activity is not recurrent or regular in nature.

The Commissioner does not consider that your activities in relation to Property 1 and Property 2 are in the form of a business. However, an adventure or concern in the nature of trade may include an isolated or one off transaction that amount to a business deal.

Paragraphs 262 - 263 of MT 2006/1 state:

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-off' or isolated real property transactions.

263. The issue to be decided is whether the activities 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 265 of MT 2006/1 has identified a number of factors related to isolated transactions and sales of real property. If several of these factors are present in a property transaction, 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 as follow:

•                     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 subdivision costs was claimed as a business expense;

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

•                     buildings have been erected on the land.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the factors 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 weighted up as a part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be combination of factors that will lead to a conclusion as to the character of the activities. (paragraph 263 of MT 2006/1).

In this case there was a change of purpose for which the land was originally held and two new residential premises had been constructed on the land. However, as none of the other factors are present in the sale of Property 1 and 2, we consider that your activities are not sufficient to fall within the scope of an 'enterprise' as defined for GST purposes. Taking into account all of the facts in this case we consider your activities do not have the flavour of a business deal and were of a private or personal nature based on circumstances.

Conclusion

The supplies of Property 1 and Property 2 are not made in the course or furtherance of an enterprise and therefore not taxable supplies as defined in section 9-5. Consequently, GST will not apply to the supplies and you will not be liable for GST pursuant to section 9-40.