Edited version of private advice

Authorisation Number: 1052069918667

Date of advice: 9 January 2023

Ruling

Subject: Taxable supply

Question 1

Will the sale of one of the subdivided lots which originally formed part of an existing residential rental property, be a taxable supply in accordance with section 9-5 of the GST Act and, as a consequence, would you be required to register for GST?

Answer

Yes. If one subdivided lot is sold it will be a taxable supply in accordance with section 9-5 of the GST Act and as a consequence you will be required to be registered for GST.

Question 2

Will capital gains tax (CGT) apply to the future sale of the block?

Answer

No, CGT will not apply to the future sale of the block, however we consider it an isolated profit making transaction and the proceeds will be considered ordinary income under section 6-5 of the ITAA 97.

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

The date this ruling is issued

Relevant facts and circumstances

You purchased a residential property in XXXX for $XXXX with the intention of living in the existing house as your principal place of residence.

Due to personal reasons, you decided not to move into the property but to rent the property out.

You are now considering demolishing the existing residence and subdividing the land into two separate lots.

You intend to sell one lot and keep the other lot to build what will be your own residence.

Development approval has recently been sought to subdivide the property.

You have not previously developed a property of this type.

You do not hold an Australian business number (ABN).

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Under section 9-5, 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 this case, if you sold one of the subdivided lots, it would consist of a property that is located in the indirect tax zone and the supply would be for consideration. Therefore, the sale of the one subdivided lot would satisfy two elements outlined above (1 & 3).

An assessment must be made to determine if the act of subdividing the property amounts to an enterprise of dealing with the property either as a series of activities in the form of a business or in the form of an adventure in the nature of trade if the frequency of transaction is low.

Are you carrying on an enterprise?

The term enterprise is defined for GST purposes in section 9-20 and includes among other things, an activity or a 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)).

The phrase 'carry on' in the context of an enterprise includes 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 (MT 2006/1) 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: 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 on MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied upon 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.

Considering your arrangement, you purchased the property with the intention of using it as your residence. This indicates that early on you did not have the intention to acquire and sell at a profit. Holding an asset for private use is not normally within the ambit of an enterprise.

You decided to lease the property to cover costs and you never took up residency in the property. You are now contemplating demolishing the existing residence and subdividing the land into two lots. Your intention is now to sell one of the subdivided lots and keep the other lot to build yourself a residence in which you intend to live. That change is also not indicative of a profit motive per se. We consider that in terms of assessing the scale of your subdivision and proposed sale activity, it is not enough that there be land changing hands without more. Certainly, it is not a large-scale activity and there are instances in previous court cases where larger subdivisions were held to be a mere realisation and as such would not be considered an enterprise.

Given these facts, we consider that the proposed sale of one of the subdivided lots by you would not display the characteristics of a business as listed above. Scale of land sales alone is not necessarily evidence of intention to make a profit. You only intend to subdivide into two lots.

Change in intention to commercial intention

In respect of isolated or one-off business ventures or profit-making schemes, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) at paragraphs 33-36 states:

33. The views expressed in Whitfords Beach and Myer that profits from isolated transactions can be assessable income must be looked at in the context of the facts involved in those cases. In Myer, the taxpayer was carrying on a large business at the time it entered into the transactions, and, in Whitfords Beach, the taxpayer company embarked on a substantial business venture.

34. Nevertheless, there is a strong line of reasoning through the judgements in Whitfords Beach and Myer that suggests that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income. In Myer, at 163 CLR213; 87 ATC4369; 18 ATR 699-700, the Full High Court has this to say about the nature of profits from isolated transactions:

'It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.'

35. A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

a)    The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

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.

36. 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme (Myer at 163 CLR213; 87 ATC4369; 18 ATR 699-700). If a transaction satisfies the elements set out in paragraph 35 it is generally not a mere realisation of an investment.

In Whitford's Beach, a change in intention was found when the company changed its articles to become profit focussed. Early on, when you bought the property, there is no evidence of any commercial intention on your part. However, intentions can change. In the recent matter of Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation (Taxation) [2022] AATA 628 (Collins), the argument was made that the property was the mere realisation of a capital asset, and, as a result, should be excluded from the turnover threshold for GST registration under section 188-25(a). Senior member Olding found at para 24 that the assessment of intention is far more significant at the point of sale rather than at acquisition for the purposes of making an assessment under that provision.

In this case your initial intention was of a private nature; however, straight after purchasing the property you changed your intention to leasing the property instead. You state that this was because of personal circumstances and to assist with the cost the mortgage repayments.

You are now contemplating demolishing the existing residence and subdividing the land into two separate lots. Your intention is to keep one lot on which to construct a residence for yourself to reside in and to sell the other lot to assist with all the associated costs.

If you were to construct a residence to rent instead of selling the vacant lot, this would be evidence of an intention to hold it as a capital asset, but this is not your stated purpose. You have not, and still do not, reside in the residential premises situated on the property. You have recently applied for subdivision approval in relation to the property.

An adventure or concern in the nature of trade refers to transactions that have a commercial nature which are entered into for a profit-making purpose.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and those done in the form of an adventure or concern in the nature of trade. A business encompasses trade engaged in on a regular basis. An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 6 in TR 92/3 provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph 13 of TR 92/3 provides that:

13. Some matters which may be relevant in considering whether an isolated transition amounts to a business operation or commercial transaction are the following:

a)    The nature of the entity undertaking the operation or transaction

b)    The nature and scale of other activities undertaken by the taxpayer

c)    The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d)    The nature, scale and complexity of the operation or transaction

e)    The manner in which the operation was entered into or carried out

f)     The manner in which the operation between the relevant taxpayer and any other party to the operation or transaction

g)    If the transaction involves the acquisition and disposal of property, the nature of that property, and

h)    The timing of the transaction or the various steps in the transaction.

Considering these factors, you are an individual and, as discussed above, the activity you propose is not on a large scale. The arrangement is more complex than a mere subdivision. The existing residential property will be required to be demolished as part of the subdivision and approvals required to be obtained from the relevant authorities. The property was purchased in August 2022 at a cost of $1,200,000 and a lease entered into. These activities have occurred in a very short amount of time.

MT 2006/1 also discusses isolated transactions and sale of real property and at paragraph 265, it presents a list of factors which, if present, may be an indication that a business or an adventure or concern in the nature of trade is being carried on.

Those 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 pf land;

•         The parcel of land is bought 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 of money borrowed to defray subdivisional cost 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

•         Building have been erected on the land.

Again, these factors must be considered as a whole to assess the isolated nature of the activities to determine whether they may be business-like.

The facts indicate that your intended use of the property changed after purchase and your future intended use of part of the property is to subdivide and sell one lot for a profit. You have owned the property for a short length of time and in that time, you have entered into a residential lease and applied for subdivision approval.

You have not held the property for a full financial year and, as a result, have not treated expenditures as business expenses. However, given that the property is currently leased and subdivision approvals sought, it would be reasonable to assume that you are keeping records of all expenditures incurred.

In order to subdivide the property into two lots, there would be a requirement to demolish the existing residence. This is considered significant and goes beyond that which is necessary to secure council approval for a subdivision.

You do not operate as a property developer in such a way that you have an office or letterhead. Given that subdivisions are becoming increasingly complex there is less weight given to the fact you do not have traditional badges of trade.

The facts of this case indicate that you changed your intended use of the property, which was initially intended to be for personal use, but the subsequent change of use resulted in an income producing purpose of leasing. Now your intention is to subdivide the property, changing the configuration of the property to sell one of the subdivided lots.

Given the facts of this case, you currently have a leasing enterprise, pertaining to the leasing of the residential premises. However, should you decide to demolish the existing premises and subdivide the land into two lots and then on sell one lot, we would consider that you would be carrying on an enterprise of property subdivision. As such, we consider that you would meet the requirements of 9-5(b) as you would be making a supply in the course or furtherance of your enterprise.

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).

As you are currently making input taxed supplies of residential accommodation, this income is excluded from the GST turnover calculation. However, the income you receive from selling one of the subdivided lots will need to be included in the GST turnover calculation. As the sale of the subdivided lot will exceed the $75,000 turnover, you will be required to be registered for GST as a result.

Based on the facts of this case, you would be required to be registered for GST as the sale of one of the subdivided lots would result in your GST turnover exceeding the registration turnover threshold. As a result, the sale of one of the subdivided lots would be a taxable supply under section 9-5 when sold.

Question 2

Will capital gains tax (CGT) apply to the future sale of the block?

Answer 2

No, CGT will not apply to the future sale of the block, however we consider it an isolated profit making transaction and the proceeds will be considered ordinary income under section 6-5 of the ITAA 97.

Detailed reasoning

Broadly, there are three main ways profits from a land development, subdivision and sale can be treated for income tax purposes:

1.    As ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2.    As ordinary income under section 6-5 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, which is the commercial exploitation of an asset acquired for a profit making purpose;

3.    As statutory income under the capital gains tax legislation from the mere realisation of a capital asset.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. 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.

No one factor is decisive. The indicators must be considered in combination and as a whole.

Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? provides that land will be treated as trading stock if it is held for the purpose of resale and a business activity which involves the dealing in land has commenced. Both the required purpose and the business activity must be present.

TD 92/124 further provides that the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

Land that was originally held for a purpose other than for resale may nevertheless become part of the carrying on of a business as trading stock if the purpose for which it is held changes to that of resale and a business activity involving the land commences.

Isolated transactions

Alternatively, Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income where:

•               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 operation or commercial transaction.

Taxation Ruling TR 92/3 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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit-making venture.

Paragraph 42 of TR 92/3 provides that if an asset is acquired with the intention of using it for a purpose other than profit but is later ventured into a profit-making undertaking with the characteristics of a business operation or commercial transaction, the profit from the activity will be income although you did not have the purpose of profit making at the time of acquiring the asset.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.