Edited version of private advice

Authorisation Number: 1052076509050

Date of advice: 29 March 2023

Ruling

Subject: Sale of property

Question 1

Will the sale of subdivisions B and C be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the sale of subdivisions B and C be subject to the capital gains tax provisions contained in Part 3-1 of the ITAA 1997?

Answer

Yes. The sale of the properties is the realisation of the capital value of those assets and will be CGT Event A1. The time of the event will be when you enter into the contract for the disposal of each property.

Question 3

Will the sale of each of the properties situated at subdivisions B and C be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. You will not be making a taxable supply when you sell the properties situated at subdivisions B and C as all the requirements under section 9-5 of the GST Act were not satisfied. This is because the Commissioner has determined you were not required to be registered for GST in relation to the sale. Therefore, GST will not be payable on the sale.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a discretionary trust registered on a specified date.

You made a family trust election to commence on a specified date.

The sole director of your corporate trustee is Individual A.

The sole shareholder of your corporate trustee is Individual B.

You are not currently or historically registered for GST.

Your Australian Business Number (ABN) was cancelled with effect from a specified date in 20XX.

Individual A applied to reactivate the ABN to take effect from a specified date in 20XX which has remained active to the current date.

The reason Individual A reapplied for the ABN was to restructure his personal business affairs from a sole trader to the discretionary trust.

Individual A is a registered professional.

You, Individual A and Individual B have no prior history in property development; either subdividing or construction.

On a specified date in 20XX your corporate trustee entered into a purchase contract for vacant land (the Property).

You were nominated as the purchaser of the Property.

The purchase price of the Property was $X.

The purchase contract for the Property was conditional on planning approval to subdivide the Property into a specified number of separate allotments within a specified timeframe of the contract date.

Approval for the subdivision was received on a specified date in 20XX.

You entered into a loan agreement with a lender to obtain funds to use in the purchase of the Property.

The loan amount was $X and was for a term of X years.

The Property was used as security for the loan.

The purchase of the Property settled on a specified date in 20XX.

At the time of purchase your intention was to construct three separate dwellings on the split tiles as follows:

•                     Subdivision A - private residence / holiday rental

•                     Subdivision B - rental property

•                     Subdivision C - rental property

The land size of the Property was X m², with the size of each of the subdivided lots as follows:

•                     Subdivision A - X m2

•                     Subdivision B - X m2

•                     Subdivision C - X m2

At or around the time of purchase you conducted desktop research on the rental market in the area and your expected rental return was in the range of $X-$X per week.

You expected to rent the dwellings out through a real estate agent but you were open to possibly renting through short term platforms such as Airbnb and Stayz.

Based on Individual A's experience your expected construction costs were in the range of $X-$X per dwelling.

Engineering plans for the sub-division were approved on a specified date in 20XX.

You entered into a loan agreement with a different lender to obtain funds for the subdivision costs.

The loan amount was $X.

Engineering and civil works commenced on a specified date in 20XX and all works were completed by a specified date in 20XX.

You received a certificate of Practical Completion on a specified date in 20XX.

You incurred subdivision expenses of $X.

Notice of issue of three new titles was received on a specified date in 20XX.

Development application permits for the dwellings were submitted on a specified date in 20XX.

Development approval for the dwellings was received on a specified date in 20XX.

You incurred development application expenses of $X.

You received a quote to construct a single dwelling from a builder on a specified date in 20XX. The quoted price of construction was $X.

You received an estimate to construct a single dwelling from a different builder on a specified date in 20XX. The estimated price of construction, once making allowances for excluded items, was around $X.

After receipt of the quote from the builders you consulted with a local real estate agent and you were advised it was unlikely a constructed property could either achieve the required rental return to make holding the property affordable or targeting sales of $X.

Individual A and Individual B circumstances changed in 20XX which decreased their appetite for financial risk.

You conducted further desktop research on the rental market in the area and your expected rental return was in the range of $X-$X per week.

You made the decision not to proceed with the dwellings on subdivisions B and C due to:

•                     the costs of construction,

•                     the unlikelihood of achieving required rental returns or sales to cover costs,

•                     no experience with construction developments,

•                     forecasted interest rate rises, and

•                     reduced appetite for financial risk due to change in circumstances.

You consulted with a number of real estate agents in 20XX and listed subdivisions B and C for sale.

You intend to construct a dwelling on subdivision A for private use.

You intend to use the proceeds from the sale of subdivisions B and C to fund the construction of the dwelling at subdivision A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 section 108-5

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 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

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

Reasons for decision

Question 1

WIll the sale of subdivisions B and C be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

You are not considered to be carrying on a business and the sale of subdivisions B and C are not considered to be an isolated profit-making transaction. As such any gain on the sale of subdivisions B and C will not be assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Under section 6-5 of the ITAA 1997 your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Ordinary income may include income from a business you carry on or income from an isolated transaction with a profit-making purpose.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business:

•                     whether the activity has a significant commercial purpose or character;

•                     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;

•                     the size, scale and permanency of the activity; and

•                     whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

In this case the property development was the first of its kind undertaken by the taxpayer. There has been no repetition or regularity of any development activity. The subdivision was of a small scale and the taxpayer had to engage independent third parties for all the works conducted. The expenses incurred were relatively low and significant time passed between the purchase of the property and when the properties were placed for sale.

Based on the information provided the subdivision and sale of the property was not the beginning of or the continuing of a business of property development. Your activities do not display the indicators of a business, being transactions entered into on a continuous and repetitive basis. The transaction is likely to represent an isolated transaction.

Isolated transaction with a profit-making purpose

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated refers to:

•                     those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•                     those transactions entered into by non-business taxpayers.

It is 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.

Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present:

•                     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.

Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors as some of the matters which may be relevant in 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 that property; and

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

Paragraph 36 of TR 92/3 states 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.

At paragraph 41 the taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Further at paragraph 43 if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

In this case, in determining whether the subdivision and sale of the subdivided lots would be viewed as a profit making undertaking the following has been considered:

•                     The entity undertaking the transactions was a family trust.

•                     You have not previously undertaken any development activities.

•                     The amount of money expended on the purchase and subdivision is relatively small.

•                     The subdivision was of a small scale.

•                     You had to engage independent third parties for all works conducted in the subdivision.

•                     The property was vacant land.

•                     Your intention at the time of purchase was to subdivide and build three separate dwellings of which one was to be used for private purposes and the other two for rental income

•                     You undertook the steps in the transaction over an almost 5-year period.

•                     You successfully subdivided the property into three new lots and received a practical completion certificate from the local council in December 20XX, almost two years after the property settled.

•                     You submitted development applications for a dwelling on each property and once you had approval for development you obtained quotes from two separate builders. The quotes were well above your original expectations.

•                     You consulted with a local property professional and you were advised you were unlikely to achieve the required rental returns to make the project feasible and unlikely to achieve the sales to cover your construction costs.

•                     In this time your sole director and sole shareholder had a change of circumstances and welcomed a second child. This reduced their appetite for financial risk. Further adding to the financial risk was the forecasted interest rate rises.

•                     Considering your lack of development expertise and in addition to the unexpected costs of construction, change in circumstances and increased financial risks you decided not to proceed with the construction of the rental properties and instead place the two vacant lots on the market for sale.

Based on the information provided and having regard to the factors set out in TR 93/2 the subdivision and sale of the land is not considered to be commercial in nature and you are not considered to be engaged in a profit-making undertaking. Your intent was to develop capital assets from which you would earn rental income and the decision to sell came about due to changes in circumstances and unexpected costs. At that point you are merely realising the value of a capital asset.

Question 2

Will the sale of subdivisions B and C be subject to the capital gains tax provisions contained in Part 3-1 of the ITAA 1997?

Summary

The sale of the properties is the realisation of the capital value of those assets and will be CGT Event A1. The time of the event will be when you enter into the contract for the disposal of each property.

Detailed reasoning

As you are not carrying on a business, and the subdivision activities are not an isolated profit-making transaction, the subdivision and sale will be a mere realisation of your capital asset and CGT Event A1 will occur on the date you enter into a contract for the disposal of each subdivided property. Any gain or loss on the sale of the subdivided lots will be calculated in accordance with the capital gains tax provisions in Part 3-1 of the ITAA 1997.

Question 3

Will the sale of each of the properties situated at subdivisions B and C be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

You will not be making a taxable supply when you sell the properties situated at subdivisions B and C as all the requirements under section 9-5 of the GST Act were not satisfied. This is because the Commissioner has determined you were not required to be registered for GST in relation to the sale. Therefore, GST will not be payable on the sale.

Detailed reasoning

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

Section 9-5 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 (Australia); 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.

Division 38 and 40 provide for certain supplies to be GST-free and input taxed respectively. Where a supply is GST-free or input taxed, the supply is not a taxable supply.

We consider that Division 38 and 40 do not have any application to your sale of the vacant lots. This means your supply will be a taxable if the requirements specified in paragraphs 9-5(a) to (d) are satisfied.

In this instance, you will be selling subdivided vacant lots that are located in Australia for consideration. The term 'indirect tax zone' generally means Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied.

Accordingly, we need to determine whether the sale of the vacant lots will be made in the course or furtherance of an enterprise that you carry on (paragraph 9-5(b)) and, since you are not currently registered for GST, whether you are required to be registered (paragraph 9-5(d)) in relation to the supply.

Enterprise

Subsection 9-20(1) 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; or

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

The definition of 'carrying on' an enterprise can be found in section 195-1:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

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 Australia 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.

Paragraph 122 of MT 2006/1 provides that activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise.

Paragraph 123 of MT 2006/1 1 provides that in the Commissioner's view, the term, 'doing anything in the course of the commencement...of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities.

Paragraphs 303 to 322 of MT 2006/1 discuss the activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. The term 'property' includes tangible assets such as land, cars and boats. The term also includes intangible assets such as copyright and patents.

In your case, you purchased the Property on a specified date in 20XX with the view to subdivide the land into three lots and construct a dwelling on each lot. Your original intention of subdividing and constructing a new dwelling on each lot was to:

•                     retain one property as your private residence/holiday home; and

•                     maintain ownership of the other 2 properties for the purpose of leasing to generate rental income and to hold for investment purposes.

You received approval on a specified date in 20XX to subdivide the land into three lots and the subdivision was financed by entering into a loan agreement for $X. The notice of issue of the three new titles was issued on a Specified date in 20XX.

However, the proposed leasing enterprise did not eventuate because you were unable to proceed with the construction of the dwellings on subdivisions B and C as the quotes you received were well above your original expectations. You were also advised by a local real estate agent that it is unlikely you would achieve the required rental returns nor generate sales that will make the project feasible. As a result, you decided the best course of action is to dispose of both subdivisions B and C and realise the asset you have purchased. You will, however, carry on with the construction of the dwelling at subdivision A by using the proceeds from the sale of subdivisions B and C.

With respect to subdivisions B and C, the Commissioner accepts that you had the intention of constructing dwellings on the lots for leasing purposes and the activities you have undertaken have the character of those ordinarily undertaken to commence a leasing enterprise. It is irrelevant that the preparatory activities did not result in an ongoing enterprise for the preparatory activities to constitute, in of themselves, an enterprise of leasing for the purposes of paragraph 9-20(1)(c).

The activities you have undertaken are considered to be commencement activities and constitute an 'enterprise' as defined for GST purposes.

Therefore, your sale of subdivisions B and C will fall within the scope of being 'made in the course or furtherance of an enterprise that you carry on'.

GST registration

Section 23-5 states that you are required to be registered for GST if:

(a)          you are carrying on an enterprise; and

(b)          your *GST turnover meets the *registration turnover threshold (in your case, the threshold is $75,000).

As discussed above, your activities fall within the scope of 'carrying on an enterprise', thus satisfying paragraph 23-5(a) above.

The next issue to consider is whether your GST turnover meets the registration turnover threshold of $75,000 or more.

Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)          your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)          your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

In your case, it is necessary to determine whether your projected GST turnover meets the registration turnover threshold.

Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a)          any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)          any supply made, or likely to be made, by you solely as a consequence of:

(i)            ceasing to carry on an enterprise; or

(ii)           substantially and permanently reducing the size or scale of an enterprise.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Paragraphs 258 and 259 of MT 2006/1 contain guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following:

•                     Assets can be categorised as trading/revenue assets or capital/investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•                     Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

In your case, you acquired the Property on a specified date in 20XX and you subdivided the land into three lots which was completed on a specified date in 20XX. You have also stated that you have no prior history in property development, either in subdivision or construction.

Although a profit may arise as a result of selling these lots, your initial intention in relation to the Property and the subsequent development of the Property as a whole, does not show that your intention in relation to this Property was to sell it with a view to make a profit. Further, we note that the term of the loan is X years and is secured over the Property. This supports your initial intention to continue holding the lots for a prolonged period of time, as opposed to them being used as trading assets.

Taking into account the relevant facts of this case, we consider the sale of the Property would constitute the transfer of a capital asset for the purposes of section 188-25 and is disregarded when calculating your projected GST turnover.

Given the above, your GST turnover does not meet the $75,000 registration turnover threshold. Therefore, you are not required to be registered for GST under section 23-5.

The sale of the Property will be made in the course or furtherance of an enterprise you carry on, made for consideration and is located in Australia. However, you are neither registered nor required to be registered for GST.

Consequently, you will not be making a 'taxable supply' when you sell subdivisions B and C and GST will not be payable on the sale.

ATO view documents

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?

Goods and Services Tax Ruling GSTR 2001/7, Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover

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