Edited version of private advice

Authorisation Number: 1052080751668

Date of advice: 7 February 2023

Ruling

Subject: CGT and GST - subdivision of land

Question 1

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

Answer

Yes. Based on the information you have provided to the Commissioner disposal of the property is the mere realisation of a capital asset and subject to capital gains tax pursuant to subsection 104-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) and assessable as statutory income under section 102-5 of the ITAA 1997. It will not be treated as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Will GST be payable on the sale of your property, under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. Based on the information you have provided to the Commissioner disposal of the property would constitute the transfer of a capital asset for the purposes of section 188-25 of the GST Act. The proceeds are therefore disregarded when calculating your projected GST turnover, and your GST turnover will be less than $75,000 meaning you will not be required to register for GST. As such you will not be making a taxable supply when you sell the property and GST will not be payable on the sale.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in 20XX. The property included a dwelling (house).

The property is a corner block and the size of the land is less than two hectares.

You moved into the property shortly after purchase and treated it as your main residence.

The property has been your main residence since its acquisition.

The property was zoned Residential, and this has not changed.

The property has never been on the market for sale.

You are not registered for GST as a partnership or individually, nor have you been registered for GST in the past.

In 20XX you made a decision to demolish the existing house, subdivide the land into two lots and build a new unit on each lot.

You demolished the existing house in 20XX.

In the plan of subdivision, the two lots are known as:

•         Lot 1

•         Lot 2

Your original intention when you decided to proceed with the development was to:

•         retain the unit to be built on the rear block (Lot 2) as a rental investment property.

•         retain and reside in the unit to be built on the front block (Lot 1) as your main residence.

You provided valuation details for the property effective as of 1 July 20XX based on a letter from the local council, with Site Value and Capital Improved Value of $XXXX.

Your tax agent advised that the land value of each Lot is assumed to be proportionate to the total value of the land.

The sale value of the subdivided lot once the development is completed is expected to be $X.X million for each lot.

You have a construction loan financed in 20XX for the building of the unit on each subdivided lot. The term of the loan is for 30 years with two years interest only repayments.

You refinanced that loan in 20XX to extend the 'interest only' period of the loan to 20XX. After this two year 'interest only' period, repayments of principal and interest will apply.

You refinanced the loan due to COVID-19 impacts - due to supply chain issues, construction timeframes had protracted, and you felt it was necessary to extend the interest only period.

The expected finalisation of the subdivision and the building completion of the two units will be in 20XX-20XX income year.

As intended, you will use the Unit built in the front block (Lot 1) as your main residence. You do not intend to sell Lot 1. Lot 1 is not the subject of this private ruling.

However, your intention to use the Unit built in the rear block (Lot 2) as rental property has changed because you don't have enough money to keep and maintain it, given the COVID-19 related delays causing extra costs.

As a result, you plan to sell the Unit built in the rear block in the 20XX-20XX financial year when it is completed. You are selling Lot 2 to pay off your debt because you can't afford the mortgage repayments.

Lot 2 will not be leased at any point prior to its sale.

Subdivision of land and demolition of house

You applied for a Planning Permit which was submitted in 20XX.

Demolition of the house commenced in 20XX.

You moved out of the original house in 20XX. At this date, all utilities and/ or services were disconnected.

Demolition was completed in 20XX.

The land will be subdivided into two (2) lots.

You applied for and were given planning permits.

You do not have any development agreements.

You have engaged the services of land surveyors who will compile and submit plan of subdivision for council endorsement.

The land surveyors provided a quote for the 2-lot subdivision project.

In a letter from 20XX from the local council, addresses have been allocated to the subdivided lots.

The street address allocations supplied in the letter will be formalised at title registration, or upon sale of one of the lots or once Council has received an occupancy permit.

You have not undertaken any business of buying and selling land or property development in the past.

Planning Permit (20XX)

A planning permit was issued in 20XX by the local council to the land address of your property.

This Permit allows for the construction of two double storey attached dwellings in accordance with the endorsed plans.

The planning permit will expire if the development does not start within two years from the date of the permit; or the development is not completed within four years of the date of the permit subject to the council's discretion to extend in certain circumstances.

This permit is subject to certain conditions which include the following:

Condition 1

Amended plans must be submitted to, and approved by, the council. The plans must be drawn to scale with dimensions and must generally accord with the plans submitted with the application but modified to show a number of alterations required by council.

When approved, the plans will be endorsed and will then form part of this Permit.

Condition 2

A detailed landscape plan must be submitted to council, and when approved, it will become an endorsed plan forming part of this permit. The landscape plan must incorporate a number of features required by council.

Condition 3

The landscaping as shown on the endorsed landscape plan must be completed and maintained to the satisfaction of the council.

Condition 4

A tree protection fence must be erected to protect a certain tree.

Condition 5

Prior to the occupation of the development, the walls on the boundary of adjoining properties must be cleaned and finished in a manner to the satisfaction of the Council.

Areas set aside for the parking of vehicles and access lanes must be constructed based on the plans, surfaced with an all-weather sealcoat, and drained to the satisfaction of the Council; and must not be used for any other purpose other than what is intended.

Condition 6

Vehicular crossing(s) must be constructed to the road to suit the proposed driveway(s) to the satisfaction of the council.

Planning Permit (20XX)

A planning permit was issued in 20XX by the council to the land address of your property.

This permit allows 2 lot subdivision in accordance with the endorsed plans.

This permit will expire if 2 years after the date of the permit, the plan of subdivision is not certified within that time; or 5 years after the date of certification of the plan of subdivision.

The council may extend the expiry of this permit if a request is made in writing by the owner or occupier of the subject land before the permit expires or within 6 months afterwards.

Amended Plans

Amended Plans must be submitted and approved by the council; and modified to show Lot boundaries and dimensions which are in accordance with the endorsed development plans, or any further planning approval issued by the council.

Public Works

Prior to the issue of a Statement of Compliance for this subdivision, the owner must complete all public works associated with the permit issued in 20XX to the Council's satisfaction.

Mandatory State Government Conditions

The owner of the land must enter into agreements with the relevant authorities for the provision of water supply, drainage, sewerage facilities, electricity, and gas services to each lot in accordance with that authority's requirements and relevant legislation.

All existing and proposed easements and sites for existing and required utility services and roads on the land must be set aside in favour of the relevant authority.

The owner of the land must enter into an agreement with a telecommunications network or service provider for the provision of telecommunication services to each lot in accordance with the provider's requirements and relevant legislation.

The owner must also engage a suitably qualified person for the provision of fibre ready telecommunication facilities to each lot in accordance with any industry specifications or any standards set by the Australian Communications and Media Authority, unless the land is in an area where the National Broadband Network will not be provided by optical fibre.

Prior to the issue of Certificate of Compliance for the subdivision, the owner of the land must provide written confirmation from a telecommunications network or service provider that all lots are connected to or are ready for connection to telecommunications services; and a suitably qualified person for that fibre ready telecommunication facilities have been provided.

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