Edited version of private advice

Authorisation Number: 1052082663583

Date of advice: 24 August 2023

Ruling

Subject: GST - subdivision and sale of real property

Question 1

Is A and B as joint tenants (you) making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell Lot Y (also described as 'the back block') of the property?

Answer 1

Yes. You will make a taxable supply when you sell lot Y at the property as all elements of a taxable supply will be met.

Question 2

Is the company engaged in an enterprise?

Answer 2

No, based on the facts the company is not engaged in an enterprise. In this instance it is not engaged in the property development business conducted by A and B.

Question 3

If you are making a taxable supply of the property described as lot Y, are you entitled to input tax credits on the acquisitions related to the construction?

Answer 3

Yes, where you make taxable supplies of the property, you will be entitled to claim input tax credits to the extent of your creditable acquisitions provided you hold a valid tax invoice.

Question 4

Are you required, pursuant to section 14-255 of Schedule 1 to the Taxation Administration Act 1953 (TAA), to give notification to the purchaser of the property to withhold GST on the sale?

Answer 4

Yes, will be required to give notice to the purchaser that they will be required to withhold the GST. The amount to be withheld is dependent on whether the margin scheme will apply to the sale.

Question 5

Is the company entitled to claim input tax credits for the GST paid on the trades/materials invoices made out to it?

Answer 5

No. The company has not met the requirements for a creditable acquisition.

Issue 2: Income Tax

Question 6

Will the disposal of the property (Back House) be a mere realisation for income tax purposes?

Answer 6

No. The disposal of the property is not a mere realisation and the net profit is treated as ordinary income and assessable under subsection 6-5(1).

Question 7

If the disposal of the property (Back House) is not a mere realisation, can you use the market value of the property in calculating the net profit from the sale of the property (Back House) for the purposes of subsection 6-5(1)?

Answer 7

Yes, for the purposes of determining the net profit that is assessable under section 6-5(1), you can use the market value applicable to the subdivided allotment at the time when it was ventured into the property development.

Question 8

Can you access the main residence exemption if you dispose of the property (Back House)?

Answer 8

Yes. However, any capital gain made from the sale of the property (i.e. CGT event A1) is reduced to the extent that the amount is included in assessable income under another provision, in your case section 6-5.

This ruling applies for the following period:

1 January 2020 to 31 August 2027

Relevant facts and circumstances

Background information

A and B are not registered for GST and have never been registered for GST, either individually or jointly.

A and B, as joint tenants, purchased the property from a seller consisting of two individuals (who you presume were husband and wife) in 2020. In this ruling we refer to A and B as 'you'.

The purchase price of the property (which did not include any GST) was $X, of which $X was payable as a deposit and the remaining $ was payable at settlement. You borrowed $X from a bank in relation to the purchase of the property in 2020.

At the time of purchase, the property consisted of a X square metre block of land which had one older residential dwelling on it.

The older dwelling was fully habitable at the time of purchase and included a living area, kitchen, bedrooms, bathroom, toilet and laundry.

The property was zoned residential. The zoning has not changed since you acquired the property and the zoning is not about to change as far as you are aware.

The title to the property was registered in your names as joint tenants in 2020 (as per the record of certificate of title, which also shows a mortgage registered to the bank).

Moving into the older dwelling and the first two electricity bills for that dwelling

You moved into the older dwelling as soon the contract for the purchase of the property (dated 2020) had settled (which was on 2020 as per the settlement statement. You advised that you moved into the older dwelling in July 2020.

Prior to moving into the property, you lived at X Avenue (A's parents' house) and at X Street, (a property that A had owned together with his relative - refer further below), and prior to that at XX Street, (a third party owned rental property). You advised that you:

•                     lived in the X Street property (refer further below) from [date] to [date] (when the property was sold).

•                     moved in to live with A's parents at X Avenue after selling the XX Street property.

•                     briefly lived in the X Street property in [date]

•                     moved in to live with A's parents at X Avenue after moving out of the XX Street property the first time between [dates].

•                     lived in the XXX Street property between [dates].

•                     moved in to again live with A's parents at X Avenue after moving out of the rental property, staying with them from around [dates].

•                     moved into the X Street property a second time in [date] and resided there until [date].

•                     moved into the older dwelling on the property in 2020.

•                     the renovations for the X Street property took place between [dates] and that you lived in the X Street property while the renovations were being done.

•                     you advised that during the period [dates], the X Street property was advertised for sale and sold.

Obtaining builders' ticket

In 2020, while working full time as a project manager, A obtained his own builders' ticket having recently met the qualification/eligibility requirements and thinking it might come in handy in the future if he was made redundant. The certificates and letters will go out in today's mail.

The builder's ticket is 'housed' in a company called company, of which A is the sole director and sole shareholder. A is not paid any salary by the company.

A applied for the building licence in 2020 and used a consultant to assist with the application, with that consultant advising that it would be best to set up a company and apply for the licence through the company for risk mitigation purposes. The building licence was applied for once A became eligible, as he was advised that it would be best to apply before there were any possible rule changes which might result in losing his eligibility to apply.

Further details about the company

• The company is not registered for GST and has never been registered for GST.
• A had no intentions of starting a business and took no steps to advertise or conduct any work using the abovementioned registration or company; but instead continued to work full-time for salary for an unrelated third-party employer.

Decision to subdivide the property and build a new house on the 'back block' of the property

•                     In 2021, you felt that the older dwelling was too old and not fit for purpose for your upcoming family as B was expecting a child at the time. The dwelling was too small, had poor heating/cooling, and was asbestos lined. A decision was made to subdivide the property and build a new house on the 'back block' for your family to live in.

•                     From the time that you purchased the property up until 2021, you had only intended to reside in the older dwelling and had no intention of subdividing the property. You were happy with the old house prior to expecting a child.

Details about the subdivision of the property

•                     G was engaged by you in return for a fee to attend to the subdivision application process and to deal with the relevant authorities on your behalf.

•                     An email from G to you dated 2020, which you provided us a copy of states as follows:

Hi A

Sorry for the delay.

It's been a bit busy.

Please find attached...

•                     Your email reply to G in 2020 states as follows:

Hi G

As discussed can you please proceed with submitting the subdivision application ...

Thanks

•                     The abovementioned email correspondence is the only correspondence between you and G regarding your instructions to them about the subdivision of the property and their completion of the task (which was the only time they were engaged by you). You met at their office to discuss the details of the submission.

•                     You did not actively participate in engaging with the local council, amongst other things in relation to the subdivision of the property. Nor did you approach any developers in relation to the subdivision of the property, and no developers approached you. Also, the property subdivision was not part of any development with neighbouring properties.

•                     The copy of the application for approval of a subdivision you provided, was lodged with ZZ on your behalf by G. The application is dated 2020.

•                     The subdivision plans attached to the abovementioned application when it was lodged show two proposed lots; with the fibro and tile house (older house) "to remain" on proposed lot one, and the shed on proposed lot Y "to be demolished".

•                     A copy of the approval (subject to conditions) given by ZZ of the survey-strata plan for the property you provided, shows an approval date of 2021 (the application receipt date is shown as 2020).

•                     One of the conditions of the abovementioned approval was the plans for the subdivision be modified as per the attached plan dated 2021. You advised that you did not have a copy of such modified plan as it had been submitted by G; however, there would only have been very minor changes, if any, from the original plan that you provided.

•                     Apart from surveying the property and lodging plans with the relevant authorities, no additional works were required in relation to the subdivision. Approval of the property subdivision was however subject to certain conditions, including the requirement that an additional water meter and power service to be installed.

•                     Of the two residential lots subdivided from the original site, the 'back block' (lot Y) is XX square metres and the 'front block' (lot X) is XX square metres. The balance of the land (lot Z) is made up of the driveway. The back block or lot Y is also described in the income tax portion of this private ruling as the 'back house'.

•                     The neighbouring lots are of similar size as the original lot for the property used to be, although several other lots in the neighbourhood have also been subdivided.

Construction of a new house on the 'back block' of the property using the company's trade account

•                     With the idea of building a new family home on the 'back block' of the property, you thought that there would be savings to be made by doing the build yourself via the company which had the building licence and thus avoiding paying a markup to a third-party builder.

•                     You knew that this would also be a good way to obtain trade prices from suppliers, as trade prices are often given to building companies but not to individual members of the public. It was also administratively easier (less paperwork was involved) to get approval for the build through the company which had the building licence, rather than through an owner builder set up.

•                     On 2021, the Council approved the building permit application for a two storey residential dwelling to be built on the property (on the 'back block'). The estimated value of the building work is stated as being $X. The form also shows that the certificate of design compliance had been issued by H on 2021.

•                     On 5 May 2021 the company took out material damage and public liability insurance in relation to its annual building project within your state, with a retrospective start date of 2021 and an end date of 2022.

•                     On 2021, the company took out professional indemnity insurance in relation to its project management activities at X Street, with a retroactive commencement date of 2021 and an end date 2022.

•                     Construction of the house on the 'back block' (lot Y) of the property began in 2021. You provided copies of the plans for this house which also show that the older house on the 'front block' of the property was to remain (the file name of the PDF document with the plans includes a date 2021). No variations were made to these house plans.

•                     The abovementioned build was structured so that all invoices from tradespeople and other suppliers would be issued to the company. Payment of those invoices was however, more often than not, made from your personal account instead of 'running through' the company's bank account.

•                     The company did not add any margin to the building costs (i.e., the company did not make any profit or loss from the construction of the house on the back block' of the property).

•                     You also provided copies of two invoices and an adjustment note issued to the company in relation to the construction of the new house on the 'back block' of the property. You advised that the two invoices are from the time that construction of the new house on the 'back block' of the property commenced.

•                     The two abovementioned invoices were from D. The first invoice was issued on 2021 with an order and shipping date of 2021, and a delivery address of X Street. The second invoice was issued on 2022 with an order and shipping date of 2022, and a delivery address of X Street.

•                     The abovementioned adjustment note was from TT Trade. It was issued on 2021 and was stated as relating to X Street.

Decision to demolish the older dwelling and build a new house in its place on the 'front block' of the property

•                     In 2022 you decided that you did not wish to live in the house that was under construction on the 'back block' of the property, with it becoming apparent that you needed a backyard for your child, who was born on [date] and was almost a year old by then.

•                     Plans were submitted to the local council in 2022 to knock down the older dwelling that was on the 'front block' of the property at the time and to build a new dwelling which you and your family would live in for the foreseeable future.

•                     You provided a copy of the building permit issued by the council to the company on 2022 for a new two storey residential dwelling, swimming pool and swimming pool fencing. The estimated value of building work as shown on the form is $X. The form states that the certificate of design compliance was issued on 2022 by ZZ.

•                     You advised that the new house to be built on the 'front block' of the property would have much more suitable specifications to cater for your growing family, including a bigger backyard.

•                     You provided copies of the plans for the proposed house on the 'front block'. The plans also show the house on the 'back block' as being under construction. The file name of the PDF document with the plans includes a date 2022.

Further details regarding your intentions for the property

•                     In relation to the older dwelling on lot X, after deciding to build a new house on lot Y being the 'back block' of the property, you had contemplated whether to sell the older dwelling, rent it or demolish it and build again. However, after realising that the house on the 'back block' of the property was not ideal for your growing family, you decided to demolish the older dwelling and build a new house in its place.

•                     You considered demolishing the older dwelling a few months after living in it, when you realised how poor the insulation was and how cold it was during the winter and how hot it was during the summer.

•                     You only considered building a house on the 'back block' for the first time in 2021, and you made a decision to do so around 2021.

•                     You advised that you had originally thought that you might like to subdivide the property and sell the 'back block' without building on it, and that lodging a subdivision application would not lock you into anything.

The new house constructed on the 'back block' of the property

•                     You provided a copy of the 'building contract' for the house (which was still under construction at that stage) being built on the 'back block' of the property. The document states that it relates to lot Y X Street, which you advised was the house constructed on the 'back block' of the property (this is also confirmed by the building plans that you provided).

•                     The abovementioned 'building contract' is a single page document which has been signed by A on behalf of the company on 2022. The cost of the build is stated as being $X plus GST and is said to be built by A within 18 months from when the council gives approval for the building permit. The price excludes the subdivision costs, demolition works and furniture supply; it does however include surveying costs, landscaping and a swimming pool.

•                     You later clarified that no pool was ever designed, drawn or approved in relation to the house built on the 'back block' of the property, and that the mention of a pool was simply a typo in the contract (which was copied and pasted from a template, and you forgot to take out the reference to the pool).

•                     The new house built on the 'back block' of the property was completed in 2022. It has a living area(s), kitchen, bedrooms, bathroom(s), toilet(s) and laundry.

•                     You provided a copy of an excel spreadsheet itemising the actual building costs for the new house constructed on the 'back block' of the property although the spreadsheet refers to 'estimated' costs. There were no additional costs that are not listed in the spreadsheet which shows the total costs as $X (excluding GST) and $X (including GST).

•                     Initially, you had been advised by a builder named F that the cost of constructing a new house on the 'back block' of the property would be approximately $X. Also, around 2021 when you first contemplated building on the 'back block' of the property, G advised that the cost of subdividing the property would be approximately $X. So, you allowed a total of $X for both.

•                     Given that sales of similar houses in the area were fetching around $X, you considered it economical to undertake the abovementioned subdivision and construction. However, the construction costs for the new house on the 'back block' of the property ended up being a lot more than had been budgeted for due to cost increases in the last two years.

•                     The specifications of the build for the new house built on the 'back block' of the property did not change in any way after you decided that it would no longer be your 'forever home' (i.e., no extra expenses were incurred, nor was more complex work performed on the build; also, no activities were undertaken that would substantially increase the amount of money/profit from selling the house).

•                     Once the proposed new house to be built on the 'front block' of the property has been built, you will have the new house on the 'back block' of the property cleaned and advertised for sale. To date, the house built on the 'back block' of the property has not been advertised for either sale or rent. You have been living in the house on the 'back block' of the property since it was built.

•                     You estimate that the new house on the 'back block' of the property will fetch some $X on sale based on recent sales of similar properties in the area.

Moving out of the older dwelling and into the new house constructed on the 'back block' of the property

•                     You and your family moved out of the older dwelling (which you stated was around 2022) and then moved into the new house built on the 'back block' of the property as soon as it was ready to be occupied (which you advised was in 2022). You moved straight into the new house built on the 'back block' of the property and did not stay anywhere else after moving out of the older dwelling.

•                     You provided a copy of a Notice of Completion in relation to permit number ZZZ for X Street, as well as an email from you to the Council on 2023 attaching the form "relating to the recently competed property at X Street,". The form was signed on 2023 and states that the building works were completed on 2023 and that the final value of the contract was $X. The builder is listed as the company.

•                     You and your family are currently residing in the new house that was built on the 'back block' of the property.

Demolition of older dwelling

•                     The permit to demolish the older dwelling on the 'front block' of the property was applied for on 2022. The demolition contractor as stated on the demolition application form is C, who submitted the demolition application to the Council on your behalf.

•                     The demolition permit was issued to C by the Council on 2022. The permit covers the full demolition of a single dwelling at X Street, and is valid until 2023.

•                     The demolition of the older dwelling on the 'front block' of the property commenced in late 2022. Both the demolition and the clearing of the block was completed by you at your own cost. The demolition company only did the paperwork in order to obtain the licence to demolish; you undertook the demolition works in your own right (i.e., not on behalf of the company) with the help of relatives at no cost to you.

•                     You provided a copy of a photo taken post the abovementioned demolition and clearing of the 'front block' of the property. The photo shows a flat and empty piece of land.

Construction of the new house on the 'front block' of the property

• You advised that construction of the new house on the 'front block' of the property commenced in or about 2023.
• The construction costs for the new house to be built on the 'front block' of the property will be borrowed from B's parents.
• According to the copy of the building plans that you provided in relation to the proposed new house to be built on the 'front block' of the property, the house will have a living area(s), kitchen, bedrooms, bathroom(s), toilet(s) and laundry. The yard will be a bit bigger than for the house constructed on the 'back block' of the property and there will also be a pool. No variations have been made to the building plans to date.

•                     You advised that, as well as power and water facilities, the proposed new house to be built on the 'front block' of the property will also have gas fitted during the construction phase. To date, no building contract has yet been entered into in relation to the proposed new house to be built on the 'front block'.

Reason why you did not simply sell the property rather than building new houses on the property

•                     When asked if there was any reason why you did not simply sell the property and purchase a new property rather than undertaking the subdivision, you advised that you wanted to remain in the area because it has good schools and is close to friends and family. You also advised that with property prices and demand having 'skyrocketed' over the relevant period, it would have been hard for you to secure an alternative property.

Your future intentions and what the property has been used for

•                     Apart from the houses mentioned above, you have no intention of building any other dwellings in the near future, nor of moving out of the 'soon to be constructed' new dwelling on the 'front block'.

•                     To date, no part of the property, including any of the land or any house originally on it or built on it, has been used for any purpose other than a residence in conjunction with a residence for your family.

•                     You and the company have no intention of performing any construction work or services in the future for a profit or otherwise.

•                     Apart from the applications to council mentioned above, in relation to the subdivision of the property and the building of new houses on the subdivided blocks, no other applications were made to the Council in relation to the property.

Employment/business history

•                     In the last three years, A has been employed full-time as a project manager by an unrelated entity, and in the XX years prior to that A has been employed full-time by as an assistant project manager by an unrelated entity.

•                     In the three years 2018 to 2020, A also ran a side business as through the entity the company while working full-time. During this time, the company lodged income tax returns with income amounts not high enough to require GST registration. A established the company to conduct the side business; however, after that business activity ended, the company was 'mothballed'.

•                     The side business work that A currently undertakes for a commercial builder and that he has undertaken in the past, relates to the building of schools and apartment blocks, etc., not residential properties.

•                     B has been a communications manager for the last X years, having been employed by three different third-party employers in that role.

Company activities and history

•                     When A obtained his building registration, the company's name was changed.

•                     You used the company to build your home in order to access trade prices, allowing you to buy materials for your home at much cheaper prices than otherwise possible as a member of the general public.

•                     The company is not registered for GST and has never been registered for GST in the past (including when it was known as another entity).

•                     The only project that the company has any involvement in is the new house built on the 'back block' of the property. The company undertook the construction but added no margin to the costs for undertaking this project.

•                     The only project that the company has planned for the future is the new house proposed to be built on the 'front block' of the property also known as lot X.

Time spent by you on the construction

•                     The amount of time spent by A in relation to the construction of the new house on the 'back block' of the property was approximately 10 to 20 hours per week. This involved organising materials, tradespeople and deliveries, meeting tradespeople and suppliers, as well as selecting materials. His time was mainly spent on managing the work, with subcontractors being engaged to complete the majority of the work.

•                     A received no wages or other payments from the company for his work. However, when the company was called another name, A did receive some payments from the company for his work.

Who tradespeople invoice

•                     All invoices relating to the construction of the new house on the 'back block' of the property were made out to the company. Suppliers/tradespeople were dealing with the company and its director A in relation to the project.

Taxation returns and record keeping

•                     To date, you have not lodged any taxation returns in relation to the expenses incurred by the company for the construction activities as you are waiting for the outcome of this ruling. The last taxation return lodged by the company is for the financial year ended 30 June 2021 and the expenses shown in it related only to the side business.

•                     As well as keeping the invoices and the excel spreadsheet of costs relating to the subdivision and development of the property, you maintain a professional accounting system for the company.

Previous property dealings

•                     You have not jointly, or through any entity related/associated with both of you, purchased, developed, subdivided, sold or held any property apart from that mentioned above and the following:

•                     a property located at XX Street, that A jointly owned with his relative of X Avenue a couple of years ago.

•                     a property located at X Street, that you previously owned in As name several years ago.

•                     The X Street property that A previously owned with his stepfather (as tenants in common with your share being X%) was purchased on or about 2017 for $X. A's relative paid most of the purchase price and that you contributed around $X.

•                     The abovementioned property originally had an old two bedroom, one bathroom house on it, which A's relative extended as an owner builder, adding three more bedrooms and a bathroom. You advised that you both lived in the X Street property between 2018 and 2020

•                     A and his relative sold the property at X Street on or about 2020 for $X. You advised that during the period 2020 to 2020, the X Street property was advertised for sale and sold.

•                     The XX Street property that A previously owned in his own name was purchased by him in 2013 as vacant land for $X. A constructed a two storey house on this property in which he lived in for approximately 12 months in 2017, before he sold the property in 2017 for $X. The property was never rented.

Source of funds for the construction of new houses on the property

•                     In relation to the source of the funds for constructing the new house on the 'back block' of the property, you advised that they were borrowed from B's parents.

•                     Funds for the proposed construction of the new house on the 'front block' of the property will also be borrowed from B's parents, with the total borrowing for both houses totalling approximately $X. You advised that there was a joint account that you could access and draw down as required.

•                     There is no intention that your partner's parents will have any proprietary interest in the new property on either part of the block.

•                     No written agreements were entered into in relation to the abovementioned borrowing from B's parents. The funds will be paid back in the next year or two, but no set date has been confirmed or requested by B's parents regarding repayment.

•                     You intend to live in the unit on Lot X in the front part of the block once construction concludes.

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 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 29-10

A New Tax System (Goods and Services Tax) Act 1999 section 29-70

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 section 40-75

A New Tax System (Goods and Services Tax) Act 1999 section 93-5

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

A New Tax System (Goods and Services Tax) Regulations 2019 section 23-15.01

Taxation Administration Act 1953 Schedule 1 section 14-250

Taxation Administration Act 1953 Schedule 1 section 14-255

A New Tax System (Australian Business Number) Act 1999 section 8

Detailed reasoning

Question 1 - Enterprise of the partnership

Please note that all legislative provisions in the goods and services tax (GST) issues portion of this document are references to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise specified.

The appropriate entity

The subdivision and sale of the property is potentially the enterprise under consideration. Section 9-5, set out below, indicates that a fundamental preliminary requirement is that 'you' make the supply for consideration.

Therefore, we must make the enquiry as to who is the 'you' referred to in the provision. There are a few possibilities:

•                     A and B as individuals

•                     A and B as partners

•                     The company

•                     A as an individual

The issue of whether the company is engaged in an enterprise is considered below, in question 2. In our view, it is not engaged in a property development enterprise relevant to the activities conducted by A and B.

In our view, the appropriate entity is A and B in partnership because the facts indicate that, amongst other things, it is not merely A acting alone.

Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships (GSTR 2003/13) sets out the definition of partnerships and how the GST legislation applies to them. A partnership is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The GST legislation adopts that definition in section 195-1 and it is set out at paragraph 9 of GSTR 2003/13 as follows:

partnership means:

(a)          an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b)          a limited partnership.

[Note an asterisk refers to a defined term in the legislation.]

As set out below, in our view A and B are not in business but were engaged in an enterprise. Accordingly, A and B are not general law partners. However, they may still meet the definition of a tax law partnership (TLP).

Are A and B making supplies as a tax law partnership?

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) sets out the ATO view on what constitutes a tax law partnership (TLP), when they are formed and the consequences of that formation, the circumstances in which a tax law partnership carries on an enterprise and the GST consequences of transactions between a tax law partnership and its partners amongst other things.

GSTR 2004/6 begins with a definition. 'Partnership' is defined in the section 195-1 picking up the definition of that term in section 995-1 of the Income Tax Assessment Act 1997. It is:

an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company.

The first limb of the definition considers the traditional general law partnerships and the second limb makes reference to receipt of income jointly, but takes into consideration that the suppliers under an arrangement may not be in business together. This definition is carried over into GST law from the income tax position by virtue of the adoption of the income tax definition in s.195-1.

Para 52 of 2004/6 points out the ATO view that tax law partnerships are also entities for GST purposes.

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) indicates that activities in the form of a business may be less than a business but still meet the enterprise test for GST purposes. This is set out at paragraph 170B of that ruling.

Association of persons

The first requirement under the definition is that there must be an association of persons. At paragraph 21 of GSTR 2004/6 it makes the point that 'association' is not defined in the legislation. The ordinary meaning is set out there: '1. an organisation of people with a common purpose and having a formal structure; 5. connection or combination'

That is, there must be a link or existence of common purpose between the parties. Here, the parties are joint tenant holders of the property. Without more they are mere co-owners. However, given that the parties purchased the property and made key decisions together with an eventual sale of a developed block with a house on it, this evidences mutual and common objectives.

Receipt of Income

The association of persons must also be in receipt of income to meet the definition of a tax law partnership. On this point, GSTR 2004/6 at paragraph 25 states that: 'to be in receipt of income jointly, it is not necessary to have actually received the income'.

The activity must have already commenced. At para 27 it states:

The expression 'in receipt of ordinary income...jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature.

In this case, you are co-owners who have together obtained appropriate expertise to ensure a successful subdivision application with the local council including doing all works necessary to ensure the subdivision and construction completes successfully. The requirements of the council were met and the completed subdivision will include 2 blocks containing completed new residential premises, one of which you will use as a residence.

The parties will be entitled to the joint receipt of a revenue amount upon sale of the lots.

The time of association is also discussed in GSTR 2004/6. It could be that the appropriate time is the date of acquiring the land or it could be later. The facts will best point to when this occurs. In this case, it is when you commenced taking steps in the execution of the subdivision project. More specifically the point that this occurred is when you decided to sell the rear block and to live in the front block. This point in time also is significant because it is principally when A and B indicated their change in intention for the use of the property from a personal asset to effective trading stock. This is also the most appropriate as it allows the parties to claim their input tax credits from an early point in time.

A and B are co-owners of property as they meet the tax law partnership definition and the facts of their co-relationship do not point to the options that the entities are acting separately.

As you are engaged in a joint enterprise and the circumstances and actions suggest the other elements of the definition are present, in our view you are making supplies as a tax law partnership for GST purposes.

Enterprises and tax law partnerships:

As TLPs are an entity for GST purposes, TLPs can carry on an enterprise. As such, partners can make supplies on behalf of the partnership and the TLP itself is capable of making supplies and acquisitions in the course of its enterprise.

As discussed below, section 9-20 defines 'enterprise'. Under paragraph 9-20(2)(c) an enterprise does not include activities done by a partnership (all or most of the members of which are individuals) without a reasonable expectation of profit or gain. In our view, the activities engaged in to ensure the works are completed, the marketing and sale of the lot will also be made with the expectation of gain by the partners for the partnership. This is consistent with their actions and the assessment that the parties are in the pursuit of profit.

The assessment whether a tax law partnership carries on an enterprise depends on an objective evaluation of the facts including the conduct of the co-owners of the property. From paragraph 62 of GSTR 2004/6, the following factors point to an enterprise being carried on by a tax law partnership and not by a partner in their own right:

•                     The existence of an agreement written or oral, setting out the mutual rights and obligations of the parties. It may include rules setting out how a co-owner may act for the mutual benefit of all involved in the arrangement or project. It notes the agreement may be entered into before the property is acquired. In this case, there is no written agreement, but the actions of the parties shows a common interest.

•                     The property is jointly acquired by the co-owners under a single contract. This factor is present in this case.

•                     A further factor positively indicating a TLP is operating an enterprise is the holding of the property as joint tenants as in this case.

•                     The co-owners fund the ownership of the property out of joint funds. In this case you funded the acquisition of the original property via a bank loan. The later construction of costs of approximately $X were funded by B's parents.

•                     The joint activities of the co-owners of the income producing property are for the mutual benefit of all the co-owners. A coordinated the construction and B provided the funding.

•                     The co-owners appoint a manager or agent to manage the enterprise, or one co-owner may act with the authority of all co-owners on behalf of the co-owners in managing the enterprise. We consider that A assumed this role given that he had the building qualifications and utilised the company account to acquire goods and services to complete the construction. This is in keeping with his skills in managing commercial projects in his paid employment albeit of non-residential construction.

•                     The income is or will be paid into a joint bank account. At this point the facts indicate that A and B are using a joint bank account to pay for inputs into the construction. The property has not completed construction so it is assumed that this will continue to be the case.

•                     The co-owners pay all liabilities in relation to the property. To date this has occurred. These liabilities are met by A and B.

Paragraph 62 makes the point that the enterprise involves the interests of all the co-owners of the income producing property.

GSTR 2004/6 also points to some factors which may indicative that there is no enterprise being carried on by the TLP and rather it is the co-owners themselves that may be carrying on an enterprise. These factors are:

•                     The co-owner is registered for GST in its own right in relation to a broader enterprise and acquires an interest in property carrying on that enterprise. This superficially describes A's involvement. However, A and B have a singular purpose of developing the lot for sale at a profit.

•                     There is an agreement between the parties not to form a partnership or carry on an enterprise together. In this case, the indicator is not present. A and B acted together to advance this subdivision, as co-owners, with a singular bank account in joint names. It is likely joint marketing and sale will be made under a single contract.

•                     Each co-owner makes independent decisions with regard to the acquisition of an interest in the income producing property. There is no evidence pointing to separate activity by the parties.

•                     Each co-owner's acquisition of the property is made separately. This is not in fact what occurred in this case.

•                     Each co-owner fund acquisition of their separate interests. This factor is also not present in this case.

•                     Each co-owner acts independently with respect to making their own investment decisions. This factor is not present.

•                     Each co-owner acts separately in the appointment of a manager. This is not met. The parties are acting jointly.

•                     The expenses are not paid out of a joint account. In this case they are made jointly.

•                     The manager accounts to each co-owner separately. This is not what occurs in this case.

•                     Each co-owner does not act for the mutual benefit or on behalf of the other co-owners and is mainly concerned with securing advanced returns from the investment. In this case the parties are obliged to act for mutual benefit.

•                     The parties hold as tenants in common. This is not present but it is acknowledged that this factor is not in itself decisive.

•                     The co-owners are paying into a mutual fund to pay liabilities each co-owner makes in the course of their own enterprise. There is no evidence provided that the parties each have their own enterprise.

GSTR 2004/6 from paragraph 96 discusses situations where the property is converted from a personal asset into an income producing property. In this case, this is what has effectively occurred given that the property was purchased for a personal reason which changed with the need for more space for your child. In situations where the factors below are present, it leads to the conclusion that a TLP is carrying on an enterprise.

Activities done in the commencement of the TLP enterprise are set out from paragraph 97 of that ruling:

•                     The making of an application for zoning: this factor is not present.

•                     Seeking local government approval to commence necessary building works: the parties jointly took this action with the assistance of G.

•                     The appointment of building contractors to carry out the works. This role was undertaken by A for approximately 20 hours per week.

•                     Making an application for finance to fund the acquisition of the land and building works. In this case, the parties decided that B would be sourcing the funds for the works and funds to acquire the original land were borrowed jointly from a commercial lender.

•                     Converting residential premises to commercial: not present in this case. But the premises are being converted to a revenue creating property. This factor is relevant to leasing enterprises whereas in this case the enterprise is the development of the land.

•                     Placing the premises with a real estate agent to manage. In this case, the project is being driven by the parties with input from experts and consultants. It is acknowledged that this factor is also more about rental. However, the property will be placed with an agent for the purpose of sale.

On this basis, our view is that the TLP enterprise partnership is dealing with potential profits and or losses and liabilities in the way the construction has been conducted. The partners only have an interest in the property coupled with a right to the share of the net income or losses (paragraph 104, GSTR 2004/6). This is supported by s.184-5(1) which removes any doubt that supplies are made by partners on behalf of the partnership in whatever form.

If a TLP is conducting an enterprise, it can be registered for GST if it meets the registration turnover threshold.

Taxable supply analysis

Section 9-40 requires you to pay GST on any taxable supply you make.

Section 9-5 provides that you make a taxable supply if:

(a)          you make the supply for consideration

(b)          the supply is made in the course or furtherance of an enterprise that you carry on

(c)           the supply is connected with the indirect tax zone (Australia), 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.

Based on the facts provided, the supply of the original property to you was of input taxed residential premises in the form of the older residence on what became lot X. That house was demolished and was only ever situated on lot X which is not the focus of the provision as you only intend at this juncture to supply lot Y. In the analysis below, the supply of lot Y may be input taxed if it is not new residential premises. There is no prospect that your supply of the back block (lot Y) will be GST-free.

For the sale of lot Y to be a taxable supply, all abovementioned conditions of a taxable supply under section 9-5 must be met.

You subdivided and intend to sell lot Y. The eventual sale of lot Y is a 'supply'. You will therefore satisfy the requirements of paragraphs 9-5(a) and 9-5(c) as you will make a supply of real property for consideration (assuming it is made for sale at arms' length) and lot Y is located in the indirect tax zone (Australia).

You have not as yet registered for GST.

Consequently, there are two related issues raised:

•                     whether the sale of lot Y is made in the course or furtherance of an enterprise that you carry on and, if so,

•                     whether you are required to be registered.

Enterprise

The term 'enterprise' is defined in subsection 9-20(1) to include, among other things, an activity, or series of activities, done:

•                     in the form of a business, or

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

Paragraph 9-20(2)(c) provides that an enterprise does not include an activity or series of activities by an individual or a partnership with no expectation of profit or gain. You are not an individual but you are in partnership, so it is relevant whether you have a prospect of profit or gain.

You purchased the property for $X, subdivided it and can sell lot Y for approximately $X. You had costs of construction on this portion of the original property of $X (including GST) well above what you originally forecast. You asked a builder what they would charge and considered you would not use a builder as you can save on this cost with your skillsets. On this basis, it is considered that there was a reasonable prospect of profit or gain. Additionally, you were given interest free funds to cover the construction of the building on lot X and Y. The exception in paragraph 9-20(2)(c) does not apply.

In addition to our discussion above about the TLP as an enterprise as an adventure in the nature of trade, we provide the following further commentary.

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 judgments 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 CLR 213; 87 ATC 4369; 18 ATR 699-700, the Full High Court had 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 from 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 out 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 CLR 213; 87 ATC 4368-4369; 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. In 2 July 2020, 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, at best, you changed your intention to reside in the original property and subdivided to sell the other lot. You stated your intention changed in or about 2021 to subdivide the property. However, in correspondence from G apologised for the delay in correspondence to you providing a reply on 2020. In that reply he set out the options in 4 drawings and varying configurations.

Additionally, you also obtained a builders' licence in 2020 suggesting a coherent plan to construct property in a professional manner. During the construction of lot Y you decided you would build on lot X and live in that residence and sell lot Y. Had you constructed the residence in lot Y intending to rent, this would be evidence more likely than not of an intention to hold it as a capital asset, but this is against your stated purpose.

You retained contractors and used your expertise to pursue the steps of the subdivision. The retention of experts is often present in commercial arrangements. You have not retained a builder as in substance you did these things, although you did use the company as it held a builders' licence to ensure that the units met the local government documentary requirements. The fact you did not do all of the work yourself is not necessarily indicative that you were not acting in a business-like manner. As local council requirements are becoming more complex and potentially more costly, the decision to employ consultants is the hallmark of business deals in more recent times. In Collins, the Administrative Appeals Tribunal (AAT) made this point at paragraph 63:

That the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land is, I would have thought, a hallmark of modern subdivision projects. While that may mean Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work.

Construction on the lots is a factor pointing to a one-off approach but includes the features of a business deal. In Whitford's Beach and Collins, the taxpayers only subdivided the land and did not sell the lots with a structure on it. In Collins, it was argued that they could have sold the lots with a residence on them but instead "left further profits on the table". Senior Member Olding took the view at para 64 that it was of little assistance to them as that choice is still one that every operator of a land development business has to make. As you went a further step fortifies the prospect that the aim of the partnership was to maximise its profit.

As the transaction may be described as one-off, we need to consider the extended definition of enterprise and whether these activities fall into the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression.

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 237 of MT 2006/1 states:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, See McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 6 in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (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 transaction 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 or transaction was entered into or carried out

(f)           the nature of any connection 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, the nature of the entity is that you are a partnership and, as discussed above, the activities are small scale. The arrangement is more complex than a mere subdivision and it was carried out in a manner expected of any business-like endeavour of land development by coordinating relevant expertise. The nature of the property transformed via the subdivision from a personal asset to live in into what effectively became trading stock, at least in the case of lot Y. The amount expended is quite low and profit is potentially moderate.

MT 2006/1 also discusses isolated transactions and sales 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 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.

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 you have changed your use of the property as you held the property for personal reasons but subsequently altered the configuration to sell a portion of it with a new residence constructed upon it.

There are no other land parcels being adjoined to yours but you do operate as a builder and as a developer would. You have the skills relevant to a builder and a property developer, but you do not hold yourself out in such a way that you have an office or letterhead. As noted above, given that subdivisions are becoming increasingly complex there is less weight given to the fact you do not have traditional badges of trade.

You have not, to date, treated expenditures as business expenses but you have kept apprised of the costs incurred in relation to the construction.

Additionally, you have built on the subdivided land which, as stated above, is of significance.

After weighing up all of the information, we consider that you are carrying on an enterprise of subdividing the land and selling new residential premises as an adventure in the nature of trade. In reaching this conclusion we acknowledge that your involvement in previous residential projects fell short of amounting to an enterprise.

Continuing the taxable analysis above, we consider that you have met 9-5(b) as you made a supply in the course of your enterprise.

We note that you are not registered for GST but we consider that the eventual sale of Lot Y will exceed the GST registration turnover threshold requiring you to register. The GST Act sets out at paragraph 23-15(1)(b) that the threshold is set by the regulations. Currently the registration turnover threshold is set by the A New Tax System (Goods and Services Tax) Regulations 2019 per section 23-115.01 at $75,000.

Therefore paragraphs 9-5(a) to (d) are met.

As stated above, the supply of lot Y is not GST free but we need to determine if you will be making an input taxed supply of residential premises. In particular residential premises are input taxed under subsection 40-65(1), and we need to consider if the premises are residential premises which are input taxed, or whether they are 'new residential premises' which are not input taxed. You will be moving into lot X as a residence upon completion.

Section 40-75 provides the meaning of 'new residential premises'.

(1)           Residential premises are new residential premises if they:

(a)          have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long-term lease; or

(b)          have been created through substantial renovations of a building; or

(c)          have been built, or contain a building that has been built, to replace demolished premises on the same land.

In our view, the construction of lot Y meets paragraph 40-75(1)(a) as you have built a structure that has not been previously sold as residential premises.

Subsection 40-75(2) provides for some exclusions and a time limit:

(2)           However, the residential premises are not new residential premises if, for the period of at least 5 years since:

(a)           if paragraph (1)(a) applies (and neither paragraph (1)(b) nor paragraph (1)(c) applies)-the premises first became residential premises; or

(b)           if paragraph (1)(b) applies-the premises were last substantially renovated; or

(c)           if paragraph (1)(c) applies-the premises were last built;

(d)           the premises have only been used for making supplies that are input taxed because of paragraph 40-35(1)(a).

Paragraph 40-75 (2)(a) operates to ensure that premises constructed on the land that have not previously been sold as residential premises remain new residential premises at least for 5 years since the completion of construction.

As there are no relevant exclusions from the definition of new residential premises, they are not input taxed when supplied. For the reasons stated above the supply of lot Y is therefore a taxable supply of new residential premises.

It is important to note that if the residence on lot X is sold within 5 years of the date of construction it would also be a taxable supply.

Question 2 - Is the company conducting an enterprise?

Under subsection 8(2) of the A New Tax System (Australian Business Number) Act 1999, a Corporations Act company is entitled to an ABN.

Under subparagraph 9-20(2)(c) an enterprise does not include a series of activities of an individual or a partner without reasonable expectation of gain. It follows that a company does not need to have an expectation of profit or gain to be entitled 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? confirms that MT 2006/1 has equal application to the meaning of 'entity' for GST purposes.

The company is a corporate entity and does not need to perform activities with reasonable expectation of gain to register for an ABN. However, on the facts of the case, the company has not undertaken the activities that the partnership has performed with an expectation of gain. You advised that the company was used to hold the builder's licence but all the activities you undertook in building the house on lot Y you did in your own capacity. You used the company to buy materials but the funds for the most part, did not come from a company account. Rather, you used the company as a means of obtaining cheaper materials.

The company is not engaged in the property development enterprise conducted by the partnership. Further, as you use the company principally to hold the builders' licence to ensure liability is quarantined to the company, we consider that the company is not engaged in an enterprise.

It is noted that the company is not registered for GST but currently has an ABN.

Question 3 - Input tax credits available if a taxable sale

As the sale of lot Y meets the taxable supply conditions, you may be entitled to input tax credits for any creditable acquisitions you make in the course of your development enterprise.

You purchased the premises as residential premises which are input taxed. This means that the original sale did not have GST in the price. There are no input tax credits that can be claimed in relation to the original purchase of the property. However, you demolished those premises and, with the assistance of subcontractors, you constructed the two new houses being lot X and lot Y where you currently reside. You intend to sell lot Y when construction completes on lot X.

Section 11-20 provides that you are entitled to input tax credits for any creditable acquisition that you make.

Section 11-5 sets out what is a 'creditable acquisition'. A creditable acquisition is made if you make an acquisition for a creditable purpose, the supply to you is a taxable supply, you provide or are liable to provide consideration for the supply and you are registered or required to be registered.

Under section 11-15, you acquire a thing for a creditable purpose to the extent that it is acquired in carrying on your enterprise and the acquisition relates to making supplies that would not be input taxed or private or domestic in nature (such as the construction of lot X as a residence).

You conduct an enterprise of developing real property. The supply you make of lot Y in relation to your enterprise is a taxable supply.

Your expenditure in relation to the existing residence on lot X are not a creditable acquisition to the extent that it relates to you using lot X as your residence. However, the construction of the new building on lot Y is undertaken as part of your enterprise.

Where your costs of advancing your enterprise, such as construction, are shared across both the site that you currently use as a residence and the site that you will sell in the course of your enterprise, the costs that you can claim are only partly creditable to the extent that they relate to the acquisitions used in your enterprise.

You will need to determine a fair and reasonable basis for making that apportionment unless the amounts are separately specified. Where available, there is a preference towards direct methods of calculation. For example, it would be fair and reasonable to calculate your input tax credit entitlements on the basis of which lot they relate to on a direct approach. If that is not possible, an indirect calculation relating to area may be appropriate.

Where costs are directly related to lot Y, provided you hold a tax invoice and you are within time you may claim the related input tax credits. Usually under section 93-5, the time limit is four years 'after the day on which you were required to give the Commissioner a GST return for the tax period to which the input tax credit would be attributable under section 29-10(1)'.

Where you do not hold a tax invoice but the company does hold a tax invoice, you will not be able to claim an input tax credit. Here the company has been issued with tax invoices. The tax invoice must also be valid. Under paragraph 29-70 (1)(c)(ii), it provides the following condition to be valid:

if the total price of the supply or supplies is at least $1,000 or such higher amount as the regulations specify, or if the document was issued by the recipient-the recipient's identity or the recipient's ABN;

Therefore, any tax invoices over $1000 that are made out to the company where they were actually acquired by you, will be invalid.

However, under subsection 29-70(1B), the Commissioner has a discretion to treat a particular document as a tax invoice. On the facts, it is not clear whether that discretion can be granted, but we are willing to give further consideration to this issue separate to this ruling.

Question 4 Notice requirements

Section 14-250 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a recipient of a taxable supply in certain circumstances involving real property is liable to withhold an amount, and pay that amount to the Commissioner.

Subsection 14-255(1) of Schedule 1 to the TAA provides that a supplier of residential premises by way of sale must, before making the supply, give to the recipient a written notice stating whether the recipient will be required to make a payment to the Commissioner under section 14-250 of Schedule 1 to the TAA.

Given the analysis above in question 1 indicating that you will be making a taxable supply of new residential premises, prior to settlement of lot Y, you must give written notice to the recipient stating they are required to withhold GST and pay that amount to the Commissioner. In this case, your supply to the recipient is a taxable supply and, as such, the recipient will be required to withhold GST under section 14-250 of Schedule 1 to the TAA.

Law Companion Ruling LCR 2018/4 Purchaser's obligation to pay an amount for GST on taxable supplies of certain real property (LCR 2018/4) discusses GST notification requirements for vendors and obligations of purchasers of new residential premises. Paragraph 44 of LCR 2018/4 sets out the various rates of withholding that may apply depending on the circumstances. On a fully taxable sale, the withholding is 1/11^th of the contract price. In the event that you are able to apply the margin scheme the appropriate withholding rate will be 7 percent of the contract price.

Question 5 - entitlement to input tax credits for the company

The analysis in question 3 applies to the company. It must make a creditable acquisition in order to be entitled to input tax credits. Section 11-5 requires the company to make an acquisition for a creditable purpose, the supply to it must be a taxable supply, and it must provide or be liable to provide, consideration for the supply and finally, it must be registered or required to be registered for GST.

On the facts provided, the company as discussed above in question 2 is not engaged in an enterprise. Section 11-5 requires the company acquire things to the extent that they are used in their enterprise. As it has no enterprise, the acquisitions are not for a creditable purpose. Additionally the company did not provide the consideration as that came out of your joint account. Finally, the company is only entitled to input tax credits if it is registered or required to be registered. As it is not registered or required to be registered, under section 11-5, it is not entitled to input tax credits.

You advised that the company is merely to house your builders' licence and is not intended to operate in your enterprise. On this basis, even though the company does hold tax invoices, it has not made creditable acquisitions and cannot claim input tax credits.

Issue 2: Income Tax

Questions

6. Will the disposal of the property (Back House) be a mere realisation for income tax purposes?

7. If the disposal of the property (Back House) is not a mere realisation, can you use the market value of the property in calculating the net profit from the sale of the property (Back House) for the purposes of subsection 6-5(1)?

8. Can you access the main residence exemption if you dispose of the property (Back House)?

Summary

The disposal of the Back House is not a mere realisation and the net profit is treated as ordinary income. To determine the net profit you can use the market value applicable to the subdivided allotment for the Back House at the time when it was ventured into the property development. The main residence exemption does not apply to the Back House.

Detailed reasoning - income tax

For questions 6 to 8, all legislative provisions references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 6

There are three ways profits from a land subdivision can be treated for taxation purposes:

•                     As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock.

•                     As ordinary income under section 6-5, on revenue account, as a result of an isolated business transaction entered into in carrying out a business operation or commercial transaction.

•                     As statutory income under the capital gains tax (CGT) legislation (section 102-5), on the basis that a mere realisation of a capital asset has occurred.

Ordinary income - carrying on a business

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? (TR 97/11), provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole.

Ordinary income - isolated transaction

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199 (Myer Emporium)).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3), considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 as ordinary income.

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.

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 taxpayer's 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.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Paragraph 13 of TR 92/3 lists the following factors:

•                     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

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

In addition to the above, 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 (MT 2006/1), provides a list of factors relevant to isolated transactions and sales of real property (paragraph 265). 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 listed as follows:

•                     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

•                     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

•                     buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Capital gains tax (CGT)

CGT is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1 (section 104-10 of the ITAA 1997), occurs when you dispose of your ownership interest in a CGT asset to another entity.

Application to your situation

In your case, you are not considered to be carrying on a business of buying, selling or developing land. However, we do consider that you have made a profit from an isolated business or commercial transaction.

We consider that you undertook the property subdivision with the intention of making a profit by selling the back house. Making an overall assessment of the factors set out in TR 92/3, we consider that your activities are a separate business operation or commercial transaction.

You instigated the process of subdividing the property within a short timeframe after purchasing the property. Correspondence suggests that you had formed this intention by 2020 at the latest, and quite possibly earlier.

You engaged contractors, and undertook the process of subdividing the property using your own expertise. You operated through your own company, which held the building licence, to complete the building of the back house and meet local government requirements. You have previous experience with property development.

Your intention in undertaking the property subdivision was to make a profit and this was carried out by way of a business operation or commercial transaction, in a similar manner to a property developer carrying on a business.

We consider that the net profit from the sale of the back house is ordinary income and assessable pursuant to section 6-5.

Question 7

For the purposes of determining the net profit that is assessable under subsection 6-5(1), you use the market value applicable to the subdivided allotment for Lot X at the time when it was ventured into the property development. Taxation Determination TD 97/1 Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business? provides that it is the market value of the land when it is ventured into a business of development, subdivision and sale that should be taken into account when calculating net profit.

Question 8

The main residence exemption applies where you make a capital gain or capital loss from a CGT event that happens in relation to a dwelling that is your main residence (section 118-110). The main residence exemption would apply to the sale of the back property if it remains your main residence until you sell the property.

However, under section 118-20 any capital gain you make in relation to the sale of the back property is reduced to the extent that the amount is assessable income under another provision; in your situation under section 6-5.