Edited version of private advice

Authorisation Number: 1052087403981

Date of advice: 30 March 2023

Ruling

Subject: Sale of property

Income Tax

Question 1

Will the gain made from the proposed sale of the units be assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The proceeds from the sales should be included in your assessable income as Trustee of the Trust.

Question 2

Will you be assessed on the capital gains made from the proposed sale of the units?

Answer

No.

GST

Question 3

Will the proposed sale of the units be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The sale of the property will be a taxable supply made by the Trust. GST is payable on the sale by the Trust.

Question 4

If GST is payable on the sale, which entity should be required to register for GST?

Answer

The Trust should be registered for GST.

Question 5

If the Trust is registered for GST, will the registered entity be entitled to claim the GST paid in developing the land?

Answer

Yes. The Trust will be entitled to claim the GST paid in the costs incurred in developing the land, subject to the four-year rule.

Relevant facts and circumstances

Upon your father's death, you were appointed under the will as executor of your father's estate and trustee of the trust created (the Trust). The will instructed you, as trustee, to administer the estate for the benefit of your father's beneficiaries.

The estate consists of the specified residential property. The property was purchased in the last century. At the time probate was granted, the property was valued at $X.

You have leased the property to unrelated parties for a number of years. Neither you nor the beneficiaries resided at the property.

Several years later, with the agreement of the beneficiaries, you decided to redevelop the property into a number of units. This decision was motivated by the fact that the ongoing maintenance of the original dwelling was likely to cost as much as the rent it produced. At a later point in time, you decided that you will sell the units and distribute the proceeds of the sale to the beneficiaries and close the trust.

You engaged an architectural draftsman to draft plans to redevelop the property. These plans were submitted to the local council and approved by the council. The original dwelling was demolished in the process of redevelopment.

You entered into a Deed of Agreement with the beneficiaries. In the Deed, the beneficiaries consented to you constructing the units on the property. The Deed stated that the units would be transferred to each of them once completed. The vacant block was valued at $Y at the time.

You took out a loan of $Z from a bank in order to construct the units. A related party was added to the title of the property to secure the loan. You engaged a construction company to build the units.

The construction of the units was completed, and the occupation certificates were granted. You applied to council to subdivide the block.

Council recently approved the subdivision application.

The units are currently valued at more than $X each.

You (with agreement of the beneficiaries) now intend to sell the units as soon as practicable and distribute the proceeds evenly between the beneficiaries. This distribution will now occur in place of the transfer of the units directly to the beneficiaries, as was outlined in the Deed of Agreement. After this you will wind up the trust.

You are currently not registered for the goods and services tax (GST) either individually or as Trustee of the Trust, or in any other capacity. The Trust is currently not registered for GST.

You have paid an amount of GST included in the costs that you have paid to develop the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 118-10

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 subsection 184-1(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-10(1)

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

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

Reasons for decision

Detailed reasoning

Income tax

Ordinary income

Subsection 6-5(2) of the ITAA 1997 states that assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during an income year. Such income is described as being revenue in nature.

Profits from an isolated transaction

Ordinary income is not confined to profits from business activities. Profits made from an isolated transaction entered into with a profit-making intention are also revenue in nature.[1] The intention of the taxpayer is discerned from an objective consideration of the facts and circumstances of the case.[2] The intention of profit-making need not be the sole purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.[3]

The intention to enter into an isolated profit-making transaction may exist at the time of purchasing property or it may form at a later point in time.[4] Where property that was committed to a profit-making undertaking some time after its acquisition, the market value of the property at the time it is so committed must be taken into account in determining the profit arising from the carrying out of the undertaking.

Tax on capital gains

Section 102-20 of the ITAA 1997 states that your net capital gain for the year is included in your assessable income. A capital gain or loss is incurred if a CGT event happens to a CGT asset. Real property is considered a CGT asset. CGT event A1 occurs when you dispose of a CGT asset.

Section 118-20 of the ITAA 1997 is an anti-overlap provision. It operates to reduce any capital gains by amounts which are already included in your assessable income by another provision.

Mere realisation or profit-making venture

The mere realisation of property is taxed as a capital gain. Mere realisation occurs when a gain is made on the sale of a property merely by realising its enhanced value, where it is not carried on as part of a business operation or profit-making venture. Any profit realised is not considered ordinary income and instead will be a capital gain.

Transactions that are simply conducted in an advantageous manner are considered mere realisations.[5] Typically in such situations, only a minimal amount of work has been undertaken in order to prepare the land for sale.

Paragraph 13 of Taxation Ruling TR 92/3 lists some of the factors the Commissioner will consider in determining whether an isolated transaction amounts to a business operation or commercial transaction:

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.

Application to your circumstances

Your actions have gone beyond the steps needed to merely realise the value of the property. A mere realisation would have likely been confined to demolishing the original dwelling and subdividing the land.

As a result of the manner in which you have redeveloped the property, the sale of the units will be considered an isolated profit making-transaction. Any profit made from the sale of the units will be ordinary income and assessable under section 6-5 of the ITAA 1997.

The main residence exemption in section 118-10 of the ITAA 1996 is not relevant as it only an exemption to tax on capital gains. The exemption does not apply to ordinary income.[6]

GST

GST is payable on taxable supplies.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

Taxable supply

You make a taxable supply if you meet the requirements of section 9-5 of the GST Act, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

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

(c) the supply is *connected with indirect tax zone; and

(d) You are registered or required to be registered.

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

(*Denotes a term defined in section 195-1 of the GST Act)

In accordance with subsection 184-1(3) of the GST Act, a person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity for GST purposes. For example, where an individual is the trustee of a trust, the individual in his or her personal capacity is one entity. As trustee of a particular trust, he or she is a different entity.

The executor of a deceased estate is a trustee of the deceased estate trust.

On the facts, we consider that you have been acting as trustee of the trust rather than in your individual capacity, in your dealings regarding the property. Therefore, the relevant entity for GST purposes regarding the sale of the property is the trust, with you acting as trustee. You are currently not registered for GST in your capacity as trustee of the trust.

The sale of the units will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. This is because the sale will be a supply made for consideration and the property is located in Australia.

The sale of the newly constructed units under the present circumstances will be neither GST-free nor input taxed.

Therefore, what remains to be determined is whether the sale of the units will be made in the course or furtherance of an enterprise that you carry on in your capacity as trustee, and whether, in your capacity as trustee, you will be required to be registered for GST at the time of settlement of the sale.

GST registration

Section 25-1 of the GST Act provides that you must make your application to be registered for GST within 21 days after becoming required to be registered.

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) it is carrying on an enterprise, and

(b) its GST turnover meets the registration turnover threshold.

Carrying on an enterprise

Section 9-20 of the GST Act defines 'enterprise' to include, amongst 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.

The ATO view on the meaning of the term 'enterprise' is explained in detail in 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).

Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

Paragraph 178 of MT 2006/1 lists a number of indicators to be considered when determining whether an activity or series of activities amount to a business.

It is also relevant to consider the length of time the property had been held and to what purpose it had been put to in that time.

Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one-off transaction may fall into the category of 'an adventure or concern in the nature of trade' where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

No single factor will be determinative of whether the activity or activities will constitute either a business or an adventure or concern in the nature of trade.

In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case.

In accordance with section 195-1 of the GST Act, the term 'carrying on an enterprise' includes anything done in the course of the commencement or termination of the enterprise, for example, selling assets as part of the winding up of the enterprise.

In accordance with paragraph 140 of MT 2006/1, an enterprise terminates when the activities related to that enterprise cease. Ordinarily, that occurs when all assets are disposed of or converted to another purpose or use and all obligations are satisfied. Disposal of asset may include the sale, scrapping, or other disposal of the assets.

GST turnover

The applicable registration turnover threshold in this case is $75,000. You have a GST turnover that meets the registration turnover threshold if your current GST turnover is at or above $75,000 and your projected GST turnover is not below $75,000.

You must register for GST if you are carrying on an enterprise and your GST turnover is at or above the registration turnover threshold of $75,000.

You may choose to register if the turnover of your enterprise is below the registration turnover threshold.

Goods and Services Tax Ruling GSTR 2001/7 explains the meaning of GST turnover and the effect of section 188-25 of the GST Act on the calculation of projected GST turnover. GSTR 2001/7 is available on our website at www.ato.gov.au

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

•         your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

•         your projected GST turnover is at or above the turnover threshold.

Your 'current GST turnover' is the sum of your turnover for the current month and the previous 11 months.

Your 'projected GST turnover' is the sum of your turnover for the current month and the next 11 months. However, turnover from making input taxed supplies is not included when calculating your current and projected GST turnovers.

It is necessary to determine whether your projected GST turnover meets the threshold. You are required to be registered for GST if your projected GST turnover is at or above $75,000.

Sale of the units

We need to consider whether the sale of the units is included in the projected GST turnover.

Section 188-25 of the GST Act provides that when calculating your projected GST turnover, you do not include any supplies made, or likely to be made by you:

•         by way of transfer of ownership of a capital asset, or

•         solely as a consequence of ceasing an enterprise or substantially and permanently reducing the size or scale of your enterprise.

For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Capital asset

GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover states at paragraphs 34 and 35:

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

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction...

GSTR 2001/7 further states the following at paragraphs 46 and 47:

Isolated Transactions

46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade.²⁰ As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover.

47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise.

According to paragraphs 46-47 of GSTR 2001/7, an enterprise may consist of an isolated transaction resulting in the creation of or dealing with a single asset. The disposal of that asset at the completion of that isolated transaction is not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances, the enterprise ceases as a consequence of the disposal of the asset rather than the asset being disposed of in consequence of the ceasing to carry on the enterprise.

Application to your circumstances

On the facts provided, we consider that your activities involving the demolition of the existing dwelling, construction of a number of units and selling of the newly constructed dwellings constitute activities done in the form of an adventure or concern in the nature of trade and thus amounts to 'carrying on an enterprise' for GST purposes.

We consider that in your capacity as trustee of the trust, you are carrying on an enterprise of property development. Also, as you are deriving income from the sale of the units itself, the asset will be of a revenue nature and connected to the enterprise of property development. The sale will not be the transfer of a capital asset.

Moreover, the sale of the units will not be in consequence of the ceasing to carry on the enterprise. Rather, the enterprise ceases as a consequence of the sale.

The sale of the new residential premises is not an input taxed supply. Therefore, the proceeds from the sales are included when calculating the projected GST turnover. Based on the expected $ of the proceeds from the sales of the units, the trust will have a GST turnover of more than $75,000. The GST turnover will meet the $75,000 GST registration turnover threshold, and all the requirements of section 23-5 of the GST Act will be satisfied.

Consequently, the trust will be required to be registered for GST at the time of settlement.

It is considered that the winding up of an enterprise will still be part of the carrying on of that enterprise. As the sale of the units will be something done in the course of winding up the trust's enterprise, this will meet the requirement of paragraph 9-5(b) of the GST Act.

The sale is neither GST-free nor input taxed in the given circumstances. Therefore, all the requirements of a taxable supply under section 9-5 of the GST Act will be met at the time of settlement, and the sale of each newly constructed unit will be a taxable supply.

Consequently, GST will be payable by the trust on the sale of each of the units constructed on the land inherited by the beneficiaries. The trust will be liable to remit the GST payable on those sales.

Claiming input tax credits

An entity must be registered for GST to claim GST credits. In this case, the Trust is the entity that must be registered for GST and that would be entitled to claim GST credits.

If you are registered for GST, you may be entitled to claim input tax credits or GST credits for any GST included in the price you pay for things you use in your enterprise where those purchases are related to the taxable supplies that you make (creditable acquisitions). If you are entitled to a GST credit, you need to claim it within four years.

You claim GST credits in your business activity statement (BAS). You must hold a tax invoice for the creditable acquisitions when you make the claim in your BAS.

Your entitlement to a GST credit ends four years from the due date of the earliest activity statement in which you could have claimed it. You cannot claim the GST credits where the time limit for claiming a GST credit for the acquisition has ended.

[1] Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199.

[2] Taxation Ruling TR 92/3, para [7].

[3] Taxation Ruling TR 92/3, para [8].

[4] Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355.

[5] Californian Copper Syndicate (Limited and Reduced) v Harris (1904) 5 TC 159.

[6] Tax Determination TD 92/135.