Edited version of private advice

Authorisation Number: 1052173163461

Date of advice: 26 September 2023

Ruling

Subject: CGT - subdivision

Question1

Is the sale of the subdivided blocks a taxable supply?

Answer

No, you are not carrying on an enterprise and you are not making a taxable supply.

Question2

Are the proceeds received from the sale of the subdivided blocks assessable as ordinary income, on revenue account, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development or as a result of an isolated profit-making transaction?

Answer

No.

Question3

Are the proceeds received from the sale of the subdivided blocks assessable as statutory income, on capital account as the mere realisation of an asset, under Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property and built a house which you moved into.

At the time of purchase, the local council did not allow subdivision at this location.

A subdivision was undertaken where your residential house block was separated so that you could sell and downsize, due to your health and inability to upkeep the large house. A smaller house was then built on the remaining lot.

During this time, you decided to reconfigure this block, again in two stages, to make three blocks.

A block was created and sold as a vacant land.

There are now two remaining blocks.

There is no intention at the moment of selling the remaining blocks.

There has been no business activity carried out on the land.

You have not undertaken any other subdivision activities in the past and do not intend to do any future subdivisions.

There has only been minimal work done to satisfy the council requirements in relation to the subdivision and you carried out the subdivisions yourself.

No planning documents were prepared prior to subdivision or sale.

The margin scheme has not been applied to the property.

The property has never been used to produce income nor has it been held by you as a business asset.

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(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Question 1

All legislation, unless specifically mentioned, in this question refer to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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

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

(a)  you make the supply for consideration; and

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

(c)   the supply is connected with Australia; and

(d)  you are registered, or required to be registered.

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

For the supply of blocks to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

You will be selling blocks for consideration in Australia.

Therefore, paragraphs 9-5(a) and 9-5(c) are satisfied. Further, the supply of block will be neither GST-free nor input taxed.

Accordingly, we must determine whether your sale of the blocks is in the course or furtherance of an enterprise that you carry on (9-5(b)) and whether you are required to be registered for GST (9-5(d)).

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

An enterprise is an activity, or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

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

[...]

The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

In subparagraph 9-20(1)(a), an issue to be decided is whether you conducted an activity or series of activities that amount to a business, or is in the form of a business of property development.

In subparagraph 9-20(1)(b), we have to assess whether your activities are a one off, adventure in the nature of trade in dealing with the property as the activities of construction and eventual sale potentially are in the commencement and termination of a property development enterprise.

In subparagraph 9-20(1)(c), the definition of 'enterprise' states that leasing, licencing or other grants of land can amount to an enterprise. We can exclude this subparagraph from further consideration in this ruling as it is not applicable.

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 guidance on what activities will amount to an enterprise for GST purposes.

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 the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Paragraph 178 of MT 2006/1 with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•         a significant commercial activity;

•         the purpose and intention of the taxpayer in engaging in the activity;

•         an intention to make a profit from the activity;

•         the activity is or will be profitable;

•         repetition and regularity of activity; and

•         the activity is organised and carried on in a businesslike manner.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. In particular:

(a)  a business encompasses trade engaged in on a regular or continuous basis.

(b)  an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal.

Given the facts of your case, we consider that the sale of the subdivided blocks does not display the characteristics of a "business" as listed above.

The facts indicate that the level of commercial activity is on the lower end of the scale. Your initial purpose or intention in this arrangement was to keep the property. You have not previously undertaken a development or sale of this nature. The development of the land is to secure council approval for the subdivision only. This factor, of itself, does not point to an enterprise. It is noteworthy that you are not employed in any sector related to building or construction. This suggests it is less likely to be a business-like venture.

MT 2006/1, paragraphs 233 to 257 explains that an entity is carrying on an enterprise where activities are being done 'in the form of an adventure or concern in the nature of trade'. This is not a defined term. However, MT 2006/1 points out in paragraph 241 that this expression was used in the definition of enterprise as a result of a lengthy history of case law setting out the taxation of isolated transactions.

On balance, we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not large scale; you do not have a business plan for developing the property. Your principal driver for entry into the sales is your deteriorating health and increase in your costs.

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

Further where the activities involve subdivision and sale of real property, MT 2006/1 lists a number of factors drawn from Statham & Anor v. Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v. Federal Commissioner of Taxation 97 ATC 5135 (Casimaty) to determine whether the activities are an adventure in the nature of trade. If several of these 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 set out at paragraph 265 of MT 2006/1:

•         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.

While holding an asset for a considerable period of time may indicate that it is a long-term capital asset, the intention of the taxpayer at the time of acquisition, including any subsequent change in intention or use of the asset is an important consideration.

The facts above are not indicative of a profit motive per se. We consider that in terms of assessing the scale of your purchase, development and building a house on a block and the sale, if viewed in isolation, would not indicate that your activity was in the form of a business.

You are not carrying out a large-scale construction on multiple lots.

In applying paragraph 265 of MT 2006/1,

•         there was no additional land acquired to be added to the original parcel of land;

•         the land was not accounted as a business asset;

•         there was no coherent plan for the subdivision of the land;

•         there was no manager, office and letterhead;

•         there were no borrowed funds which financed the acquisition or subdivision and a house was erected on the land.

This indicates that initially you did not have the intention to sell at a profit. Holding an asset for private use is not normally within the realm of an enterprise.

Paragraph 266 of MT 2006/1 provides that 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. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Of relevance are Examples 33 & 34 of MT 2006/1:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Example 34

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

On the facts provided, we are of the view that your situation is similar to the examples provided in paragraphs 33 and 34 of MT 2006/1 and consider that your subdivision of the land is a mere realisation of a capital asset.

Consequently, we consider that your activities at the subdivided blocks are not 'an adventure or concern in the nature of trade'.

You are not carrying on an enterprise of property development. Your supplies of the subdivided blocks are not in the course or furtherance of an enterprise that you carry on and you do not satisfy the requirements in section 9-5(b). Therefore, you are not making a taxable supply of the subdivided blocks and no GST is payable on their sale.

Questions 2 and 3

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

1. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;
2. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;
3. As statutory income under the capital gains tax legislation.

Carrying on a business

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

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

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

• whether the activity has a significant commercial purpose or character
• whether the taxpayer has more than just an intention to engage in business
• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity
• whether there is regularity and repetition of the activity
• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business
• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit
• the size, scale and permanency of the activity, and
• whether the activity is better described as a hobby, a form of recreation or sporting activity.

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

Isolated transactions

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

Profit from an isolated transaction will be ordinary income where:

• the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain and
• the transaction was entered into, and the profit was made, in the course of carrying on a business operation or commercial transaction.

Taxation Ruling TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

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

Taxation Ruling TR 92/3 outlines that the relevant intention of the taxpayer, in making a profit or gain, is not the subjective intention or purpose of the taxpayer, but rather their intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Application to your circumstances

The factors to consider when determining if a business is being carried for income tax purposes are similar to those considered for GST purposes. Therefore, as discussed previously with regards to GST, an analysis of the factors points towards that you have not been carrying on a business.

Additionally, based on the information provided and having regard to the factors set out in TR 93/2, the subdivision and sale of the land is not considered to be commercial in nature and you are not considered to be engaged in a profit-making undertaking.

Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income under section 6-5 of the ITAA 1997. Rather, the sale is considered a mere realisation of your capital asset and the transaction is subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.