Edited version of private advice

Authorisation Number: 1052176148526

Date of advice: 8 November 2023

Ruling

Subject: CGT and GST - property development

Issue 1 Income tax and capital gains tax (CGT)

Question 1

Will the profit from the sale of the subdivided lots located at in Queensland, be treated as ordinary income by you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development?

Answer

No.

Question 2

Will the profit from the sale of the subdivided lots be treated as ordinary income by you, under section 6-5 of the ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character?

Answer

Yes.

Question 3

Will the profit from the sale of the subdivided lots be treated as statutory income by you, under the capital gains tax provisions in part 3-1 and part 3-3 of the ITAA 1997 as a result of a realisation of a capital asset?

Answer

No.

Question 4

Will you be entitled to disregard capital gains made on the disposal of any subdivided lots under the main residence exemption of subdivision 118-B of the ITAA 1997?

Answer

No.

Issue 2 - Goods and services tax (GST)

Question 5

Will the sale of subdivided lots by you, be a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commenced on:

1 January 20xx

Relevant facts and circumstances

You and your partner acquired a parcel of residential land with an existing dwelling (the Property).

You have occupied the Property as your principal place of residence since it was purchased.

Following separation from your partner, you acquired your partner's interest in the Property.

You are not registered for GST and your Australian Business Number (ABN) has been cancelled on a specified date.

On the relevant date, you approached a Planning Company to explore the feasibility of reconfiguring the Property into 5 lots (including your main residence). At that time, you intended to sell four vacant lots as you considered that the cost of constructing residential dwellings would be prohibitive. You would retain your main residence on the fifth lot.

You mortgaged the Property with a financial institution for an amount to cover Development Application (DA) and OPWS costs associated with the subdivision.

You applied for a DA for the Property from the local Council. The DA was approved and did not require you to rezone the property. The approved DA comprised the subdivision of 5 lots with the existing dwelling located at Lot 5.

Subsequent to the approval of the DA, you decided to build houses/duplexes on the four newly created lots. Your intention was to rent out the four residential dwellings to provide a retirement income.

The subdivision of the Property has commenced.

A draft Construction Contract (Contract) has been provided between Company A and Company B. This Contract was executed by you on a specified date.

Company B was registered for GST and will undertake the development of the Property. Company B will invoice you for the costs associated with the subdivision and development of the land. You will finance the payment to Company B upon settlement of the subdivided properties/townhouses.

You have also provided a copy of an 'Application for Finance from a Financial Institution to Coy B. The purpose of the loan is described as 'Construction' and the term is one year. A registered mortgage over the Property is the proposed security for the mortgage. At the time of this ruling, no loan arrangements have been concluded with the Financial Institution.

Any additional funds required will be funded from personal savings.

Due to the rising costs associated with the development of the property, you decided to sell two of the newly created vacant lots.

You have executed sale contracts for Lot 3 and Lot 4. The Sale price of the respective lots were provided. The contracts will not settle until separate titles have been issued. Civil works need to be completed prior to issue of the titles.

No construction approval has been granted for the proposed residential dwellings on the remaining vacant lots. You further have not entered into an agreement for construction of dwellings on the remaining vacant lots.

You do not have a business plan and have not engaged a developer to undertake the project.

You intend to sell your primary residence, located on Lot 5, to provide additional funding for the construction of the townhouses on Lot 1 and Lot 2. Once constructed, you will occupy one of the townhouses as your primary residence. The second townhouse will be rented to provide you with a retirement income.

You have not been involved in property development or subdivision previously. You do not have any specialist or subdivision knowledge.

Settlement of Lots 3 and 4 will take place in the next 2-3 months depending on when titles are issued for the respective lots.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 subsection 118-115(1)

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1936 section 118-125

Income Tax Assessment Act 1936 subsection 118-130

Income Tax Assessment Act 1997 subsection 995-1(1)

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

A New Tax System (Goods and Services Tax) Act 1999 section 25-1

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-5(1)

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

A New Tax System (Goods and Services Tax) Act 1999 subsection 188-15(1)

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Questions 1, 2 and 3

Summary

The profits from the sale of the subdivided lots are considered ordinary income and are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as an isolated commercial transaction with a view to profit.

Detailed reasoning

Generally, an amount received in relation to subdividing land would be assessable either as:

• ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as business income,
• ordinary income under section 6-5 of the ITAA 1997 as an isolated commercial transaction with a view to a profit, or
• statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 of the ITAA 1997 as a mere realisation of a capital asset.

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states the term business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. The question of whether a business is being carried on is a question of fact and degree. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators should be considered in conjunction with the other factors.

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.

Profits from an isolated transaction

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit-making purpose can be assessable income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refer to:

a)    those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

b)    those transactions entered into by non-business taxpayers.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable.

A profit from an isolated transaction will generally be income when:

a)    the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

b)    the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction.

Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.

TR 92/3 lists the following factors which are relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

• the nature of the entity undertaking the operation or transaction;
• the nature and scale of other activities undertaken by the taxpayer;
• the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;
• the nature, scale and complexity of the operation or transaction;
• the manner in which the operation or transaction was entered into or carried out;
• the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;
• if the transaction involves the acquisition and disposal of property, the nature of that property; and
• the timing of the transaction and the various steps in the transaction.

In contrast, paragraph 36 of Taxation Ruling TR 92/3 notes that 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Paragraphs 41 and 42 of TR 92/3 outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

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.

Numerous cases have considered the assessability of profits or proceeds from the sale of land including the following case:

Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer's activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land.

In determining whether activities relating to isolated transactions are a profit-making undertaking, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however, there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion.

Capital gains tax

Under section 6-10 of the ITAA 1997, assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5 of the ITAA 1997.

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. Real estate property is considered a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset (section 104-10 of the ITAA 1997).

When a CGT asset (the original asset) is split into 2 or more assets, such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event (subsection 112-25(2) of the ITAA 1997).

In Taxation Determination TD 97/3, the Commissioner considers that the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3 (ITAA 1997), to divide the original land parcel into two or more assets (viz., the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.

Application to your circumstances

In your case, you are an individual taxpayer who is not in business who acquired the Property and have resided in the Property for in excess of 20 years. You obtained full ownership on a specified date after you separated from your partner. You later decided to subdivide the Property into five lots and intend to sell four vacant lots.

Albeit you are not in the business of property development, to decide if any profit you make is ordinary income, we need to consider if the transaction was entered into, and the profit was made in carrying out a commercial transaction.

A balanced view of the observations of your circumstances, with no one feature being determinative in isolation, reasonably leads to a conclusion that your intention for holding the property has changed to a profit-making undertaking.

Although the Property is your main residence and has been for some years, the intention in relation to the property changed when you committed to this undertaking in relation to the subdivision of the land and the sale of the lots by approaching a company to subdivide the land. The decision to pursue the subdivision shows your choice to engage in exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the lots.

It is viewed that your subdivision activity is of a sufficient scale to characterise it as a commercial or profit-making undertaking.

We have determined that based on the facts of this situation, the sale of Lot 3 and Lot 4 is an isolated profit-making undertaking on revenue account and is assessable under section 6-5 of the ITAA 1997.

Question 4

Summary

You are eligible for the main residence exemption under section 118-110 of the ITAA 1997 when you dispose of Lot 5 that has the existing dwelling. The dwelling has been your main residence throughout your ownership period.

Detailed reasoning

Section 118-110 of the ITAA 1997 allows a capital gain or capital loss from a CGT asset that is a dwelling, or your ownership interest in it, to be disregarded if:

(a) the taxpayer is an individual, and

(b) the dwelling was the taxpayer's main residence throughout their ownership period, and

(c) the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, a deceased estate.

The term "dwelling" has its ordinary meaning. Subsection 118-115(1) of the ITAA 1997 states that a dwelling includes:

a)    a unit of accommodation that

                      i.        is a building or is contained in a building; and

                     ii.        consists of wholly or mainly of residential accommodation; and

b)    a unit of accommodation that is a caravan, houseboat or other mobile home; and

c)    any land immediately under the unit of accommodation.

Land adjacent to a building only attracts the main residence exemption if the land (including the land on which the dwelling is built) is two hectares. In this case, the CGT exemption is available to the extent that the land was used primarily for private or domestic purposes in association with the dwelling (section 118-120 of the ITAA 1997).

A dwelling can only be the main residence of the taxpayer if the taxpayer actually occupies the dwelling. The mere intention of a taxpayer to occupy the dwelling as a main residence is insufficient to obtain the exemption.

For the purpose of the main residence exemption, the taxpayer's ownership period for a dwelling is the period on or after 20 September 1985 when the taxpayer had an ownership interest in the dwelling or in land (acquired on or after 20 September 1985) on which the dwelling is later built (section 118-125 of the ITAA 1997).

Section 118-130 of the ITAA 1997 states that a taxpayer has an ownership interest in land or a dwelling if:

a)    for land - you have a legal or equitable interest in the land or a right to occupy it

b)    for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which the dwelling is erected, or a licence or right to occupy it; or

c)    for a flat or home unit - you have

                      i.        a legal or equitable interest in a stratum unit in it; or

                     ii.        a licence or right to occupy it; or

                    iii.        a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected that gives the taxpayer a right to occupy it.

Application to your circumstances

You and your partner had ownership of the Property since it was purchased. You then acquired your partner's interest in the Property after your separation approximately 8 years later. The existing dwelling has been your main residence throughout your entire ownership period. As discussed earlier, the subdivided lots are then treated as separate assets under the capital gains provisions.

Lot 5 that has the existing dwelling remains your main residence. Hence you are eligible for the main residence exemption when you dispose of lot 5 the includes your residential dwelling.

Lots 1, 2, 3 and 4 are vacant lots. These lots are considered separate assets after the subdivision and when separate titles are issued. Hence, they will not qualify for the CGT main residence exemption.

As previously discussed, the disposal of lots 3 and 4 is considered an isolated profit-making undertaking on revenue account and is assessable under section 6-5 of the ITAA 1997.

Issue 2 - Goods and services tax (GST)

Question 5

Summary

The sale of lots 3 and 4 will be taxable supplies, hence GST is payable pursuant to section 9-40 of the GST Act. All of the positive limbs of a taxable supply as defined in section 9-5 of the GST Act are satisfied. Furthermore, the sales of the two lots are neither GST-free nor input taxed.

Detailed reasoning

Hereon in, unless otherwise stated,

• all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
• all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
• all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you must pay the GST payable on any taxable supplies that you make.

The requirements of a taxable supply are set out in section 9-5, 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)

On the facts of this case, there are no provisions in the GST Act to make the sale of the subdivided lots of vacant land GST-free or input taxed. The sale of Lot 3 and Lot 4 will satisfy the requirements of paragraphs 9-5(a) and 9-5(c). This is because the sale will be a supply made for consideration (the sale price of the lots) and the Property is located in Australia.

It now needs to be determined whether the sale of the subdivided lots is made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b). Moreover, as you are not currently registered for GST, we also need to determine whether you will be required to be registered for GST under paragraph 9-5(d) at the time of settlement of the sale of the subdivided lots.

GST registration

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

Division 23 considers who is required to be registered and who may be registered. In particular, section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

Enterprise

The term 'carrying on' an enterprise is defined in section 195-1 and includes doing anything in the course of the commencement or termination of the enterprise.

The term 'enterprise' is defined for GST purposes in subsection 9-20(1) and includes, among other things, 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.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number (MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999.

However, paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act. 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? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act.

Paragraph 159 of MT 2006/1 discusses how to determine the extent to which an activity or a series of activities amounts to an enterprise:

159. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case.

Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all the relevant activities in order to determine the existence of an enterprise:

160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling.

Paragraph 180 of MT 2006/1 explains that small scale activities can still constitute an enterprise:

Small scale activities

180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

Based on the facts of this case, the relevant activities are the activities associated with preparing the Land for sale including the process of subdividing the Land into 5 lots, subsequent sale of the subdivided lots and the proposed construction of townhouses on two of the subdivided lots. These activities will now be examined in light of the relevant types of enterprises listed under section 9-20, described above.

Are the relevant activities relating to the land in the form of a business?

Section 195-1 provides that a 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business.

The facts in this case suggest that the indicators set out in paragraph 178 of MT 2006/1 are not present to a sufficient degree to warrant the conclusion that you are carrying on a business in the context of the GST Act. In particular, your activities are not regular or recurrent, which is a hallmark of business activities generally.

Therefore, we consider you are not carrying on a business in the context of the GST Act in relation to your activities on the Land.

Are the relevant activities relating to the Land in the form of an adventure or concern in the nature of a trade?

'An adventure or concern in the nature of trade' is not defined in the GST Act.

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':

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, 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.

Paragraph 237 of MT 2006/1 states further that:

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 a business deal...

Consequently, the expression 'in the form of 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 244 of MT 2006/1 provides additional guidance on the nature of activities that would constitute 'an adventure or concern in the nature of trade':

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

In your case, given that the relevant activities concern a single project, consideration needs to be given whether your activities constitute an adventure or concern in the nature of trade.

Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty). Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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 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 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.

In addition to the above, paragraphs 266 and 267 of MT 2006/1 provides that there may be other relevant factors outside this list that a present on the facts of a given case, and that no individual factor is determinative to the question of whether an enterprise is present:

266. 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. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. 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.

267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions.

In your case, we consider that the following facts regarding the activities associated with the subdivision of the Land and subsequent sale of the subdivided lots point towards an adventure or concern in the nature of trade:

There is a coherent plan for the subdivision of the land with the intention to engage in commercial activity. Your activities in relation to the Land were systematic, organised and carried on in a businesslike manner. You registered a private company, Company B, with GST registration. Company B will undertake the subdivision and development of the Land. Company B has secured funding from a financial institution for an amount of $1,590,000 and is the Principle named in the draft construction contract.

Once the subdivision has been completed, two lots will be developed further by constructing two duplex townhouses on the subject lots. You intend to sell your primary residence in order to provide additional funding to undertake the development on these lots.

The subdivision of the Land into lots and the sale of the lots constitutes a significant commercial activity and you have entered into a number of significant financial arrangements in order to undertake the subdivision and proposed development of the lots. This includes:

•         You mortgaged the Property with a financial institution for Development Application (DA) and OPWS costs associated with the subdivision.

•         A draft Construction Contract (Contract) has been provided.

Company B has secured funding from a financial institution.

The subdivision of the land into 5 Lots has required you to undertake a significant level of development works to improve the property, as outlined in the Development Approval (DA) including:

o   The construction of a new intersection with the new internal roadway;

o   Construction of new roads;

o   New Residential driveways must be constructed to lots 1,2,3 and 4.

o   Underground reticulated electricity and telecommunication services must be provided to each lot;

o   An underground connection to reticulated water and sewerage must be available and provided to each lot;

o   Earthworks and retaining walls;

o   Detailed stormwater management plan;

o   The site must be provided with a stormwater drainage system connecting to a lawful point of discharge.

o   A stormwater quality treatment system must be provided for the development;

o   Permanent educational signage must be erected to educate the residents of the development about the function of the raingarden;

o   The surface levels of all lots must be constructed to provide flood immunity;

o   The development site must be landscaped;

• There is a change of purpose for which the land was held. This is supported by your intention to sell your principal residence to provide additional funding to build townhouses on two of the vacant lots

We consider the following facts regarding subdivision and development of the property are indicative of the mere realisation of a capital asset.

• the Property has been your principal residence since a specified time.
• you have no history of property subdivision and development.
• You do not have a business plan and have not engaged a developer to undertake the project.
• You do not have any specialist or subdivision knowledge.

On balance, we consider the facts pointing towards an adventure or concern in the nature of trade outweigh the facts pointing towards a mere realisation of a capital asset. The activities described above, associated with subdividing the Land and preparing two of the remaining lots for development, show a level of sophistication, organisation, and complexity above and beyond what would reasonably be expected in a mere realisation of a capital asset.

These activities have a commercial flavour and give the strong impression of a 'business deal' designed to maximise the profit on disposing of the asset, as discussed in paragraphs 234 and 244 of MT 2006/1. They are activities that one would not ordinarily engage in as part of merely disposing a capital asset for market value.

While you may not have prior experience or history in property development, you engaged experts as needed to bridge the gap in your expertise and knowledge and to help you facilitate the desired outcome of maximising the profit on the disposal of your lots.

Furthermore, the DA required you to undertake significant development works and incur significant cost which would result in a profitable outcome. The registration of a company, Company B, to undertake the development works further supports the view that there is a commercial motive.

For the above reasons, we consider your activities in relation to the Land are activities done as an adventure or concern in the nature of trade, and as such fall within the scope of an 'enterprise' as defined under section 9-20. The sale of the two lots will constitute supplies made in the course or furtherance of that enterprise as per paragraph 9-5(b).

You advised that you are not registered for GST, so it remains to be determined whether you are required to be registered for GST as stipulated in paragraph 9-5(d) in order to determine whether the sale of the two lots are taxable supplies under section 9-5.

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

a)    you are carrying on an enterprise; and

b)    your GST turnover meets the registration turnover threshold.

As discussed above, we consider you are carrying on an enterprise and therefore satisfy paragraph 23-5(a).

The current registration turnover threshold for entities other than non-profit bodies is $75,000. This is the threshold that applies to you.

Subsection 188-10(1) provides that you will meet the registration turnover threshold if:

a)    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

b)    your projected GST turnover is at or above the turnover threshold.

Section 188-15 defines the term 'current GST turnover' as the sum of the values of supplies made in a particular month and the previous 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

Section 188-20 defines the term 'projected GST turnover' as the sum of the values of supplies make in a particular month and are likely to make in the following 11 months other than:

• supplies that are input taxed
• supplies that are not made for consideration
• supplies made that are not made in connection with an enterprise you carry on.

The above exclusions do not apply in this case and therefore your sales of the subdivided lots will be included in your registration turnover threshold calculations.

Furthermore, section 188-25 provides that in working out your projected GST turnover you should disregard, amongst other things, any supply made or likely to be made by you by way of a transfer of ownership of a capital asset of yours.

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

Meaning of 'capital assets'

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

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

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

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

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

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

We consider that there has been a change in intention regarding the Property when you decided to proceed with the subdivision and development of the Property. This is based on the costs to be incurred, the engagement of Company A, the registration of Company B and the risk associated with additional financing to undertake the subdivision and development. The subdivision of the property has created revenue assets in the form of the subdivided lots of vacant land.

Therefore, section 188-25 does not apply to your sale of the two vacant lots and must be included in the calculation of your GST turnover. Given the sale price of the two vacant lots, your GST turnover meets the registration turnover threshold and so you are required to be registered for GST under section 23-5.

Conclusion

All of the positive limbs of a taxable supply as defined in section 9-5 are satisfied. Furthermore, the sales of the two lots are neither GST-free nor input taxed.

Therefore, your sale of Lot 3 and Lot 4 will be taxable supplies and GST is payable on the sales pursuant to section 9-40.