Edited version of private advice

Authorisation Number: 1052176498385

Date of advice: 25 October 2023

Ruling

Subject: GST - subdivision income tax

Question 1

Are you making a taxable supply on the development and sale of your property (duplex A) in accordance with section 9-5 of the A New tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is any part of the sale proceeds on the development and sale of your property (duplex A) included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You are registered for goods and service tax (GST) and have an active Australian Business Number (ABN) as you carry on an enterprise within Australia in a field that is not related to property development or the real estate market.

You purchased a property (the original dwelling) in YYYY for $X which is zoned for residential use and has remained that way.

You initially planned to use this property to live in as your main residence. However, after living in the property for a short period of time, you were seconded to interstate for work. The property then became a rental property from MMYYYY to YYYY.

You moved back in the property in YYYY until approximately MMYYYY.

In MMYYYY, you decided to subdivide the land, demolish the original dwelling and build two new duplexes referred to as duplex A and duplex B.

You planned that other members of your family would live in duplex A and you would live in duplex B as your main residence. The new construction was described as an attached two storey dual occupancy development and studio for residential use.

The local city council endorsed the subdivision plan on DDMMYYYY and the separate titles were registered on DDMMYYYY.

You engaged qualified professionals to undertake the development project and did not undertake any of the activities yourself. The construction was undertaken between MMYYYY and MMYYYY. You have never been engaged in any building, property speculation or other real estate development enterprises or business ventures.

You did not complete, undertake or provide us any planning documents, such as projected cash flow statements, projected financials, financial or economic modelling, budgets or business plans for the development activity. You have never engaged in any previous activity of property buying, for the purpose of resale at a profit.

During the construction, you stayed at a friend's house that lives nearby.

There was no change in the zoning required to complete the works.

You did not receive any capital proceeds on the demolition of the original dwelling/structures.

To finance the project, you borrowed $X from a financial institution.

The total land area is x square metres, with each subdivided lot being x square metres.

The market value of the total land area just prior to the subdivision in YYYY was $X.

The total construction costs for duplex A & B combined were $X.

You did not claim any input tax credits or income tax deductions on the construction costs of the duplexes.

In MMYYYY, the building construction was completed and final additional works were completed on or around MMYYYY. You then moved into the duplex B as your own main residence.

On DDMMYYYY a sales contract was exchanged with a related party to purchase duplex A.

The settlement of duplex A occurred on DDMMYYYY for $X and the purchasers moved in.

You stated there is no documentary evidence to support the agreed sale price of $X. The seller and purchasers simply agreed duplex A was worth this value.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section9-5

A New Tax System (Goods and Services Tax) Act 1999 section9-20

A New Tax System (Goods and Services Tax) Act 1999 section9-40

A New Tax System (Goods and Services Tax) Act 1999 section23-5

A New Tax System (Goods and Services Tax) Act 1999 section40-65

A New Tax System (Goods and Services Tax) Act 1999 section40-75

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Issue 1 - GST - New residential premises

Summary

You are making a taxable supply on the development and sale of your property (duplex A) in accordance with section 9-5 of the GST Act.

Detailed reasoning

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

Section 9-5 of the GST Act provides you make a taxable supply if:

(a) you make the supply for consideration; and

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

(c) the supply is connected with the 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 a GST-free or input taxed.

On DDMMYYYY, a sales contract was exchanged with a related party to sell the duplex A for consideration of $X.

The sale of duplex A was connected with the indirect tax zone as it was located in Australia. The requirements in paragraphs 9-5(a) and 9-5(c) of the GST Act were satisfied.

We will now need to consider whether the sale was made in the course or furtherance of an enterprise that you carry on (section 9-5(b) of the GST Act). If yes, then we will need to consider if you will be required to register for GST under section 9-5(d) of the GST Act when making the sales.

Section 9-20 of the GST Act provides that the term 'enterprise' includes, among other things, an activity or series of activities done:

•   in the form of a business;

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

Section 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity or series of activities by an individual with no expectation of profit or gain.

Section 195-1 of the GST Act states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

The Commissioner, 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) provides advice on the meaning of the term 'enterprise' for GST purposes.

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: 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.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of 'enterprise' beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is on determining the factors indicating a business.

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;

•   the activity is organised and carried on in a businesslike manner and records are kept;

•   the activities are of a reasonable size and scale;

•   a business plan exists;

•   commercial sales of product, and

•   the entity has relevant knowledge and skill.

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.

Given the facts of your case, we consider that the sale of duplex A by you does not display the characteristics of a "business" as listed above.

As the transaction may be described as one-off, we also need to consider the extended definition of 'enterprise' and whether these activities are in 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.

These factors in turn are derived from common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in matters including FCT v Whitfords Beach Pty Ltd (1968) 120 CLR 191 (Whitfords Beach), Federal Commissioner of Taxation v Williams (1972) 127 CLR 226, and Casimaty v FCT 97 ATC 5135 (Casimaty). A leading case considering isolated transactions is FC of T v The Myer Emporium Ltd (1987) 163 CLR 199 (Myer).

The principles in this case, amongst others, were selected and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3).

TR 92/3 lists some factors in considering whether a transaction is a business or commercial transaction as set out below:

(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.

These cases indicate that the question of whether a business is being carried on is a question of a fact and the conclusion generally depends on weighing up all the relevant factors set out above.

You had purchased the original dwelling on DDMMYYYY for $X. The original dwelling was demolished between MMYYYY and MMYYYY.

Your intention at the time of the construction was for your relatives to live in duplex A.

You have not previously undertaken a development or sale of this nature.

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.

This change is also not indicative of a profit motive per se. We consider that in terms of assessing the scale of your purchase, demolition and construction of duplex A and the sale, if viewed in isolation, would not indicate that your activity was in the form of a business.

You only constructed duplex A for your relatives to live in and duplex B for you to live in, and not a large scale construction on multiple lots.

On this basis, there is no repetition and it is a small scale. Being small scale, as a factor viewed alone, does not prevent the activity or series of activities from being an enterprise.

In Whitford's Beach, a change in intention was found when the company changed its articles to become profit focussed. Early on, 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) of the GST Act. Senior member Olding found at paragraph 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 your case, you changed your intention when the construction of duplex A was completed to sell at a profit to a related party, considering you did not occupy or rent the property after construction.

You contend that you have no prior experience in the construction and property development industry. As a result, you do not have the expertise to construct property enterprise or act in the form of a business.

The fact you did not do 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.

A factor adding weight to the business-like manner of the arrangement is the fact that you did not sell the lots as vacant land but instead constructed duplex A and then sold it (irrespective of who the buyer is). As you have taken this further step, it suggests the aim was the maximising of profit.

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 TR 92/3 provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Considering these factors, you are an individual and, as discussed above, the activity is not on a major scale. The arrangement is more complex than a mere demolition and it was carried out in a manner expected of any business-like endeavour of the demolition and construction of duplex A. The nature of duplex A effectively became an investment property.

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 activity to determine whether they may be business-like.

The facts indicate that you have changed your use of the property as you bought the property for personal reasons but subsequently constructed duplex A on it and sold it.

You do not operate as a property developer in such a way that you have an office or a letterhead.

Given that demolitions and constructions 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 appraised of the costs incurred in relation to the duplex A construction.

Additionally, you have built two properties on the land which, as stated above, is of significance then sold duplex A for $A. Moreover, it has cost you approximately $X to construct both duplexes.

On this basis, it is considered that there is a reasonable expectation of a profit or gain and, as a result, the exception in section 9-20(2)(c) of the GST Act does not apply and we consider that you are carrying on an enterprise of selling new residential premises.

'Residential premises' is defined in the GST Act as land or a building that:

•   is occupied as a residence or for residential accommodation, or

•   is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

A sale of residential property is input taxed in accordance with section 40-65 of the GST Act but:

1.    only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

2.    However, the sale is not input taxed to the extent that the residential premises are:

(a) commercial residential premises; or

(b) new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

In accordance with section 40-75 of the GST Act residential premises are new residential premises if they:

a)    have not previously been sold as 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.

Paragraphs (b) and (c) have effect subject to paragraph (a).

The duplex A was constructed around YYYY to YYYY as a new residential premise and it replaced the demolished property.

You built duplex A with the intention of providing it to your relatives to live in. However, the change in intention suggests that the sale of the property at a profit to your parents and relative was at least a 'not insignificant' possibility when you acquired the property.

Since duplex A was a new residential property, it satisfies the requirements in section 40-65 and 40-75 of the GST Act and would not be classified as an input taxed supply.

You incurred the costs for the development for duplex A, spending approximately $X and you sold duplex A for $X.

The character of the sale of the duplex A was of a commercial venture for the purpose of gaining a profit on the sale. Accordingly, paragraph 9-5(b) of the GST Act is satisfied. As such you are carrying on an enterprise for the purposes of GST in relation to the sale of duplex A.

Section 23-5 of the GST Act provides that you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

As the sale of the new residential premise is considered a taxable supply and not the sale of a capital asset and the activity of selling duplex A would constitute an enterprise for GST purposes. The requirements in section 23-5 of the GST Act are met.

As you are already registered for GST under the ABN: 46 009 493 479, you can report and pay GST on the sale of duplex A under this ABN in accordance with section 9-40 of the GST Act.

Claiming Input tax credits

As you were required to be registered for GST, you are also entitled to the input tax credits on the construction costs and sale costs of duplex A in accordance with Division 11 of the GST Act provided you hold tax invoices for those acquisitions.

Margin Scheme

Subsection 75-5(1) of the GST Act, the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply.

The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

Under subsection 75-5(1A) of the GST Act, the Commissioner has the discretion to allow a further period of time, after the making of the supply, for the supplier and recipients of the supply to make the agreement in writing.

The Law Administration Practice Statement PS LA 2005/15 The Commissioner's discretion to extend the time in which the agreement in writing must be made to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 sets out the circumstances in which the Commissioner may exercise his discretion under subsection 75-5(1A) of the GST Act. The discretion may be exercised where the Commissioner is satisfied that:

•   all the requirements to apply the margin scheme, other than the requirement for the agreement in writing, are met; and

•   there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.

Other than satisfying the requirement of the written agreement, to apply the margin scheme, you must be making a taxable supply by:

•   selling a freehold interest in land;

•   selling a stratum unit; or

•   supplying a long-term lease.

However, you will not be able to use the margin scheme if you are selling real property that you:

•   acquired through a taxable sale on which the margin scheme was not used;

•   inherited from a person who would not have been able to use the margin scheme;

•   acquired from a member of the same GST group who would not have been able to use the margin scheme; or

•   as a participant in a GST joint venture, acquired from the joint venture operator who would not have been able to use the margin scheme.

There should not be any evidence to suggest that any arrangement exists that would have the effect of producing an outcome contrary to the policy of the legislation.

In your case, you can apply for the Commissioner's discretion by providing the evidence mentioned above by DDMMYYYY via the Online Services for Agents/Businesses.

Issue 2 - Income Tax - Ordinary income

Summary

The net profit you make from your development and sale of your property (duplex A) is treated as a profit-making undertaking that will be assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Tax treatment of property sales transactions

The profits from property sales will 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 property as trading stock; or

2.    As ordinary income under section 6-5 of the ITAA 1997 on revenue account, as a result of an isolated commercial transaction with a view to profit, entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business; or

3.    As statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 and 3-3 of the ITAA 1997 as a mere realisation of a capital asset.

Transactions with a profit-making purpose

Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

The term 'isolated transactions' in paragraph 1 of TR 92/3 refers 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.

Whether a profit from an isolated transaction is ordinary income is a question of fact and depends very much on the individual circumstances of the case.

However paragraph 6 of TR 92/3 provides that profits from an isolated transaction is generally 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; and

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.

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. 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 that profit-making is a significant purpose (paragraphs 7 & 8 of TR 92/3).

If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question (paragraph 10 of TR 92/3).

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. (paragraph 12 of TR 92/3).

By considering the factors listed in paragraph 13 of TR 92/3, your activities were commercial in character once your intention for the use of the original property changed:

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.

Your intention at the time purchase of the original dwelling in MMYYYY was for the property to be your main residence however it later became a rental property.

You have not previously undertaken or been engaged in any building development, property speculation or other real estate development enterprises or similar business ventures.

Even though the transaction may be described as one-off, the character of the sale of duplex A is commercial in nature for the purpose of gaining a profit on the sale. You changed your intention once you made the decision to subdivide the original asset into separate assets that no longer formed part of your home as a domestic asset. Considering you did not occupy or rent duplex A after construction also demonstrates the significance and nature of the transaction. You constructed duplex B to occupy as your main residence, rather than duplex A.

In your case, the transaction is not in the ordinary course of your business, however a factor adding weight to the arrangement being commercial in nature is the fact that you were not selling the original dwelling, which might be described as mere realisation of a capital asset. You have built two new properties on the land where the original dwelling stood. You then sold duplex A as new residential premises. As you have taken this further step, it suggests the aim was the maximising of profit.

It cost you approximately $X to construct both duplexes and the market value of the total land area just prior to the subdivision in YYYY was $X. You sold duplex A for $X.

You did not supply any documentary evidence to support the agreed sale price of $X or that the purchaser actually paid less than the stated purchase price.

The net profit you make from your development and sale of your property (duplex A) is treated as a profit-making undertaking that will be assessable as ordinary income under section 6-5 of the ITAA 1997.

Capital gains tax

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997. Refer to QC 71028 Tax consequences on sales of small-scale land subdivisions on our website for worked examples of the income tax and GST consequences.