Edited version of private advice

Authorisation Number: 1052184795273

Date of advice: 27 October 2023

Ruling

Subject: Taxation of subdivided proceeds from land sales and transfers

Issue 1 - Income tax - capital versus revenue

Question 1

Are proceeds from the sale or transfer of parcels of land, subdivided from the Property, on capital account and therefore assessable only as capital proceeds under the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA97)?

Answer

Yes

Issue 2 - Goods and services tax - Taxable supplies

Question 1

Are the supplies of the parcels of land, subdivided from the Property, taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Question 2

Is the sale of the Additional Land a taxable supply under section 9-5 of the (GST Act)?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commenced on:

2014

Relevant facts and circumstances

Company A (Trustee) is the trustee for The Trust, a discretionary trust. Individual A and Individual B and their four children are potential beneficiaries of the Trust.

All actions of the Trustee discussed below were carried out in its capacity as Trustee of The Trust. The Trustee is controlled by Individual A and Individual B. Individual A and Individual B made all material decisions for the Trustee and acted on behalf of the Trustee.

The Trust is not currently registered for GST. The Trust was previously registered for GST.

The Trustee purchased The Property (the Property).

The Property was zoned Rural Residential. This zoning has not changed.

The purpose for which the Property was originally purchased

When the Trustee purchased the Property, Individual A and Individual B intended to use the land for multiple purposes, including:

•                     intensive agriculture, and

•                     subdividing the Property and transferring parts of the land to beneficiaries.

When the Property was purchased, the Trustee had no intention to subdivide any of the Property for the purpose of selling subdivided lots.

After settlement, the Trustee allowed the prior owner's family to continue to graze sheep on the land. The Trustee did not receive any consideration for this.

Initial activities to develop the Property

From around August 20Y1 to June 20Y4, the Trustee engaged in various activities preparing for the intensive agriculture, including applying for various approvals from the local council (Council) and various licences and permits.

By June 20Y4, the various approvals had not been obtained and licenses and permits had lapsed, and no licenses were available.

Commencement of work on the Structure Plan

In 20Y4, the Trustee commenced activities to subdivide the land, including the preparation of a Structure Plan for approval.

The Trustee's initial discussions regarding subdividing the Property and draft applications comprised less than 13 lots.

The Trustee submitted a Draft Structure Plan detailing a 13 lot subdivision to Council for approval in late 20Y5 or early 20Y6.

The Trustee was advised that this did not commit them to subdividing into, and applying for titles for, all 13 lots.

Decision to sell some of the lots

Prior to June 20Y4, the Trustee had accrued substantial capital expenditure on assets for use in the intensive agriculture and personal use assets.

Around June/July 20Y4, it became clear to Individual A and Individual B that only two of their children planned to move to the area, and the remaining two children no longer wanted land from the Property. The Trustee decided to cause funds to be available to enable Individual A and Individual B to make cash gifts to the children who would not receive subdivided lots from the Property.

At this time, the Trustee had strong doubts as to whether the intensive agriculture application would be approved given the licences had expired and no further licences were available. This would mean the Trustee's plan to generate income from the intensive agriculture would be impossible and this income could not be used to recover existing capital debts.

As a result of these factors, the Trustee decided to sell some of the subdivided lots.

Valuation of the Property

A Bank obtained a valuation of the Property for mortgage security purposes that adopted an 'As Is' market value of $X, and an 'As if completed' bases in relation to the proposed development of $X.

The Approved Structure Plan

The Structure Plan was approved in August 20Y6 (the Approved Structure Plan). The Approved Structure Plan did not include designated land for intensive agriculture and the Trustee submitted an application to subdivide nine lots from the Property.

Various tenders were obtained for the necessary roadworks, which comprised earthworks, road pavement, drainage, road surfacing, electrical, communications and signage.

The roadworks contract was awarded in June 20Y7. Other external contracts were also agreed and entered into to undertake fire tank and revegetation works.

An Approved Deposited Plan was received in March 20Y8.

The Trustee will not construct any buildings on the Third-Party Lots prior to their sale.

Additional land purchased

In May 20Y6, to satisfy the relevant bodies in relation to required egress and fire escape routes for the proposed lots and neighbouring properties, the Trustee purchased the Additional Land for $X.

The Additional land was required to widen a link road required by Council. The land area of the Additional Land was reduced slightly due to the widening of the public access way used for the link road.

The Trustee has since entered into a contract to sell the remainder of the Additional Land for $X.

Sale of the Third-Party Lots

The following table shows details of the lots in the Subdivision and the Trustee intentions for the lots as of 6 September 20Y9:

The Third-Party Lots were not initially marketed for sale.

A real estate agent provided advice on the lot values and introduced the Trustee to interested buyers.

Funding, costs and accounting

The Trustee did not obtain Bank finance to purchase the Property, paying 50% on settlement and the remaining amount within 12 months under a vendor finance agreement.

Individual A and Individual B contributed approximately $X from personal and home loans for the Trustee to acquire the Property, however, the exact amount contributed has not been recorded and is unknown. It is considered that the amount owing to Individual A and Individual B is not insignificant.

No formal terms have been entered into in respect of repaying the loans to Individual A and Individual B. The Trustee will repay the loans to Individual A and Individual B as and when funds are available and when required or requested by Individual A and Individual B.

Trust money has been paid to Individual A and Individual B as funds have been available, however this would reflect a variety of purposes for which they are entitled as beneficiaries, including accumulated profit distribution entitlements over the years, including from substantial profits from the trust's shareholding in companies, as well as monies contributed to the trust for varying purposes.

It is likely that the transfer of the planned Residence Lot will be used to partially reduce Individual A and Individual B's beneficiary loans/entitlements.

The Trustee used bank finance of approximately $X and dividend distributions from other investments in preparing for the intensive agriculture, prior to commencing activities for the subdivision.

In May 20Y6, the Trustee obtained bank funding of approximately $X to finance roadworks and other costs of the subdivision and to refinance the original facility.

All interest charges over the term of finance have been capitalised to the cost bases carried on the balance sheet of the respective assets or properties to which the funds advanced related. Interest charges related to the cost of the subdivision have also been capitalised to the balance sheet along with the actual costs of subdivision, which have also been capitalised.

The Trustee has not claimed deductions for any interest incurred on finance.

The Trustee intends to repay these loans with funds received from selling the lots.

The Trustee has never treated the Property as a business asset. The Property has always (and consistently) been treated as being on capital account.

The Trustee did not prepare any detailed financial modelling or budgeting for the subdivision. Only informal notes of approximate expected costs were considered.

Other relevant information

The Trustee has no previous history or experience in property subdivision. Historically, the Trust has been used as an investment holding entity, particularly holding interests in a related business, a unit trust and other investments.

From 20XX, the Trustee has been an equal 50% ordinary shareholder in Company B, for which Individual A is one of two directors.

Company B was not involved in the planning or construction for the Property subdivision in any way.

As representative of the Trust, Individual A was kept updated and informed of the subdivision process and attended progress meetings during construction, as required, as the principal.

Individual A and Individual B have previously subdivided one block of land (approximately 950m²).

The Trustee did not have a formal business plan in relation to the subdivision.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 Part 3-3

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act section 9-20

A New Tax System (Goods and Services Tax) Act subsection 9-20(1)

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

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

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

A New Tax System (Goods and Services Tax) Act section 188-15

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

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

Reasons for decision

Issue 1 - Income tax - Capital versus revenue

All legislative references in Issue 1 question 1 are to the Income Tax Assessment Act 1997 (ITAA1997), unless otherwise indicated.

Question 1 - Whether proceeds of sales and transfers are capital gains

Summary

It is considered that the subdivision of The Property by Company A as trustee for The Trust and the subsequent sale or transfer of the lots are not transactions carried out in the ordinary course of a business of trading in land or isolated commercial transactions.

The sale and transfer of the lots and the Additional Land are merely the realisation of capital assets, and therefore, any capital gain or loss from the sale or transfer will be assessable only under the capital gains tax provisions in Parts 3-1 and 3-3.

Detailed reasoning

The following two sources of ATO view are discussed below:

•                     Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3)

•                     Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with a business of primary production, the underlying principles can also be applied to the business of property development.

Taxation of the proceeds from the sale of land

The capital gains tax (CGT) provisions are set out in Parts 3-1 and 3-3, under which land is a CGT asset (section 108-5); and CGT event A1 happens when you dispose of land. 'Disposal' will include both selling or transferring ownership of the land to another entity (section 104-10).

Proceeds from the sale of land may also be assessable as ordinary income (under section 6-5) or profit from a profit-making undertaking or plan (under section 15-15). Proceeds are generally income if 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:

(i)            in the course of carrying on a business or

(ii)           in carrying out an isolated business operation or commercial transaction (TR 92/3, paragraph 6).

If proceeds from an asset sale are assessable under section 6-5 or 15-15 either wholly or partly, to avoid the same amount being taxed twice, section 118-20 would apply to reduce any capital gain by the amount otherwise assessed.

Carrying on a business

The words "business" is defined in the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee (subsection 995-1(1)). However, for income tax purposes, the term "carrying on" is not defined in relation to a business.

Paragraph 13 of TR 97/11 lists the indicators that are relevant in deciding whether or not a taxpayer's activities amount to carrying on a business as follows:

•                     whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (see paragraphs 28 to 38);

•                     whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46);

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54);

•                     whether there is repetition and regularity of the activity (see paragraphs 55 to 62);

•                     whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (see paragraphs 63 to 67);

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (see paragraphs 68 to 76);

•                     the size, scale and permanency of the activity (see paragraphs 77 to 85); and

•                     whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93).

TR 97/11 explains that:

•                     whether or not a taxpayer's activities amount to carrying on a business is "a question of fact and degree" and each case turns on its own facts (paragraph 25).

•                     the indicators must be considered in combination and as a whole (paragraph 16).

•                     whether a business is being carried on depends on the 'large or general impression gained' from looking at all the indicators, and whether these factors provide the operation with a 'commercial flavour' (paragraph 16).

•                     No one indicator is decisive and there is significant overlap of the indicators (paragraph 15) and the weight given to each indicator may vary from case to case (paragraph 16).

According to Taxation Determination TD 92/124: Income tax: property development: in what circumstances is land treated as 'trading stock'?, repetitive buying and selling of land is not necessary to establish that a business is being carried on. A single acquisition of property for the purpose of development, subdivision and sale will be sufficient to constitute a business activity.

For income tax purposes, a taxpayer's activities may not amount to carrying on a business but are considered to be merely preparatory to carrying on a business. In certain circumstances a taxpayer engaged in preparatory work may be regarded as undertaken 'in carrying on' a business, however in other circumstances the activities may be considered to be at a 'point too soon' before the commencement of the business.

Isolated commercial transactions

An 'isolated commercial transaction' refers to a transaction carried on by:

•                     an entity carrying on a business, where the sale transaction is outside the "ordinary course" of the business but has elements of a commercial transaction; or

•                     a non-business entity (TR 92/3, paragraph 1).

Whether profits from isolated transactions are assessable income must be looked at in the context of the facts involved in each case (TR 92/3 paragraph 33).

A transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations (TR 92/3 paragraph 49).

The distinction between merely realising an asset and carrying out a business venture or operation, or a commercial transaction, is not always clear.

Paragraphs 13 and 49 of TR 92/3 set out the following factors that may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

(a)          the nature of the entity undertaking the operation or transaction. For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature. However, if the taxpayer acts in the capacity of trustee of a family trust, the inference that the transaction was commercial or business in nature may not be drawn so readily;

(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. This factor would include whether professional agents and advisers were used and whether the operation or transaction took place in a public market;

(f)            the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. For example, the relationship between the parties may suggest that the operation or transaction was essentially a family dealing and not business or commercial in nature;

(g)          if the transaction involves the acquisition and disposal of property, the nature of that property. For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn; and

(h)          the timing of the transaction or the various steps in the transaction. For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature.

Australian law courts have dealt with numerous cases involving property subdivisions that provide precedent and example in applying the law. In FC of T v NF Williams 72 ATC 4188 (NF Williams) (at ATC 4194-4195), Gibbs J said:

An owner of land who holds it until the price of land has risen and then sub-divides and sells it is not thereby engaging in an adventure in the nature of trade or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of sub-division and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage...

However, in some cases, the development may be so extensive that it cannot be seen to be 'mere realisation' of the land but constitutes the carrying on of a business of subdividing and selling land.

For example, FC of T v. Whitfords Beach Pty Ltd 82 ATC 4031 (Whitfords Beach) involved a company subdividing 1,584 acres (641 hectares) of land originally acquired for non-commercial purposes. Thirteen years later the taxpayer undertook a long and complex course of activity involving rezoning, developing, and selling the land over a period of many years for substantial profit.

In Whitfords Beach, in discussing the significant and scope of the word 'mere', Mason J said (at 82 ATC 4047):

... I do not agree with the proposition... that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying-out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case.

Where a transaction or operation involves the sale of property, it is not always the case that the profit-making intention or purpose is held at the time of acquiring the property (TR 92/3, paragraphs 9 and 41).

Where a taxpayer commits property they already own into a profit-making undertaking to sell the property, and that undertaking has the characteristics of a business operation or commercial transaction, the profit from the undertaking is income whether or not the taxpayer had a profit-making intention when they acquired the asset (TR 92/3, paragraphs 42).

Application to your circumstances

The Trustee in its capacity as trustee for the Trust (You) acquired the Property in 20Y1, with the intention to use the land to:

•                     subdivide and transfer portions of the land to beneficiaries of the Trust for residential purposes and

•                     to conduct an intensive agriculture business.

Neither of the above uses are a business of dealing in or trading in land. The first use is a domestic purpose, and the second activity uses the land as a capital asset of a business.

Initially, you commenced various activities preparing for the intensive agriculture.

Approximately three years later, you commenced activities to subdivide the Property. The facts relevant to the private ruling provide a detailed explanation of the subdivision activities undertaken by you, culminating in:

•                     an approved Structure Plan to subdivide the Property into 13 lots

•                     the acquisition and subsequent sale (slightly reduced in size) of the Additional land

•                     actual subdivision of the Property into 10 separate lots

•                     sale of the six Third-Party Lots to unrelated third parties, and

•                     the Residence Lot and the Child Lots being separately available for transfer.

As discussed above, where your subdivision, sales and transfer activities amount to carrying on a business or isolated commercial transactions, the proceeds from the sales and transfers will be assessable under section 6-5 or 15-15.

Based on the facts, after weighing the relevant indicators provided in TR 97/11, it is considered that the 'large or general impression gained' from your subdivision, development, sales and transfer activities is that you were not carrying on a business of developing land for sale.

Further, based on the facts after weighing the relevant factors in TR 92/3, it is considered that your subdivision, development, and sale activities do not have the character of isolated commercial transactions.

Conclusion:

Based on the facts when weighed in relation to the indicators and factors in TR 97/11 and TR 92/3, the Third-Partly Lot and Additional Land sales and transfers of the Residence Lot and Child Lots were, or will be, mere realisation of capital assets as the activities were not a business and were not commercial in nature.

Consequently, the capital proceeds from the sales and transfers are determined, and are assessable, only under the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA97).

Issue 2 - Taxable supplies

In respect of Issue 2, questions 1 and 2:

•                     all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), unless otherwise indicated

•                     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

Question 1 - The Child Lots, Residence Lot and Third-Party Lots

Summary

It is considered that your activities in preparing for the commencement of the intensive agriculture business were carrying on an enterprise for the purposes of GST. The Property was acquired, in part, for use as a capital asset in that enterprise.

As sales from capital assets are excluded from your projected GST turnover, that turnover will be below the registration turnover threshold.

On this basis, you are not required to register for GST; paragraph 9-5(d) is not satisfied in relation to the Third-Party Lots; and these supplies are not taxable supplies.

The subdivision and transfer of the Child Lots and the Residence Lot do not possess any commerciality or profit-making intention. These activities and transactions are not done in the course or furtherance of terminating your intensive agriculture enterprise; but are part of a private or domestic arrangement within the family.

On this basis, paragraph 9-5(b) is not satisfied in relation to the Residence Lot and Child Lots and these supplies are not taxable supplies.

Detailed reasoning

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 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 GST-free or input taxed.

For the supplies of the subdivided lots to be taxable supplies, all the requirements in section 9-5 must be satisfied.

Third-Party Lots

Your supplies of the Third-Party Lots will be made for consideration and will be connected with the indirect tax zone (Australia). However, you are not registered for GST.

We will first consider whether your supplies of the Third-Party Lots will be made in the course or furtherance of an enterprise you carry on (paragraph 9-5(b)).

If so, a further issue to be considered is whether you are required to be registered for GST (paragraph 9-5(d)).

Paragraph 9-5(b) - Enterprise

Subsection 9-20(1) provides, amongst other things, that 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.

The definition of 'carrying on' an enterprise can be found in section 195-1 of the GST Act:

'carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.'

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

Guidelines on the meaning of carrying on an enterprise are provided 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).

The guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes (paragraph 1 of 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?).

Activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise (MT 2006/1, paragraph 122).

In the Commissioner's view, the term 'doing anything in the course of the commencement... of an enterprise' describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. An entity has to determine its entitlement to an ABN from the time of its first activities (paragraph 123).

Carrying on an enterprise also includes doing anything in the course of the termination of the enterprise. 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 assets may include the sale, scrapping, or other disposal of the assets (MT 2006/1 paragraph 140).

A change in purpose or use of all assets could result in the termination of an enterprise. A change could occur where an asset is no longer used by the entity in the enterprise and is instead used for private purposes (MT 2006/1 paragraph 142).

Paragraph 176 of MT 2006/1 explains that the definition of 'business' can be interpreted in a similar way for the GST Act as it is for income tax purposes and at paragraphs 178 sets out the indicators of carrying on a business in TR 97/11 as previously discussed in Issue 1 Question 1 (above).

As previously discussed, paragraph 179 of MT 2006/1 explains that there is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'.

MT 2006/1, at paragraph 234, 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', and provides that:

•                     a business encompasses 'trade engaged in, on a regular or continuous basis'

•                     an adventure or concern in the nature of trade includes 'an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal'.

As discussed in paragraph 244 of MT 2006/1, 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.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions (MT 2006/1, paragraph 262). The issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset (paragraph 263).

In this case, your intention at the time you acquired the Property in 20Y1 was to:

•                     use the Property for intensive agriculture, and

•                     subdivide and transfer portions of the Property to beneficiaries for residential purposes.

As set out in the facts, you undertook activities to commence an intensive agriculture business on the land, including:

•                     engaging an expert to commence designs for two dams

•                     preparing and lodging applications with multiple regulatory bodies.

The Commissioner considers you had the intention of commencing an intensive agricultural business, and the activities undertaken have the character of those ordinarily undertaken to commence an intensive agricultural business. It is irrelevant that the preparatory activities did not result in an ongoing enterprise for the preparatory activities to constitute, in of themselves, an intensive agricultural enterprise. The activities you have undertaken are commencement activities and constitute an 'enterprise' as defined for GST purposes under section 9-20 of the GST Act.

In this case, the Third-Party Lots were subdivided from land intended to be used in your intensive agriculture business. The land was subdivided as part of you terminating your intensive agriculture enterprise and changing the future use of that land. Consequently, your sales of the Third-Party Lots will be made in the course of the termination of the intensive agricultural enterprise.

Therefore, as per the Commissioner's view in paragraph 140 of MT 2006/1 set out above, your sales of Third-Party Lots will fall within the scope of being 'made in the course or furtherance of an enterprise that you carry on', satisfying paragraph 9-5(b).

Paragraph 9-5(d) - GST registration

Section 23-5 states 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 (in your case the threshold is $75,000).

As discussed above, your activities fall within the scope of 'carrying on an enterprise', thus satisfying paragraph 23-5(a) above.

The next issue to consider is whether your GST turnover meets the registration turnover threshold of $75,000 or more. Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if:

(a)          your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)          your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months. Based on the facts, you have not made any supplies prior to the supplies of the subdivided lots; therefore, your current GST turnover is $0.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months. In this case, it is necessary to determine whether your projected GST turnover meets the registration turnover threshold.

Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a)          any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)          any supply made, or likely to be made, by you solely as a consequence of:

(i)            ceasing to carry on an enterprise; or

(ii)           substantially and permanently reducing the size or scale of an enterprise.

The meaning of 'capital asset' in the context of section 188-25 is discussed in paragraphs 31 to 36 of 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:

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 of this Ruling.

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.

Further, guidance on the distinction between trading/revenue assets and investment/capital assets is provided in paragraphs 258 and 259 of MT 2006/1, as follows:

•                     Assets can be categorised as trading/revenue assets or capital/investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•                     Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

In Collins & Anor ATF The Collins Retirement Fund v FC of T [2022] ATC 10-627, the Tribunal discussed the different principles to be applied when considering the nature of an asset in the context of income tax as opposed to GST. The Tribunal at [20] noted that '... in determining whether the proceeds of sale of an asset are on revenue or capital account, attention is focused upon whether the seller had an intention, at the time of acquisition of the asset, that the asset would be sold at a profit'.

However the Tribunal at [26] found that for GST purposes (specifically the application of subsection 188-25(a)), the character of the asset must be determined at the time the supply is made (or, likely to be made).

In this case, you acquired the Property in 20Y1. You held multiple intentions for the Property, including commencing an intensive agricultural business and subdividing and transferring portions of the land to trust beneficiaries. You have not previously undertaken a development or subdivision and sale of this nature.

As the intensive agriculture business could not continue as intended, you made a decision to subdivide and sell some of the land that was excess to your needs. The multiple intentions you had for the Property in 20Y1, therefore, had changed partially at this point - in that the intention to pursue an agriculture business was abandoned and replaced with an intention to subdivide and dispose of some of the land associated with this venture.

Only a minimal amount of work was undertaken in order to prepare the land for subdivision and sale. There has been no building on the subdivided land. The only work undertaken was that necessary to secure approval by the council for the subdivision. The Commissioner has considered your activities and has concluded the development works undertaken do not by themselves amount to a separate enterprise of property development, or similar. Therefore, the question of whether the sale of the Third-Party Lots should be considered as disposals of capital or revenue assets needs to be considered in the context of you terminating your intensive agriculture enterprise discussed above.

Following the subdivision, you entered into contracts to sell the Third-Party Lots, with the intention to use the profit from the sales to recoup previous expenditure and make a monetary payment to two child beneficiaries in lieu of lots of land as in the case of other child beneficiaries.

You expended a substantial amount of time and costs to progress your original intention of an intensive agriculture business including seeking Council approvals and building dams and sheds. Although a profit is expected to arise from the sale of the Third-Party Lots, the Property was not acquired as a trading asset for the purpose of resale.

Taking into account the facts of this case, we consider your sales of the Third-Party Lots would constitute the transfer of ownership of a capital asset for the purposes of section 188-25 and the sale proceeds will therefore be disregarded when calculating your projected GST turnover.

Given the above, your GST turnover does not meet the $75,000 registration turnover threshold. Therefore, you are not required to be registered for GST under section 23-5.

On this basis, paragraph 9-5(d) is not satisfied. Therefore, your supplies of the Third-Party Lots are not taxable supplies and GST is not payable on these supplies.

Child Lots and the Residence Lot

Your supplies of the Child Lots and the Residence Lot will be connected with the indirect tax zone (Australia). However, the supplies will be made to Trust beneficiaries for nil consideration and the Trust is not registered for GST.

Where supplies are made to an associate for no consideration or inadequate consideration, the special rules in Division 72 may bring such supplies within the GST system. If all the other requirements in section 9-5 are satisfied with respect of the Child Lots and the Residence Lot, we will then consider the special rules in Division 72.

As set out in the facts, since acquiring the Property, you have always intended to subdivide and transfer portions of the Property to the Trust beneficiaries. The Child Lots and Residence Lot were not subdivided from land intended to be used in your intensive agriculture business.

The subdivision and transfer of the Child Lots and the Residence Lot do not possess any commerciality or profit-making intention, and is not done in the course or furtherance of terminating your intensive agriculture enterprise. It is part of a private or domestic arrangement within the family to provide suitable accommodation and assistance to the Trust beneficiaries.

Given the facts, we consider the activities resulting in the transfer of the Child Lots and Residence Lot were not done in the course or furtherance of an enterprise. On this basis, paragraph 9-5(b) is not satisfied and your supplies of the Child Lots and the Residence Lot are not taxable supplies. Therefore, GST is not payable on these supplies.

Question 2 - The Additional Land

Summary

To the extent that the sale of the Additional Land is connected to ceasing the intensive agriculture enterprise and the sale of the Third-Party Lots, the sale is in the course or furtherance of winding up the agriculture enterprise. To this extent, the Additional Land will take the same character as the Third-Party Lots - namely, a capital asset.

Sales of capital assets are excluded from your projected GST turnover it will be below the turnover threshold and you are not required to register for GST. To this extent, supplying the Additional Land is not a taxable supply as paragraph 9(d) is not satisfied.

To the extent that the sale of the Additional Land is connected to the sale of the Child Lots and the Residence Lot, the sale is not done in the course or furtherance of any enterprise. To this extent, the supply of the Additional Land is not a taxable supply as paragraph 9-5(b) is not satisfied.

Consequently, the supply of the Additional Land is not a taxable supply under section 9-5.

Detailed reasoning

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

Based on the facts in this case, your supply of the Additional Land will be for consideration of $X and will be connected with the indirect tax zone. However, you are not registered for GST.

It remains to be determined whether the sale of the Additional Land is in the course or furtherance of an enterprise and whether you are required to register for GST because of the sale of the Additional Land, it being established in the answer to Issue 2 Question 1 that you are not required to register for GST for the disposal of the other lots.

MT 2006/1, at paragraph 159, 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.

Your decision to purchase the Additional Land was done in order to meet the requirements of the relevant bodies in relation to required egress and fire escape routes for the subdivided lots and neighbouring properties. Additionally, acquiring the Additional Land helped to simplify the subdivision process and practicalities, particularly in relation to road construction and widening. Consequently, the purchase of the Additional Land was done to support carrying out your intentions with the future use of the Property which, as identified in the answer to Issue 2 Question 1, are a mixture of enterprise and non-enterprise-related activities.

Paragraphs 264 to 265 of MT 2006/1 discuss the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) and have established a number of factors to assist in determining whether an isolated property transaction can be considered an enterprise in its own right:

•                     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.

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 and there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion (MT 2006/1, paragraph 266).

While your sale of the Additional Land did result in a small profit, the facts do not support the conclusion that your disposal of the Additional Land was done in order to make a profit. You did not commence or pursue a new business opportunity from acquiring the Additional Land. Once the Additional Land had been used for its intended purpose (to construct a road to meet access and egress requirements), the remainder of the Additional Land was excess to your needs and was sold.

For these reasons, we conclude that your purchase of the Additional Land should be considered in tandem with the multiple intentions you had for the Property identified in the answer to Issue 2 Question 1, and not as a separate enterprise in its own right.

To the extent that the sale of the Additional Land is connected to the ceasing of the intensive agriculture enterprise and the sale of the Third-Party Lots, the sale is in the course or furtherance of winding up the agriculture enterprise, but the nature of the asset sold will take the same character as the sale of the Third-Party Lots - namely, a capital asset. As capital assets are excluded from your projected GST turnover, your GST turnover will be below the turnover threshold and so you are not required to register for GST under paragraph 9-5(d), and the sale of the Additional Land is not a taxable supply under section 9-5 to this extent.

To the extent that the sale of the Additional Land is connected to the sale of the Child Lots and the Residence Lot, the sale is not done in the course or furtherance of any enterprise under paragraph 9-5(b), and the sale of the Additional Land is not a taxable supply under section 9-5 to this extent.

Consequently, the sale of the Additional Land is not a taxable supply under section 9-5 and GST is not payable on the supply.