Edited version of private advice

Authorisation Number: 1052191971521

Date of advice: 13 November 2023

Ruling

Subject: CGT - property sale

Question 1

Will the sale of the property be subject to GST?

Answer:

Yes.

Question 2

Will the sale of the property be subject to the Capital Gains Tax (CGT) under Pt 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997), and eligible for the 50% CGT Discount under section 115-110 ITAA 1997?

Answer:

Yes, the sale will be subject to the CGT provisions to the extent that that the amount is not assessable as ordinary income. The 50% CGT discount will apply.

This ruling applies for the following period

Year ending 30 June 2024

The scheme commenced on:

The date of issue of this private ruling.

Relevant facts and circumstances

You purchased a property.

You acquired the property for $XXX including incidental costs.

You had a loan on the property to a financial institution.

The property was purchased as joint tenants.

You moved into the property following acquisition and made it your main residence.

You decided it would be better to knock down the weatherboard cottage and construct a duplex. The plan was to live in one of the duplexes and retain the other property for a rental income stream.

The estimated rent for a similar property was $XX per week. The unit was designed based on another unit that was built 3 streets away.

You submitted plans for the construction of a duplex on the site. Planning permits which allowed the construction of two attached double story dwellings were obtained. A planning permit which allowed the construction of two attached double story dwellings was endorsed.

A building permit was obtained and construction commenced.

A further planning permit which allowed a two-lot subdivision was obtained.

The property was demolished. Construction of the duplex was completed and you moved in.

As you had some issues with obtaining financing, your parents offered to lend you an amount as an interest free loan. There was no written loan agreement. Both parents had inherited money. They had no plans for the inheritance at the time. No date was agreed on when the money was to be returned. You agreed that the loan would be repaid in cash.

In affidavits provided to the Commissioner, both parents stated:

1.    I have advanced the funds as loan interest free and there was no requirement for my son and daughter in law, respectively to repay the loan. This is common within our family culture for us parents to assist their children.

2.    The amounts advanced were better to be treated as loans rather than gifts for asset protection and estate planning purposes. It was expected that those advanced funds could then be considered as part of the estate on death of the parent.

3.    They wanted to repay the finds many years later as thank for the advance of funds and would have done so in cash but this was the children's desires not a requirement from me.

4.    They had no intention to sell the property to repay the loans as there was never an intention for the loan to be repaid.

The original loan had to be closed in order to acquire the building loan.

You also refinanced an investment property to obtain funds and used your own funds.

Your parents were running low on cash reserves and they needed the loaned amount returned. This occurred during the construction process.

You approached your broker about the possibility to refinance. This was not possible unless Y increased her working day (currently working 2 days a week as return plan from maternity leave).

Even though the average rental income had increased per week, there was an estimated loss per month.

As you would not have been able to refinance the properties and obtain a loan, you had no choice but to sell the property which is subject to this ruling.

The property was sold at auction and settled. You have since repaid your parents.

You own a unit as an investment which has been rented.

You are not registered for GST.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-20(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20(2)(c)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 section 118-150

Taxation Administration Act 1953 Schedule 1 section 14-250

Reasons for decision

Question 1

For GST to apply to the sale of the property, the supply would need to be made in the course or furtherance of an enterprise you carry on.

You are likely to have GST obligations and entitlements if you subdivide and sell land:

•         with the intention of making a profit

•         while carrying on a business

•         as part of a business or commercial transaction.

Where the gain or loss on the sale of subdivided land is considered to be ordinary income for income tax purposes, the sale will be:

•         part of an enterprise for GST

•         included in calculating your turnover for GST registration purposes

•         subject to GST if you exceed the GST registration threshold or are otherwise already registered for GST.

The term 'enterprise' is defined in subsection 9-20(1) to include, among other things, an activity, or series of activities, done:

•         in the form of a business, or

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

As per the reasoning set out for Question 2, the sale of the property is considered to be an 'isolated transaction' that has created ordinary income. Therefore, there is an enterprise being conducted for GST purposes and the amount received from the sale must be included in calculating your GST turnover.

You will be required to be registered for GST as a tax law partnership.

Question 2

Treatment of profits from land development

Broadly, profits from land development, subdivision and sale can be treated for taxation purposes in the following three ways:

•         As ordinary income under section 6-5 of the ITAA 1997 (revenue account) resulting from carrying on a business of land development and the sale of subdivided land as trading stock.

•         As ordinary income under section 6-5 of the ITAA 1997 (revenue account) resulting from isolated business or commercial transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit-making purpose. To the extent that any capital gain arises it is reduced by the assessable amount of ordinary income.

•         Solely as statutory income under the capital gains tax (CGT) provisions.

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

CGT provisions

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of property. You will make a capital gain if the capital proceeds from the disposal of the property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base of the property.

Under section 115-100 of the ITAA 1997 there is a discount of 50% for certain capital gains. Under section 115-10 of the ITAA 1997:

"To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. "

In TD 97/3 it is stated that:

[2] "We consider that the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3, 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...."

In your case the subdivided block on which the sold dwelling was situated had been subdivided from the larger block that was acquired. You sold the subdivided land with the new dwelling on it. As the land with the dwelling on it was sold more than 12 months after the property was acquired the CGT 50% discount will apply to the A1 event that happened on sale of the property.

Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA 1997 outside of Part 3-1 of that Act as a result of the sale of the property.

Subsection 118-20(1)(a) of the ITAA 1997 will operate in relation to profits from land/property developments where an isolated transaction is found as follows:

A capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in:

a)    your assessable income or exempt income; or

b)    if you are a partner in a partnership, the assessable income or exempt income of the partnership.

Isolated transactions

The following principles underpin any analysis of the meaning of 'isolated transaction':

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

d)    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.

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

TR 92/3 considerers the existence of an 'isolated transactions' to be those involving:

e)    transactions outside the ordinary course of business of a taxpayer carrying on a business; and

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

TR 92/3 [6] states that profits on isolated transactions will be ordinary income where:

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

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

1.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

Miscellaneous Taxation Ruling MT 2006/1 (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 [263], also deals in part with the taxation consequences of isolated transactions relating to the sale of land. This ATO view provides guidance additional to TR 92/3 that has relevance for identifying isolated transactions involving the sale of land, including a distinction with situations that involve mere realisations. Whilst a primary aim of MT 2006/1 is in establishing whether an enterprise is being carried on or not, in doing so it provides elaboration of the ATO view on isolated transactions for scenarios such as the current ruling request.

MT 2006/1 states:

The issue to be decided is whether the activities 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.

MT 2006/1 refers to the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v.Federal Commissioner of Taxation (Casimaty) as cases that provide guidance on when activities to subdivide land may amount to a profit-making undertaking or scheme. In both cases, farmland was subdivided and sold and based on the facts of those cases, the courts held that the sales of the subdivided lots were a mere realisation of a capital asset.

MT 2006/1 [265] states from the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether an activity is a profit-making undertaking or scheme. 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.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities that will result in an isolated transaction and an enterprise for GST purposes, pursuant to MT 2006/1 [270], which states:

"In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit-making undertaking or scheme and therefore an adventure or concern in the nature of trade".

It is to be noted that while MT 2006/1 [270], states this approach applies to properties that are purchased with an intention of resale. However, the example at MT 2006/1 [284], illustrates that this ATO view as stated can apply to home properties, where the property was not acquired with an intention of resale, but where the property was ventured into an isolated transaction at a later stage:

"[Example 31]

[284] Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

[285] They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

[286] Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

•        their house to be demolished;

•        the land to be subdivided;

•        a builder to be engaged;

•        two houses to be built;

•        water meters, telephone and electricity to be supplied to the new houses; and

•        a real estate agent to market and sell the houses.

[287] Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses."

TR 92/3 [49] also states in very general terms, 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. Some factors which may be relevant in considering whether an 'isolated transaction' amounts to a business operation or commercial transaction are the following:

a)    the nature of the entity undertaking the operation or transaction (Ruhamah Property Co. Ltd. v. F C of T (1928) 41 CLR 148 at 154; Hobart Bridge Co. Ltd. v. FC of T (1951) 82 CLR 372 at 383; FC of T v. Radnor Pty Ltd 91 ATC 4689; 22 ATR 344). 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 (Western Gold Mines N.L. v. C. of T. (W.A.) (1938) 59 CLR 729 at 740);

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 (Edwards v. Bairstow; Hobart Bridge 82 CLR at 383). 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 (Ruhamah Property 41 CLR at 154). 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.

Based on the above principles, an application of this view to your facts illustrates that the activities undertaken in this case, having regard to the actual course of events that occurred for the sold dwelling bear very little material difference to the activities described in [example 31]. The only material difference for your situation is with your stated 'purpose'.

In the context of development of properties by demolishing a home and building two dwellings in its place MT 2006/1 sets out another scenario that may be relevant in these kinds of situations:

"Example 29

[273] Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him.

[274] Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other.

[275] Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

[276] Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units."

This arrangement is different to the previous example as the property was purchased with the intent to sell of one of the newly constructed dwellings. However, this arrangement can commonly be undertaken for properties where homes are ventured into isolated transactions of this nature.

Even though a taxpayer may have acquired an asset for a private purpose, such as a home to live in, this does not preclude the taxpayer venturing the home in as part of an isolated transaction at a later stage, such as when a plan to demolish and build units is made, per TR 92/3:

"[42] For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

a)    as the capital of a business; or

b)    into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction.

This paragraph clarifies the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

In your case, an analysis of activities undertaken by you, without consideration of 'purpose' is considered to suggest an 'isolated transaction' based on the examples set out above for the second limb of TR 92/3 [6]. However, as noted in TR 92/3, the issue of 'purpose' is the other requirement for there to be an 'isolated transaction' in this respect TR 92/3 states:

[6] Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit 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.

2. The intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain

TR 92/3 provides:

[7] 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.

[8] 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...."

There are several principles around the concept of 'purpose' in the context of isolated transactions for the category of subdivision, construction and sale of a dwelling.

Principals of 'purpose'

In Doyle v. FC of T 2020 ATC 10-522 [26], the court makes its interpretation, clear:

'The Full Federal Court held that an intention to sell need only be a purpose and need not be the sole or dominant purpose.'

McCarthy v FC of T 2021 ATC 10-573 (McCarthy) demonstrates that there can be more than one relevant purpose that can exist.

McCurry v Commissioner of Taxation (1998) 98 ATC 4487, (McCurry) was sited in McCarthy where his Honour stated:

"He was not satisfied that profit by development and sale of the units was not 'the predominating objective', that comment cannot be taken to be a rule that there has to be a singular or clear, overriding intention at the time of purchase of the property."

This operation of the relevant principles described above implies that there can be more than one 'purpose' in undertaking such activities and that the characterisation of such activities involves examining the relevant surrounding objective circumstances. In the McCurry case the two relevant purposes were profit making by 'sale' and/or 'renting'. In McCurry, in this context, whilst the judgement involved a finding of predominant purpose it was noted that:

A bare claim that this was the intention of the taxpayer is insufficient to manifest that intention in the absence of evidence of that intention, for example, by steps to progress those options. The surrounding circumstances must be taken into account in ascertaining the true intention of the taxpayer, and also characterising the receipts in the hands of the taxpayer."

In some cases, it has been held that dual possibilities might realistically have been available, and can both be characterised as a purpose, even if another purpose may also have existed or have been predominant. The relevant test does not necessarily preclude a stated intent or purpose, but from such a perspective, the matter to be resolved is whether, objectively, it could be said that there was a second purpose.

The relevant test has been stated to involve a test of the other purpose being a 'not insignificant purpose':

"a not insignificant purpose";

"...the Full Court of the Federal Court in a number of cases has indicated that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities: FC of T v Cooling 90 ATC 4472 at 4484; 21ATR [ 57]; Selleck v Federal Commissioner of Taxation (1997) 78 FCR 102.ore recently, the test has been further refined to be a 'not insignificant purpose':..."

Per Collier J in Price Street Professional Centre Pty Ltd v Commissioner of Taxation".

In application to your facts, even if there was a predominant intent to rent out the property after construction. What is necessary is whether, an objective analysis of the facts, concludes the prospect of sale of the new dwelling was or was not another, 'not insignificant purpose' at the time of commencing the plan of building the duplex.

In McCurry, it was noted that there were two objective possibilities based in part on the circumstances in establishing such purpose, the actual outcome such as a sale in combination with other objective facts, was by itself a material aspect in considering purpose:

"...The case put by counsel for the taxpayers was that, at the time of purchase of the Addison Avenue property, they intended to construct townhouses thereon, but they had not made up their mind whether they would sell the units or would rent them. I accept that, when they purchased the property, Bradley and Brett McCurry had in mind as a possibility that, for a time at least, they would rent out the townhouses when completed....The applicants [the taxpayers] stated they have received numerous enquiries from people wishing to rent the accommodation provided. However, they have not yet decided if they will proceed with rental or sell.

However, I draw the conclusion that, of the two actuating factors which they had in mind, profit-making by sale or receiving rental income, the possibility of reselling the developed property at a profit was the dominant factor. In a case such as this, where the Court must examine the purpose of a transaction, the Court is entitled to have regard not only to the evidence which the taxpayers give of what they had in mind but also to the surrounding facts and to the events which actually occurred. Those events, by hindsight, can throw light upon the considerations which the taxpayer had at the time when the dealing was initiated. That which a person does is a guide to that which he had in mind to do. ..."

Purpose and relevant facts

In applying the above principles to your facts, the relevant facts provide very little objective evidence of intention to construct and rent as the only purpose for the property development.

One key objective fact in this case is the nature of the financing obtained. While a 'construction loan' was obtained from a financial institution no details have been provided of the terms and nature of this loan from the context of it being an investment loan.

However, a further core element of the financing was a loan from your parents/in-law. This loan was acknowledged to be repayable by you and characterised as non-commercial in nature. It was not suitable as an investment loan from a financial institution as it could have been recalled at short notice. And was in fact, recalled, even before construction was finalised. Other matters aside, such an arrangement is not consistent with financing for a long-term investment in a rental property.

Another key objective fact in this case is the building of a duplex on a single title block of land is not uncommon and nor is it uncommon for the owner to rent one dwelling while living in the other. However, neither is it uncommon for taxpayers to fund a new home on their block by constructing two properties and for the sale of one to subsidise the borrowings on the new home. In this case your parents/in-law let you know you needed to pay the loans back. You received a planning permit which allowed a two-lot subdivision, enabling the sale of the property. You did not provide the date you lodged that two-lot subdivision application. It is considered reasonable in application of these facts that selling one of the dwellings could reasonably have been an option or not insignificant purpose when taking that extra step of lodging the two-lot subdivision application.

Considering all of the objective facts and circumstances it is considered that a not insignificant purpose of entering into the arrangement was to sell the proerty at a profit.

It is also considered a reasonable application of the relevant principles to your circumstances that you ventured your residential property into an 'isolated transaction' with a view to making a profit and did so.

Conclusion

In objectively applying the principals outlined above to your facts and circumstances. We consider that the sale of the property will only be subject to the CGT provisions to the extent that the amount is not assessable as ordinary income. In this instance an 'isolated transaction' is considered to represent an 'isolated transaction' that has created ordinary income from the sale of the property. Your intention or purpose in entering into the transaction was to make a profit or gain. The activities that were undertaken are considered to have been done in the course of carrying on a business or in carrying out a business operation or commercial transaction.