Edited version of private advice

Authorisation Number: 1052205149857

Date of advice: 18 December 2023

Ruling

Subject: GST - subdivisions

Issue 1

Question 1

Will the sale of subdivided vacant Lots <number> and <number>, located at <property address>, be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

Issue 2

Question 1

Will the subdivision and sale of the subdivided vacant Lots <number> and <number>, located at <property address>, be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the transfer of your Lots <number>, <number> and <number> located at <property address> be a mere realisation of a capital asset and therefore subject to the capital gains tax provisions?

Answer

Yes

Question 3

Will you be entitled to a full or part main residence exemption on any gain you make on the sale of Lot <number> located at <property address>?

Answer

Yes, you will be entitled to a full main residence exemption on any gain you make on the sale of Lot <number> located at <property address>?

This ruling applies for the following period:

Year ending DDMMYY to DDMMYY

The scheme commenced on:

DDMMYY

Relevant facts and circumstances

You are not registered for GST individually or as a partnership, nor have you been registered in the past.

You are employed as an <profession>.

You purchased a property, located at <property address> (the Property), on DDMMYY (contract date) for an amount of $<amount>. Settlement took place on DDMMYY The Property was formally known as Lot <number> on Plan of Subdivision <number> contained in Certificate Title <number>.

When purchased, the Property was zoned "<zone classification>' and comprised of approximately <number> hectares of land and included a four-bedroom, one-bathroom dwelling constructed circa <year>, with <number> car parking spaces.

You financed the purchase of the Property via a Residential Home Loan (owner occupier) from <bank name>. To secure the loan, your parents were required to became guarantors. The term of the loan is <number> years requiring variable interest and principal repayments.

Since purchasing the Property, it has been used as your principal place of residence. You purchased this Property as it was located near your family (your parents live next door), close to town and had plenty of space to later build a shed to store your boat, trailer and other belongings. You have completed some minor improvements/renovations to the interior of the dwelling, painted its interior and exterior and cleaned up the yard.

Development /subdivision

The Property has not been rezoned since you purchased it.

In YYYY, you commenced working away on a two week on, one week off basis and were finding it difficult to maintain the Property given its size. In MM YYYY you decided to subdivide your property after you were approached by a third party interested in purchasing a part of your land and following your neighbour's successful subdivision of their property.

You sought the assistance of your Parent with the project and with funding the subdivision costs to date. As you had no prior land subdivision experience you engaged the services of a town planner, <entity name>, to help you with the subdivision process.

On DDMMYYYY a proposal (Development Application DA<number>) was submitted to <local Council> to reconfigure your Property from <number> lot into <number> lots. Your development application was approved in full (subject to conditions) on DDMMYYYY

On DDMMYY an application for Operational Works Permit (DA<number>) was submitted to <local Council> and was approved in full (subject to conditions) on DDMMYYYY Works approved include road work, sewage works, electricity supply, earthworks and stormwater works.

The expected total costs of the development/subdivision are summarised below:

Table 1 Summary of expected subdivision total costs

To date, you have obtained a development permit for the operational work. With the assistance of your parent, you intend to manage the project and ensure safety precautions are taken. You are in the process of organising contractors to complete the work. You will complete the required <work type>.

Works are scheduled to commence on DDMMYYYY and you expect the subdivision to be completed by DDMMYYYY

To date you have incurred approximately $<amount> in costs in relation to preliminary subdivision activities.

Your intended use of the subdivided lots is as follows:

Table 2 Intended use of subdivided lots

You expect to repay your existing home loan and your Parent for the subdivision costs from the proceeds of the sale of subdivided vacant lots <number> and <number> and from the sale of Lot <number> containing the existing dwelling. You intend to then borrow funds to construct your new principal place of residence on Lot <number> within the next <number> months.

You do not intend to construct dwellings on the subdivided vacant lots <number> and <number> prior to selling them.

A valuation of the Property was completed by real estate agents <entity name> in MM YYYY on an 'As is' and 'As if complete' basis. On an 'As is' basis (property comprising of a dwelling on approximately <number> hectares of land with DA approval), the Property was valued at $<amount>. On 'As if complete' basis (subdivided as per DA approval) the entire property comprising of the subdivided lots was valued at $<amount>.

The value of the individual lots were valued as follows:

Table 3 Value of individual lots

Other property ownership

The above listed property is the only property you have ever owned.

Other

You have not undertaken subdivision or land development activities in the past nor plan to undertake these activities in the future.

Your parent who is actively assisting you with this project, has also not undertaken subdivision or land development activities in the past nor plans to undertake these activities in the future. Your parent is a <profession>.

Relevant legislative provisions

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

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 38

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Issue 1

Question 1

Will the sale of subdivided vacant Lots <number> and <number>, located at <property address>, be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Detailed reasoning

In this ruling,

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

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.

•         all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Section 9-40 provides that you are liable for GST on any taxable supply that you make. Section 9-5 states 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 sale of the property to be a taxable supply, all the requirements in section 9-5 must be satisfied.

The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively.

In your case, there are no provisions in the GST Act under which your sale of the proposed subdivided vacant lots <number> and <number> would be a GST-free or input taxed supply.

You will be supplying the subdivided vacant lots <number> and <number> for consideration. The supply will be connected with the indirect tax zone as the land is located in Australia. However, you are not registered for GST.

The primary issue to be resolved is whether the supply of the vacant subdivided lotswill 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.

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.

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 guidelines on the meaning of carrying on an enterprise. 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? provides that 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.

Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state:

Indicators of a business

177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law.

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•        a significant commercial activity;

•        a purpose and intention of the taxpayer to engage in commercial activity;

•        an intention to make a profit from the activity;

•        the activity is or will be profitable;

•        the recurrent or regular nature of the activity;

•        the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•        activity is systematic, 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 or skill.

179. 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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business.

Application to your circumstances

Given the facts of this case, we consider that the activities resulting in the subdivision of the Property and the sale of the subdivided vacant lots <number> and <number> do not reflect the indicators of a 'business' as listed above.

We now consider whether your activities will be in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

In the form of an adventure or concern in the nature of trade

Paragraph 244 of MT 2006/1 explains that 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.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or a capital/investment asset held for either investment or personal enjoyment. While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on.

The Commissioner's view on the badges of trade in MT 2006/1 includes:

The subject matter of realisation

247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset.

The length of period of ownership

249. A trading asset is generally dealt with or traded within a short time after acquisition. ...

The frequency or number of similar transactions

251. The greater the frequency of similar transactions the greater the likelihood of trade.

Supplementary work on or in connection with the property realised

252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade.

The circumstances that were responsible for the realisation

253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties.

Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues, stating that 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 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v FC of T 97 ATC 5135 (Casimaty).

Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

•        there is a change of purpose for which the land is held;

•        additional land is acquired to be added to the original parcel of land;

•        the parcel of land is brought into account as a business asset;

•        there is a coherent plan for the subdivision of land;

•        there is a business organisation - for example, a manager, office and letterhead;

•        borrowed funds financed the acquisition or subdivision;

•        interest on money borrowed to defray subdivisional costs was claimed as a business expense;

•        there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

•        buildings have been erected on the land.

In addition to the above, paragraphs 266 and 267 of MT 2006/1 provide that there may be other relevant factors outside this list that need to be weighed up in reaching an overall conclusion and that no individual factor is determinative to the question of whether an enterprise is present:

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

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

Application to your circumstances

You purchased the Property comprising of an existing residence located on approx. <number> hectares of land in MM YYYY as your principal place of residence. You held the Property and used the Property as your principal place of residence for almost <number> years before deciding to subdivide it.

After you began working away you found the maintenance of the land difficult and decided to subdivide the Property into four lots. You intend sell the Lot <number> containing the existing residential premises and subdivided vacant lots <number> and <number>. You expect the proceeds from the sale of these lots will allow you to repay your existing home loan and your father for the subdivision costs leaving you with an unencumbered subdivided vacant Lot <number>. You intend to borrow funds to allow you to construct your new dwelling on Lot <number> which will be used as your new principal place of residence. The purpose of the subdivision is/was to allow you to ultimately build your new home on a smaller block of land rather than a profit-making undertaking or scheme.

The Property has not been rezoned since you acquired it.

Although costly, the level of subdivision works planned are limited to those necessary to meet the minimum council requirements for the subdivision. You did not acquire any additional land to be added to the original parcel. You do not intend to construct dwelling/buildings on the subdivided vacant lots <number> and <number> prior to selling them.

Neither you, nor your parent who is assisting you with the subdivision project and costs, have ever been engaged in subdivision or property development activities previously nor do you or your father plan to undertake these activities in the future.

Due to your lack of experience in subdivisions, you engaged the services of a town planner to guide you through the process. A coherent plan for the subdivision of the property has been implemented and your personal involvement (with the assistance of your parent) includes organising contractors and personally completing the necessary electrical work.

Whilst you're keeping records of your expenditure to subdivide the Property, the Property has not been brought into account as a business asset and has always been treated as your capital asset.

On balance, having considered the facts of the case against the badges of trade and other factors listed above, we consider the activities you have undertaken and propose to undertake in subdividing the Property and the subsequent sale of the subdivided vacant lots <number> and <number> do not amount to an enterprise for GST purposes pursuant to subsection 9-20(1).

As paragraph 9-5(b) is not satisfied, all the requirements for a taxable supply are not present and therefore the sale of the subdivided vacant lots <number> and <number> located at located at <property address>, will not be a taxable supply pursuant to section 9-5 and no GST will be payable on the sale.

Issue 2

Question 1

Will the subdivision and sale of the subdivided vacant Lots <number> and <number>, located at <property address>, be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 2

Will the transfer of your Lots <number>, <number> and <number> located at <property address> be a mere realisation of a capital asset and therefore subject to the capital gains tax provisions?

Detailed reasoning

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

1.    As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock;

2.    As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose;

3.    As statutory income under the capital gains tax legislation.

Carrying on a business

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

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

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

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is regularity and repetition of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•         the size, scale and permanency of the activity, and

•         whether the activity is better described as a hobby, a form of recreation or sporting activity.

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

Isolated transactions

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

Profit from an isolated transaction will be ordinary income where:

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

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

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

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

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

Application to your circumstances

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

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

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

Question 3

Will you be entitled to a full or part main residence exemption on any gain you make on the sale of Lot <number> located at <property address>?

Detailed reasoning

Subdivision 118-B of the ITAA 1997 provides an exemption for a capital gain or loss from certain CGT events that happen in relation to a taxpayer's main residence. Section 118-110 of the ITAA 1997 provides that a capital gain or loss you make from a CGT event, that happens in relation to your dwelling or your ownership interest in it, is disregarded if you are an individual and the dwelling was your main residence throughout your ownership period.

Whether a dwelling is a taxpayer's main residence depends upon the facts of each case. Under section 118-115 of the ITAA 1997, a dwelling is generally considered to be your main residence if:

•         You and your family live in it.

•         Your personal belongings are in it.

•         It is the address your mail is delivered to.

•         It is your address on the electoral roll.

•         Services such as gas and power are connected.

The length of time you stay in the dwelling and whether you intend to occupy it as your home may also be relevant.

In Couch & Anor v Federal Commissioner of Taxation [2009] AATA 41 at paragraph 14, the Tribunal confirmed that the 'mere intention to occupy a dwelling as a sole or principal residence, but without actually doing so, is insufficient to obtain the exemption.'

A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded under section 118-110 of the ITAA 1997 if the dwelling was the taxpayer's main residence throughout the period it was owned.

To be eligible for a full main residence exemption, the dwelling must have been your main residence for the whole period you owned it and must not have been used to produce assessable income.

At the time of disposal of the dwelling, you must not be an excluded foreign resident or a foreign resident who does not satisfy the life events test.

Application to your circumstances

The original residence on the land in question is your main residence. You will subdivide other land around the house and retain the original house as your main residence. You then plan to construct another house on one of the lots of land you will have subdivided. You then intend to make that property your main residence and will either sell or rent out the original main residence. That is, you will not be demolishing the original property. Provided that you meet the requirements set out above, you will be able to claim the CGT main residence exemption if you sell the original home.