Edited version of private advice

Authorisation Number: 1052221329226

Date of advice: 29 February 2024

Ruling

Subject: Subdivision of property - capital

Issue 1

Question 1

Are you carrying on an enterprise in accordance with section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, you are not carrying on an enterprise.

Issue 2

Question 2

Will the gain from the sale of the lots be treated as a mere realisation of a capital asset and subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You purchased adjoining parcels of land at different times after September 1985. You live there and they were used for private purposes apart from some dwellings that were let out.

After the zoning had been changed on the land you decided to explore the idea of subdividing and obtained advice. You embarked on a project of subdividing the land into a small number of blocks.

You have paid for the expenses to date.

You have realised that the cost of carrying on and completing the development will be significant. You do not have the financial capacity to provide sufficient capital to progress and complete the project.

A professional has approached you and offered to provide the plant and equipment to instal the required infrastructure and also to meet the costs of the remaining infrastructure and other work to bring the project to its conclusion. In exchange the professional will be sold some of the blocks at their now unimproved value. You will sell an unrelated rental property you own and some of the new blocks to assist to clear any remaining debt arising from the subdivision.

You do not have the experience to map out a full business plan.

The land has not been developed beyond that necessary to secure Council approval for the subdivision, and will not be. No buildings associated with the development will be erected on the land.

You have never subdivided and sold land before. You have no intention of doing it again.

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

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Issue 1

Question 1

Are you carrying on an enterprise in accordance with section 9-20 of the GST Act?

Summary

You are not carrying on an enterprise in accordance with section 9-20 of the GST Act.

Detailed reasoning

All legislation, unless specifically mentioned, in this question refer to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

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; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

[...]

The phrase 'carrying on' an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

In subparagraph 9-20(1)(c), the definition of 'enterprise' states that leasing, licencing or other grants of land can amount to an enterprise. We can exclude this subparagraph from further consideration in this ruling as it is not applicable.

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 guidance on what activities will amount to an enterprise for GST purposes.

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 GST Act confirms that the principles in MT 2006/1 apply equally to the term enterprise for GST purposes.

Business

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

Paragraph 177 of MT 2006/1 states that 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.

Paragraph 178 of MT 2006/1 with reference to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•          a significant commercial activity;

•          the purpose and intention of the taxpayer in engaging in the activity;

•          an intention to make a profit from the activity;

•          the activity is or will be profitable;

•          repetition and regularity of activity; and

•          the activity is organised and carried on in a businesslike manner.

Paragraph 179 of MT 2006/1 states that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. In particular:

a)    a business encompasses trade engaged in on a regular or continuous basis.

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

In terms of assessing the scale of your activity, it is a subdivision in a rural setting and you will remain living on the property. The main reason for the development was for private purposes.

The level of commercial activity is on the lower end of the scale. Your initial purpose or intention in this arrangement was for a private purpose. You have not previously undertaken a development or sale of this nature. This factor, of itself, does not point to an enterprise. It is noteworthy that you are not employed in any sector related to building or construction. This suggests it is less likely to be a business-like venture.

A professional, who had approached you, was engaged to provide the plant and equipment and experience to the subdivision of the properties. The required infrastructure, such as water, a road, and curbing were installed.

Further, the professional will pay the costs of remaining works in exchange for some blocks at their now unimproved value and some blocks will be sold to others in an open market. This does not display the characteristics of a 'business' as required above in paragraphs 177 to 234 of MT 2006/1. The developments are not systematic, organised and carried out in a businesslike manner, the activities are small and you do not have the relevant skill or knowledge to carry out the development.

There is nothing to suggest that the subdivision of the land was the beginning of a continuing business of property subdivision. The transactions entered into are not on a regular or continuous basis.

On balance, we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not large scale; you do not have a business plan for developing the property. Your principal driver for entry into the sales is to cover the costs of subdividing the land which you could not finance with a loan due to your income.

An adventure or concern in the nature of trade

MT 2006/1, at paragraphs 233 to 257, explains that an entity is carrying on an enterprise where activities are being done 'in the form of an adventure or concern in the nature of trade'. This is not a defined term. However, MT 2006/1 points out in paragraph 241 that this expression was used in the definition of enterprise as a result of a lengthy history of case law setting out the taxation of isolated transactions.

MT 2006/1, at paragraph 262, mentions that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

Further, where the activities involve subdivision and sale of real property, MT 2006/1 lists a number of factors drawn from Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 (Statham) and Casimaty v Federal Commissioner of Taxation 97 ATC 5135 (Casimaty) to determine whether the activities are an adventure in the nature of trade. 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 set out at paragraph 265 of MT 2006/1:

•         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.

While holding an asset for a considerable period of time may indicate that it is a long-term capital asset, the intention of the taxpayer at the time of acquisition, including any subsequent change in intention or use of the asset is an important consideration.

The facts above are not indicative of a profit motive per se. We consider that in terms of assessing the scale of subdivision and subsequent sale of the blocks, if viewed in isolation, would not indicate that your activity was in the form of an adventure or concern in the nature of trade.

You are not carrying out a large-scale development on multiple lots.

In applying paragraph 265 of MT 2006/1,

•         there was no additional land acquired to be added to the original parcel of land;

•         the land was not accounted as a business asset;

•         there was no coherent plan for the subdivision of the land;

•         there was no manager, office and letterhead;

•         there were no borrowed funds which financed the acquisition or subdivision.

This indicates that initially you did not have the intention to sell at a profit. Holding an asset for private use is not normally within the realm of an enterprise.

Paragraph 266 of MT 2006/1 provides that 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. 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.

Of relevance are Examples 33 and 34 of MT 2006/1:

Example 33

291. Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years.

292. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.

293. Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset.

Example 34

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

On the facts provided, we are of the view that your situation is similar to the examples provided in paragraphs 33 and 34 of MT 2006/1 and consider that your subdivision of the land is a mere realisation of a capital asset.

You are not carrying on an enterprise of property development. Your supplies of the sale of the blocks are not in the course or furtherance of an enterprise that you carry on and you do not satisfy the requirements in section 9-5(b). Therefore, you are not making a taxable supply and no GST is payable on the sales in accordance with section 9-5 of the GST Act.

Issue 2

Question 2

Will the gain from the sale of the lots be treated as a mere realisation of a capital asset and subject to capital gains tax (CGT) under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The proceeds from the disposal of the subdivided blocks of land will not be ordinary income and not assessable under section 6-5 of the ITAA 1997. The proceeds represent a mere realisation of capital assets which will fall for consideration under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

Detailed reasoning

Disposal is a mere realisation

As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the ITAA 1997 or statutory income under the capital gains provisions of the ITAA 1997.

Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the capital gains provisions of the ITAA 1997.

From paragraph 6 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, it would appear that the following are the most important factors to consider when determining whether profits made as a result of an isolated business transaction are assessable income:

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

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

The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to your subdivisional activities to determine whether your subdivisional activities amount to the carrying on of a business:

(a) the nature of the entity undertaking the operation or transaction

You and your spouse own the properties. You lived on one and rented the dwellings on the other one.

(b) the nature and scale of other activities undertaken by the taxpayer

You both don't work in the construction industry. You have not subdivided and sold land before, and don't intend to do it again.

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

You have paid for the expenses to date on the subdivision activities. A professional will provide the plant and equipment and pay the costs of the remaining work in exchange for some of the blocks at their now unimproved value. Some blocks will be kept for private purposes. A small number of blocks will be sold to extinguish the debt. The profit sought is only in line with realising a capital asset.

(d) the nature, scale and complexity of the operation or transaction

A professional will be providing the required infrastructure. The subdivision is only going to be a small number of lots.

(e) the manner in which the operation or transaction was entered into or carried out

The properties have been held for more than 15 years and have been used for private and investment purposes. The zoning of the properties was changed prior to you deciding to subdivide the properties. A professional has been engaged to take the subdivision through to completion.

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

You have engaged a professional who has offered to pay for the costs of the remaining infrastructure and see the project to its conclusion.

(g) if the transaction involves the acquisition and disposal of property, the nature of that property.

The properties to be subdivided are zoned R5 and have been owned by you for more than 15 years. They were used for private and investment purposes.

(h) the timing of the transaction or the various steps in the transaction

The proposed subdivision will have a small number of lots, some of which will be sold to extinguish the debt. The others will be kept for private purposes, or go to the professional in exchange for their costs and work.

Paragraph 36 of TR 92/3 says that:

The courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Application to your situation

In your case, you purchased properties at different times after September 1985. They were used for private and investment purposes.

You explored the idea of subdividing the properties for private purposes.

A professional, who approached you, has been engaged to provide the plant and equipment and experience to the subdivision of the properties. The required infrastructure will be installed.

No other subdivision activities have been undertaken by you in the past and you do not intend to undertake any similar activities in the future.

Based on the information provided, there is nothing to suggest that the subdivision of the properties was the beginning of a continuing business of property subdivision. Your activities do not display the salient indicator of a business, being transactions entered into on a continuous and repetitive basis. It is the Commissioner's view that your activities in relation to the subdivision are not those of an entity carrying on a business of buying, subdividing and selling subdivided land.

Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner's view that the subdivision of the properties and the disposal of the subdivided blocks as currently proposed will not be considered commercial in nature but will be a mere realisation of a capital asset, being a long-held privately owned property.

As it is not viewed that you are carrying on a business, or that the subdivision activities will be an isolated transaction with a profit-making purpose, any profit arising from the proposed disposal of the subdivided blocks of land will be a mere realisation of your properties which will be accounted for under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997.