Edited version of private advice

Authorisation Number: 1052226261243

Date of advice: 22 March 2024

Ruling

Subject: Am I in business - property development

Question 1

Will the gain from the sale of your property located at Address Q in state A, be subject to the capital gains tax pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and assessable as statutory income under section 102-5 of the ITAA 1997?

Answer

Yes.

Question 2

Will the gain from the sale of your property located at Address S in state A, be subject to the capital gains tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997?

Answer

Yes.

Question 3

Will the sale of the property located at Address S in state A be a taxable supply of new residential premises under section 9-5 of the A New Tax Systems (Goods and Services Tax) Act 1999?

Answer

No

Question 4

Will the Commissioner alter the cancellation of the GST registration of the taxpayer to be effective from 1 July 20XX?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On a specified date you entered into a contract to purchase a property located at Address X for a specified amount. The property settled on a specified date.

At the time of purchasing Address X your intention was to build a specified number of townhouses for long-term rental purposes.

You engaged a project manager to manage the subdivision, demolition and construction of the townhouses from start to finish including engagement of a builder on a fixed price contract.

At the time of the building of the townhouses you had no build or trade experience, therefore you did not contribute to the process.

The build was completed on a specified date and subdivided lots and townhouses are at the following addresses:

a.    Address P

b.    Address Q

c.    Address R

d.    Address S

You obtained funding for the acquisition and build via a finance broker who organised a long-term loan from a Bank C for the original purchase and build. You also refinanced another property in Address Y to use as additional security for the loan, which was your main residence at the time.

You leased all the townhouses as soon as you obtained the certificate of occupancy.

At the time of purchasing Address X you were a professional sports player. You provided us with your yearly salary you were receiving. At the time of selling the first townhouse your annual salary dropped significantly as you had retired from being a professional player.

Due to a change of circumstances, you have sold 2 of the properties at Address Q and Address S. You provided us with details on the sale of Address Q and Address S including: sale date, sale price, estimated gain, contract date and settlement date.

The 2 remaining townhouses are still leased, and you intend to hold these properties long term.

You acquired a new main residence on a specified date which you required funding for a renovation.

You sold 2 other properties prior to selling Address Q and Address S:

a.    Address Y, an investment property which you had owned for a substantial amount of time.

b.    Address Z, your previous main residence.

You were not registered for GST at the time of development and sale of the townhouses. Your tax agent initiated a telephone conversation with the ATO after the sale of address Q and your understanding of that discussion:

•        The ATO would not consider the sale of Address Q alone an enterprise.

•        Your tax agent advised to register for Business Activity Statements (BAS) for this period. You backdated your GST registration to a specified date.

•        You have lodged your BASs as nil statements with no claim for input tax credits and no remission of GST.

•        You were registered for GST from 1 October 20XX - 30 June 20XX. You lodged Activity Statements for the tax periods 1 October 20XX - 30 June 20XX.

•        Your understanding is that this registration and lodgement was intended to preserve your ability to claim input tax credits should the development be considered an enterprise by the ATO.

•        Your tax agent cancelled the registration from 1 July 20XX as you were not intending to sell any more units.

You advised that no GST was withheld at the settlement of Address Q but GST of specified amount was withheld at the settlement of Address S as your tax agent believes that this was a conservative approach.

You provided a cashflow feasibility that was prepared at the time of acquisition of Address X which shows that the townhouses were expected to be cashflow positive and you intended to hold the townhouses for long-term.

You have provided a letter from your mortgage broker in support of your intention to hold the properties long term.

You have provided purchase contract for the property and residential lease document for Address Q and Address S. Both the townhouses were leased from a specified date.

You have also provided sale contract for Address Q and Address S.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

A New Tax System (Goods and Services Tax) Act 1999 section 40-75 (1)

A New Tax System (Goods and Services Tax) Act 1999 section 40-75 (2)

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

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

Tax Administration Act 1953 section Division 155 of Schedule 1

Reasons for decision

Question 1

Will the gain from the sale of your property located at Address Q in state A, be subject to the capital gains tax pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and assessable as statutory income under section 102-5 of the ITAA 1997?

Summary

Having regards to your circumstances, on the balance, you are not considered to be undertaking a business operation or commercial transaction when you sold Address Q. The sale of Address Q would be the mere realisation of a capital asset. Your gain from the sale will be subject to the CGT pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

Detailed reasoning

Taxation treatment of property sales

There are 3 ways the proceeds from a property development can be treated for taxation purposes:

•        assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development;

•        assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or

•        a realisation, often referred to as a 'mere realisation', of a capital asset, assessable under Parts 3-1 and 3-3.

Carrying on a business of property development

The Commissioner's view on whether a taxpayer is carrying on a business is found in 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 the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property development.

Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business:

•        whether the activity has a significant commercial purpose or character;

•        whether there is repetition and regularity of the activity;

•        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;

•        whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour.

Isolated transaction with a profit-making purpose

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

Paragraph 1 of TR 92/3 provides that the term isolated refers to:

•        those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

•        those transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide that a profit from an isolated transaction or operation is generally income when both of the following elements are present:

•        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.

Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors as some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

•        the nature of the entity undertaking the operation or transaction;

•        the nature and scale of other activities undertaken by the taxpayer;

•        the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•        the nature, scale and complexity of the operation or transaction;

•        the manner in which the operation or transaction was entered into or carried out;

•        the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

•        if the transaction involves the acquisition and disposal of property, the nature of that property; and

•        the timing of the transaction or the various steps in the transaction.

At paragraph 41 the taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

Further at paragraph 43 if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

Mere realisation of an asset

The proceeds from the mere realisation of an asset are not ordinary income, even though the realisation is carried out in an enterprising way so as to secure the best price.

Paragraph 36 of TR 92/3 states 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme.

In McClelland v FC of T 70 ATC 4115 , the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Application to your circumstances

In your circumstances the Commissioner considers based on the information provided your activities are not that of undertaking a business operation or commercial transaction. The proceeds from the sale of Address P will be subject to capital gains tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

The sale of Address Q would not be considering as a business operation or commercial transaction for the following reasons:

•        Your intention on acquisition of the Address X was to develop four townhouses for long-term rental purposes and on completion you leased all the townhouses.

•        You have not undertaken any other property development activities and had no building or trade background.

•        The development was financed by a long-term loan from Bank C, together with a refinancing of another property owned by you. The long-term loan period evidenced that you didn't want to sell the townhouses in the short term.

•        The transaction was of a small scale and not complex, involving one initial property acquisition and building of four townhouses.

•        You engaged third-party professionals to manage and complete the townhouse build process.

•        Address Q was rented after completion of the development and was held for a specified amount of time.

•        You were a professional sports player. At the time of selling Address Q as you had retired from your professional sport your yearly income had significantly reduced.

•        Due to your change of financial circumstances, you sold Address Q at a specified date. This was some time after completion which shows that you leased the property for a reasonable time before you made the decision to sell.

•        In addition to selling Address Q, you sold another long-term investment property and your main residence to assist with your financial circumstances.

•        Your intention is to continue to hold the remaining 2 townhouses for rental purposes.

Question 2

Will the gain from the sale of your property located at Address S in state A, be subject to the capital gains tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997?

Summary

As explained in Question 1, the Address S is also the mere realisation of your asset. You are not considered to be carrying on a business for the sale of your property at Address S and the sale is also not considered to be an isolated profit-making transaction. As such any gain on the sale of Address S will not be assessable under section 6-5 of the ITAA 1997. Your gain from the sale will be subject to the capital gains tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

Application to your circumstances

In your circumstances the Commissioner considers based on the information provided your activities are not that of undertaking a business operation or commercial transaction. The proceeds from the sale of Address S will be subject to capital tax pursuant to section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

The sale of Address S would not be considering as a business operation or commercial transaction for the following reasons:

•        Your intention on acquisition of the Address X was to develop four townhouses for long-term rental purposes and on completion you leased all the townhouses.

•        You have not undertaken any other property development activities and had no building or trade background.

•        The development was financed by a long-term loan from Bank C, together with a refinancing of another property owned by you. The long-term loan period evidenced that you didn't want to sell the townhouses in the short term.

•        The transaction was of a small scale and not complex, involving one initial property acquisition and building of four townhouses.

•        You engaged third-party professionals to manage and complete the townhouse build process.

•        Address S was rented after completion of the development and was held for a specified amount of time.

•        You were a professional sports player. At the time of selling Address S as you had retired from your professional sport your yearly income had significantly reduced.

•        Due to your change of financial circumstances, you sold Address Q at a specified date and then Address S at a specified date. Address S was sold time after completion which shows that you leased the property for a reasonable time before you made the decision to sell.

•        In addition to selling Address S, you sold another long-term investment property and your main residence to assist with your financial circumstances.

•        Your intention is to continue to hold the remaining 2 townhouses for rental purposes.

Question 3

Will the sale of the property located at Address S in state A be a taxable supply of new residential premises under section 9-5 of the A New Tax Systems (Goods and Services Tax) Act 1999?

Summary

As you were not registered for GST, nor required to be registered at the time you made a supply of new residential premises, you have not satisfied all the requirements of section 9-5. The sale of Address Q is not a taxable supply under section 9-5.

Detailed reasoning

•        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.

An entity makes a taxable supply where all the requirements of section 9-5 are satisfied.

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 Australia; 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.

You make a supply of residential premises for consideration. Residential premises is defined in section 195-1 to mean land or a building that:

(a) is occupied as a residence or for residential accommodation; or

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Consequently, you are conducting an enterprise of leasing residential property. Section 195-1 states that carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise. Disposing of the townhouse, would be considered in the course of the enterprise in respect to the leasing enterprise you are engaged in.

You are an Australian resident, and the purchase and subsequent development of the property is in Australia.

The townhouses that you built on the property are buildings that are occupied as a residence. When you lease the townhouses, you receive a payment of rent as consideration for the supply of those residential premises. Section 40-35 states that a supply of premises that is by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) is input taxed if the supply is of *residential premises. Therefore, the supply of leasing the townhouses is input taxed.

Upon the sale of Address S, you make a supply of new residential premises. In section 40-75(1), residential premises are defined as new residential premisesif:

(a) have not previously been sold as residential premises (other than * commercial residential premises) and have not previously been the subject of a * long-term lease ; or

(b) have been created through * substantial renovations of a building; or

(c) have been built, or contain a building that has been built, to replace demolished premises on the same land.

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

According to the facts, Address S has not been previously sold as residential premises and has not been the subject of a long-term lease. A long-term lease means a supply by way of lease, hire or licence (including a renewal or extension of a lease, hire or licence) for at least 50 years if

(a) at the time of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, it was reasonable to expect that it would continue for at least 50 years; and

(b) unless the supplier is an * Australian government agency - the terms of the lease, hire or licence, or the renewal or extension of the lease, hire or licence, as they apply to the * recipient are substantially the same as those under which the supplier held the premises.

Further, section 40-75(2)(c), excludes residential premises as new residential premises if the premises were last built more than 5 years ago and the premises have only been used to make input taxed supplies under section 40-35(1)(a). This exclusion does not apply in your circumstances; Address S was built on a specified date and you sold the property on a specified date. When you sold Address S on a specified date, you made a supply of new residential premises.

The final requirement under section 9-5 is that you are registered for GST or required to be registered. As you were not registered for GST at the time you made the supply of new residential premises, it must be determined whether you wererequiredto be registered for GST under section 23-5.

You are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

Section 188-10 states:

(1) You have a GST turnover that meets a particular turnover threshold if:

(a) your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

Under section 188-15 of the GST Act:

(1) Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for *consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

In your case, the income you derived in the current month, being the month of settlement, and the preceding specified months was income derived from the sale of the property which was over $75,000.

Under section 188-20 of the GST Act:

(1) Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

In working out your projected GST turnover, section 188-25 of the GST Act says to disregard:

(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.

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(GSTR 2001/7)includes guidance on the meaning capital assets. GSTR 2001/7 explains:

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 [...]

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.

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. [Footnotes excluded].

Consistent with the income tax decision above, the proceeds from Address S are capital in nature. Therefore, for the purpose of GST registration, the proceeds from the sale of Address S are not included when calculating your GST turnover. For completeness, the supply of leasing residential premises is input taxed under section 40-35 and are also excluded from your GST turnover under section 188-20(1)(a).

As you were not registered for GST, nor required to be registered at the time you made a supply of new residential premises, you have not satisfied all the requirements of section 9-5. The sale of Address S is not a taxable supply under section 9-5.

Question 4

Will the Commissioner alter the cancellation of the GST registration of the taxpayer to be effective from 1 July 20XX?

Summary

For the tax periods 1 October 20XX to 30 June 20XX, you lodged activity statements. The Commissioner has taken the lodgement as an assessment and is therefore unable to amend the effective date of your GST registration cancellation.

Detailed reasoning

You made an application to the Commissioner requesting cancellation of your GST registration effective from a specified date. Your application for GST registration cancellation was approved under section 25-55(1). However, the Commissioner does not have the power to amend the cancellation of GST Registration to include periods for which activity statements have been lodged.

For tax periods commencing on or after 1 July 20XX, upon lodgement of the activity statement, the Commissioner will be taken to have made an assessment of the taxpayer's assessable amount and the activity statement is treated as being a notice of assessment signed by the Commissioner and issued on the day it is lodged. There is no legal authority for the Commissioner to cancel a valid assessment once it has been made. The Commissioner's power in Division 155 of Schedule 1 to the Tax Administration Act is limited in that the Commissioner has the power to make an assessment and, if that assessment is incorrect, amend the assessment. The power does not include the power to cancel an assessment that has been validly made.

For the tax periods 1 October 20XX to 30 June 20XX, you lodged activity statements. The Commissioner has taken the lodgement as an assessment and is therefore unable to amend the effective date of your GST registration cancellation.