Edited version of private advice

Authorisation Number: 1052242827465

Date of advice: 17 April 2024

Ruling

Subject: GST - property and income tax

Question

Is the sale of the duplex at XXX, a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Based on the information provided, the sale of the subdivided lot is not a taxable supply under section 9-5 of the GST Act.

After weighing up all the information, we consider that you are not carrying on an enterprise of subdividing the land and selling new residential premises.

As you are not carrying on an enterprise, you are not required to be registered for GST.

Question

Will any of the proceeds from the sale of the subdivided lot of land located at XXX, be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Based on the information provided, the proceeds from the sale of the subdivided lot will not be ordinary income and not assessable under section 6-5 of the ITAA 1997 as either:

•         the carrying on of a business in accordance with the factors listed in Taxation Ruling 97/11; or

•         a profit-making or commercial transaction in accordance with Taxation Ruling TR 92/3.

Therefore, any proceeds received on the disposal of the subdivided lot of land will represent a mere realisation of capital assets which will be assessed under the capital gains tax provisions contained in Parts 3 1 and 3-3 of the ITAA 1997.

This ruling applies for the following period:

Year ending XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

In January, you moved into the dwelling and lived there as your main residence.

In December, you signed a contract to knockdown the existing dwelling and build a duplex. XXX estimated a completion date.

In November, the Complying Development Certificate was approved, after various delays.

You moved out of the Property into rented accommodation.

In December, site demolition began.

In April construction of the duplex began, after lengthy process delays from the builder. The construction duration was extended several months, in large part due to COVID impacting the availability of materials and labour.

The cost to build the duplex was $XXX

You planned to live in one half of the duplex and to rent out the other one when the construction was completed.

You obtained quotes from a real estate agent as to the expected rental income to be received from renting out along with the cost for management of the property once tenanted.

The expected rental income of $XXX per month formed part of your home loan application.

You discussed your intentions in email correspondence you had with the bank officers on several occasions in the lead up to having a loan approved for the construction of the duplex. These included emails on the following dates with the following references being made within the emails:

•         Once constructed we would be renting a 4 bed duplex, with rental est. ~$XXXpw

•         Expected rental yield for the other unit, once ready: ~$XXXpw

•         Noting that our fixed rate loans are still fixed until November and we don't have a tenant in yet, it may be that we are better off refinancing at the end of the year

•         If we fix on a 2yr basis now, is it possible to attribute the majority of the loan to the duplex unit that we are renting out once it is constructed (in ~1yr hopefully)?

•         Post construction, it would be great to leverage the rental property as much as possible. I'm not sure if this means fixing for only 1yr, or alternatively can we split the loan further?

•         Our duplex is now fully built (have full OC and processing subdivision), though it is not yet rented out (our intention) and this will likely be difficult before ~Feb next year, due to Xmas etc. Estate agents have provided a conservative rental estimate of $XXX/wk (and market value of $XXX). We would hope to get above these values, but those were conservative estimates.

You completed an application form for your loan and indicated an estimated rental value of $XXX per week for the duplex once completed within the loan application.

Your application was approved for the amount of $XXX. This was made up of four separate facilities over a 30 year term and covered the outstanding balance of the original loan from the purchase of the Property, the construction costs for the duplex and additional costs such as landscaping and driveways.

Expectations in 2020 for the cashflow from renting were an annual negative cashflow of $XXX. You were going to able to meet the annual negative cashflow with your current level of income.

You did not have any involvement in the construction beyond selecting finishes and landscaping.

The dwelling was built using hardy materials including tiled floors, heavy duty carpet and plain finishes to help stand up to wear and tear associated with tenants.

In March you were made redundant from your job. This was a senior role within a remuneration package of $XXX

You began a new job on an annual salary of $XXX being a 60% reduced rate of pay from what you were receiving.

In July construction of the duplex was completed. Partial occupancy certificates were issued and you moved in.

In August, you obtained a property management proposal which indicated an expected rental income of between $XXX and $YYY per week.

In November, landscaping was completed and full occupation certificates were issued.

The increase in interest rates has impacted the cashflow from renting. The total rate increase was 1.25% per annum, with the RBA deciding to increase the cash rate by 0.25% per annum.

Your current monthly loan repayments are $XXX, $YYY, $ZZZ and $WWW.

The annual negative cashflow had now increased to $XXX.

You were no longer to be able to meet this larger annual negative cashflow with the reduction annual income.

Due to the delays in construction, you have depleted your financial reserves as you have had to rent alternate accommodation and maintain the loan repayments on the loan for the construction for much longer than expected.

Delays during construction also resulted in associated costs, for example landscaping, increasing significantly beyond your budget.

In December, the decision was made to sell rather than find a tenant.

In December you applied to subdivide the Property. The following titles issued:

•         Lot 1

•         Lot 2.In February one side of the duplex was sold at auction for $XXX

You have only sold one property in the past.

You have no prior experience of renovating properties or property development.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

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

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

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3