Edited version of private advice

Authorisation Number: 1052249366603

Date of advice: 23 May 2024

Ruling

Subject: GST - subdivision and sale

Question 1

Will Person A in transferring 50% of their interest in Lot X to Person B make a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Will Person B, in transferring 50% of their interest in Lot Y to Person A, make a taxable supply pursuant to section 9-5 of the GST Act?

Answer

No.

Question 3

Will a capital gains tax (CGT) event A1 occur when Person A transfers 50% of their interest in Lot X to Person B?

Answer

Yes.

Question 4

Will a CGT event A1 occur when Person B transfers 50% of their interest in Lot Y to Person A?

Answer

Yes.

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

Person A and Person B purchased a block of land at Lot XY as joint tenants.

The block of land was sub-divided into two blocks, Lot X and Lot Y, where each Lot is jointly owned by Person A and Person B.

Person A will transfer 50% of their share in Lot X to Person B in exchange for Person B transferring 50% of their share in Lot Y to Person A during the ruling period for the purpose of this ruling.

The resulting ownership make up would have Lot X owned wholly by Person A and Lot Y owned wholly by Person B.

For the next five years neither of you have an intention of constructing a dwelling on either Lot as you would not have the financial capacity for development.

Person A currently owns several separate properties which are held for rental income purposes.

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 11-15

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

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

Question 1

Will Person A in transferring 50% of their interest in Lot X to Person B make a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

No.

Detailed reasoning

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 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.

The concept of an 'enterprise' is a fundamental GST concept. A supply cannot be a taxable supply made by an entity unless the supply is made in the course or furtherance of an enterprise that the entity carries on. In addition, an entity cannot be registered for GST unless it is carrying on an enterprise.

The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, 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 (paragraph 9-20(1)(c)).

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an enterprise.

The leasing of a property falls within the scope of an 'enterprise' under paragraph 9-20(1)(c). This is the case regardless of the fact that proceeds generated from the rental of residential premises are not subject to GST.

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.

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.

Of relevance is Example 32 of MT 2006/1:

Example 32

288. Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live.

289. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house.

290. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter.

In your case, you are currently carrying on an enterprise of leasing, as demonstrated by your acquisition of the several properties that you lease out. On the facts provided, we are of the view that your situation is similar to the example provided in Example 32 of MT 2006/1. We consider that your acquisition of the block of land at Lot XY and subsequent partition and supply was not undertaken in the course or furtherance of your enterprise.

The partition was without any commercial aspects and is part of a private or domestic arrangement. This is evidenced by neither of you having an intention of constructing a dwelling on either lot as you do not have the financial capacity for development.

Your partition and supply of the property will not be a supply made in the course of furtherance of an enterprise. As such, the sale of the property will not be a taxable supply under section 9-5 of the GST Act.

Question 2

Will Person B, in transferring 50% of their interest in Lot Y to Person A, make a taxable supply pursuant to section 9-5 of the GST Act?

Summary

No.

Detailed reasoning

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 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.

The concept of an 'enterprise' is a fundamental GST concept. A supply cannot be a taxable supply made by an entity unless the supply is made in the course or furtherance of an enterprise that the entity carries on. In addition, an entity cannot be registered for GST unless it is carrying on an enterprise.

The definition of 'enterprise' has the meaning given by section 9-20.

Under subsection 9-20(1) an enterprise includes 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.

The definition of the term 'carrying on' an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Are you carrying on an enterprise? - paragraph 9-5(b)

Based on the information you provided, we consider your partition and supply of the property will not be a supply made in the course of furtherance of an enterprise. As such, you are not carrying on an enterprise and the sale of the property will not be a taxable supply under section 9-5 of the GST Act.

Question 3

Will a capital gains tax (CGT) event A1 occur if Person A transfers 50% of their interest in Lot X to Person B?

Question 4

Will a CGT event A1 occur if Person B transfers 50% of their interest in Lot Y to Person A?

Summary

Yes.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

The time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base.

Section 112-25 of the ITAA 1997 provides that the subdivision of land itself does not constitute a CGT event as there is no change of ownership. It is at the time of the disposal that any capital gain or capital loss may arise. Where a property that was acquired as one asset is subdivided, the new assets are treated as though they were always separate assets (paragraph 2 of Taxation Determination TD 97/3). The subdivided blocks will retain the acquisition date of the original property as there has been no acquisition or disposal for CGT purposes (paragraph 2 of Taxation Determination TD 92/148).

The CGT provisions will apply to both of you when you transfer your 50% share in either Lot to each other as a change in ownership will occur triggering CGT event A1 (paragraph 3 of Taxation Determination TD 92/148).

You should note that when calculating your capital gain or loss, the capital proceeds from a CGT event are the total of the money you have received or entitled to receive and the market value of any other property you have or are entitled to receive. You may need to consider the market value substitution rule. The market value substitution rule in section 116-30(2) of the ITAA 1997 provides that the market value of the CGT asset is used if you receive capital proceeds that are more or less the market value of the asset, and you did not deal with each other at arm's length.