Edited version of private advice

Authorisation Number: 1052288218662

Date of advice: 14 August 2024

Ruling

Subject: CGT - subdivision of land

Question 1

Will the proposed subdivision and sale of the subdivided block of land be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the proposed sale of the block of land be a mere realisation of a capital asset and therefore subject to the capital gains tax provisions?

Answer

Yes.

Question 3

Will your sale of a subdivided vacant lot be a taxable supply pursuant to section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act")?

Answer

No. The sale of the Property is not a taxable supply.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

A few of year ago you purchased vacant land.

At the time you acquired the Property your intention was to construct a dwelling for use as your primary residence in retirement.

The Property was zoned residential when acquired.

There has been no rezoning of the Property.

Around the time you acquired the Property you made the decision to subdivide as you considered that the maintenance of the Property may become onerous for you in the future.

It was not your intention at the time of purchasing the Property that you would sell the subdivided block however if in the future the upkeep of the Property did become onerous, you would have the option to sell the vacant block.

You engaged a surveyor who advised that the subdivision of the Property was permitted under local council rules and that it would be prudent to apply for the subdivision concurrently with the building application as the council may change the subdivision rules in the future.

You also engaged Company Z to prepare the development application for your new dwelling. Company Z also confirmed that it would be efficient to apply for the subdivision at the same time.

It was proposed the Property will be subdivided into lots.

You sold your existing home to fund the purchase of the Property and construction of your new primary residence.

You obtained estimates of costings for the construction of the new dwelling in the following year after you had engaged the surveyor.

The estimates you received to construct the house were substantial.

You have engaged a builder to review the building plans in an effort to reduce the cost to a more affordable level.

Due to higher than anticipated building costs you have decided to sell one of the proposed subdivided lots to assist in funding the construction.

Company Z lodged the development application (DA). The DA proposed the subdivision of the Property into lots, construction of a single dwelling, swimming pool, retaining wall, boundary fence and the removal of trees.

In the year following the DA, the Council issued a Notice of Determination granting development consent subject to conditions as specified in the notice and in accordance with stamped approval plans.

You obtained an appraisal from a real estate agent for the sale of a Lot.

Based on the estimate, the sale would result in a surplus net of estimated subdivision costs, agents commission and legal fees.

Whilst the subdivision has been approved, to date titles have not been registered.

Further works required to effect the subdivision include engaging plumbers to connect water and sewer to the existing water services.

You will not be personally undertaking any activities in relation to the subdivision.

You are funding the costs of the subdivision from your own resources and do not intend to borrow funds to finance the subdivision costs.

To date, the only works carried out on the Property has been the removal of some trees.

You expect the subdivision to be complete after the sewer and water are connected and the surveyor completes his work. You anticipate that this will occur in the next few months.

You have not prepared any formal planning documents, projected cash flow statements, projected financials, financial or economic modelling, budgets or business plans in regard to the subdivision.

You, nor any entities related to you, have engaged in activities related to the subdivision of land or land development in the past. You do not intend to undertake similar type activities in the future.

You are not currently registered for GST. You were previously registered for a period in respect of carrying on an enterprise of providing professional services.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

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

Reasons for decision

Proceeds from the sale of subdivided land will be taxed for income tax purposes as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), where the land is held as trading stock and sold as part of carrying on a business of property development.

Alternatively, profits/gains from the subdivision of land can be assessable under section 6-5 of the ITAA 1997 as an isolated commercial transaction with a view to a profit, or as statutory income under the capital gains tax (CGT) provisions contained in Part 3-1 and Part 3-3 as a mere realisation of a capital asset.

Change of intention

Based on the information provided to the Commissioner the proposed sale of the subdivided block of land will not be ordinary income and not assessable income 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 the principles contained in Taxation Ruling TR 92/3.

CGT event A1 will occur when you dispose of your ownership interest in the sub-divided block of land to another entity. The sale of the subdivided land will give rise to a capital gain under Part 3-1 and Part 3-3 of the ITAA 1997 when the sub-divided block of land is sold.

Based on the information you have provided to the Commissioner, the proposed sale of the block of land of the property is the mere realisation of a capital asset and subject to capital gains tax pursuant to subsection 104-10(4) of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.

Section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act") provides 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 for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Your supply of the vacant lot will be made for consideration and the lot is located in Australia. As such, paragraph 9-5(a) and paragraph 9-5(c) of the GST Act are satisfied.

Given the facts of this case, the sale of the vacant lot will not fall within the scope of being GST-free or input taxed.

Therefore, the primary issue in this case is whether the sale of the lot is made in the course or furtherance of an enterprise you carry on. If so, as you are not registered for GST we will then address whether you are required to be registered.

The supply is made in the course or furtherance of an enterprise that you carry on

Subsection 9-20(1) of the GST Act provides that 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

Section 195-1 of the GST Act 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'.

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 the Commissioner's view on the meaning of enterprise for the purpose of entitlement to an Australian Business Number (ABN).

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.

In the form of a business

Business is defined under section 195-1 of the GST Act that includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 170 to 179 of MT 2006/1 discuss the factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production lists the indicators of carrying on a business:

•         a significant commercial activity;

•         an intention of the taxpayer to engage in commercial activity;

•         an intention to make a profit from the activity;

•         the activity will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is systematic, organised and carried on in a business-like manner and records kept;

•         the activities are of a reasonable size and scale;

•         a business of product; and

•         the entity has relevant knowledge or skill.

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 weighing all the relevant indicators.

Based on the facts provided, we consider that the activities conducted with respect to the subdivision do not display the characteristics 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.

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.

Characteristics of trade, including the 'badges of trade'

Paragraphs 247 to 261 of MT 2006/1 sets out the factors to consider with respect to 'badges of trade' and are as follows:

•         The subject matter of realisation;

•         The length of period of ownership;

•         The frequency or number of similar transactions;

•         Supplementary work on or in connection with the property realised;

•         The circumstances that were responsible for the realisation;

•         Motive; and

•         Trade v investment assets.

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.

Paragraphs 264 and 265 reference the Statham[1] and Casimaty[2] where a list of factors were ascertained to assist with determining whether the activities conducted are a business or an adventure or concern in the nature of trade:

•         There is a change of purpose for which the whole property is held;

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

•         Borrowed funds financed the acquisition or subdivision;

•         Interest on money borrowed to defray subdivisional costs was claimed as 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.

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. 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.

In this case we note that:

•         there is no business organisation established with respect to the subdivision/development;

•         you will not be borrowing funds nor intend to borrow funds to finance the subdivision;

•         you will be funding the construction of your house from the proceeds of the sale of the Property;

•         you will not be claiming the interest on money borrowed to defray the subdivisional costs as business expense;

•         there has been no use of the land since the date of acquisition and the land was zoned as residential when you acquired it;

•         there has been no rezoning of the land nor were there any rezoning or development agreements;

•         there is a list of conditions that you are required to comply with prior to, during, and at the completion of the development such as connecting water and sewer to the existing Hunter Water services; and

•         There are currently no buildings erected on the land.

Application

You purchased the Property to build a house for use as your primary residence in your retirement. However, you decided to subdivide the Property into lots.

The decision for the subdivision came about after you considered that maintenance of the Property may become onerous in the future. Further, you were advised that it would be prudent to apply for the subdivision concurrently with the building application as Council may change the subdivision rules in the future. At that stage you had no intention to sell the subdivided vacant block.

Estimates of the construction costs had increased. You are currently in the process of speaking to another builder to amend the original plans in an attempt to reduce the construction cost. As a result of the greater than original anticipated construction costs, you made the decision to sell the subdivided vacant block to help fund the construction of your house.

You have provided that you nor any entities related to you have had a subdivision or business of land development in the past. We accept that there have been no similar transactions with respect to the subdivision.

Based on the facts provided you had removed trees from both blocks after obtaining the development consent approval from Council and will engage plumbers to connect water and sewer to the existing water services. We consider that these activities indicate that you have not improved the Property beyond preparing it for sale. You did not purchase additional land to add to the original parcel, and you have not, nor do you intend to, construct any buildings on the vacant lot before selling.

On balance, having considered the facts of the case against the badges of trade and other factors listed above, we do not consider the activities you have undertaken with respect to the subdivision of the land and the proposed sale of the subdivided vacant lot to amount to an 'adventure or concern in the nature of trade'.

Therefore, we do not consider your activities including the purchase and subdivision of the Property and proposed sale of one of the vacant subdivided lots to constitute an 'enterprise' for GST purposes as defined in section 9-20 of the GST Act. The proposed sale of the vacant lot will not be made in the course or furtherance of an enterprise and thus the requirement of paragraph 9-5(b) of the GST Act is not satisfied.

For completeness we will briefly discuss the issue of GST registration.

GST registration

One of the fundamental requirements of GST registration is that you are 'carrying on an enterprise'. As discussed above, we do not consider your activities related to the subdivision of the Property and proposed sale of a vacant lot fall within the scope of an 'enterprise' for GST purposes.

Therefore, you are neither required to register for GST nor able to voluntarily register for GST pursuant to section 23-5 or section 23-10 of the GST Act respectively.

Conclusion

Based on the above, we consider that the sale of the subdivided vacant lot is not a taxable supply as defined in section 9-5 of the GST Act.