Edited version of private advice

Authorisation Number: 1052303197793

Date of advice: 11 October 2024

Ruling

Subject: CGT - sale of vacant land

Question 1

Will the proposed sale of vacant land known as [the Property] and located at [address], be subject to goods and services tax (GST) pursuant to section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The sale is not in furtherance of an enterprise or a commercial transaction but is the mere realisation of a capital asset.

Question 2

Will the proposed sale of vacant land known as [the Property] and located at [address], be subject to capital gains tax (CGT) 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. The sale will trigger CGT event A1 as the realisation of a capital asset.

This ruling applies for the following period:

[the relevant period]

The scheme commences on:

[the date this ruling issues]

Relevant facts and circumstances

In [the relevant year], [Company A] as trustee for [Trust A] and [Company B] as trustee for [Trust B] ('You') jointly purchased a vacant [relevant measurement] parcel of land known as [property title description] and located at [address] (the Property).

At the time of purchasing the vacant land your intention was to hold it as an investment asset for its long-term capital growth.

You have no other assets and have not previously acquired vacant land as speculation or engaged in land banking.

You are not registered for GST.

The directors of [Company A] and [Company B] (the trustee companies) are the principal beneficiaries of the respective trusts.

Your trustees and beneficiaries have never directly, or indirectly (through control of other entities), carried on any land development business or undertaken any land development activities.

You are considering entering into a contract to sell the vacant land.

The land has not been subdivided, developed, or used to generate income.

The land is unimproved, and no activities have been undertaken to increase the value of the land.

You have incurred associated costs in connection with the purchase and holding of the vacant land, and you will incur any selling costs.

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 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

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

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 995-1

Issue 1

Goods and services tax on sale of vacant land.

Question 1

Taxable supply

Section 9-40 provides that goods and services tax (GST) is payable on any taxable supply that you make.

You make a taxable supply when you satisfy the requirements of section 9-5, which states:

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.

For your supply of the Property to be taxable, all the requirements under section 9-5 must be satisfied and the supply must not be GST-free or input taxed.

In your case, the sale of the Property will be made for consideration (payment), and it will be connected with the indirect tax zone (the Property being located in Australia), satisfying paragraphs 9-5(a) and 9-5(c).

Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? provides at paragraph 97 that the supply of a vacant block is not an input-taxed supply:

97. ...Vacant land is not residential premises as defined in section 195-1 of the Act. The supply of the vacant block needs to be considered under section 9-5.

The supply of vacant land is not GST-free under any provisions of the GST Legislation.

You are not registered for GST.

We therefore need to examine whether your supply of the Property was made in the course or furtherance of 'carrying on an enterprise', which would satisfy paragraph 9-5(b), and whether you are required to be registered for GST in satisfaction of paragraph 9-5(d).

Enterprise

The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise.

Section 9-20 provides that an enterprise includes an activity or series of activities done:

•         in the form of a business (paragraph 9-20(1)(a));

•         in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)); or

•         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)).

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 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) are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes. MT 2006/1 provides advice on the meaning of the term 'enterprise' for GST purposes.

Paragraph 153 of MT 2006/1 discusses how the ABN Act and the GST Act do not define an 'activity or series of activities' and as such, these terms take their ordinary meaning. An 'activity' is essentially an act or series of acts that an entity does. Entities can undertake a wide range of activities with varying degrees of interrelationship. The meaning of the term 'activity, or series of activities' for an entity can range from a single undertaking including a single act, to groups of related activities, or to the entire operations of the entity.

In your case, there will be a single act of selling one property, so we need to consider whether that single act would comprise an undertaking that meets the definition of being an enterprise.

In the form of a business or in the form of an adventure or concern in the nature of trade

According to MT 2006/1, a business (per paragraph 9-20(1)(a)) generally includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade (per paragraph 9-20(1)(b)) includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. Isolated or one-off transactions will fall into this category.

The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of 'enterprise' beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is on determining the factors indicating a business.

Whilst there is no single test of whether a business is being carried on, 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.

These factors in turn are derived from common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in several matters. A leading case considering isolated transactions is FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 (Myer). The principles in this case, amongst others, were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3). These cases indicate that the question of whether a business is being carried on is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above.

TR 92/3 further provides at paragraphs 12 and 13:

12. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character.

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

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

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

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

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

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

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

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

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

In your case, the sale of the Property might arguably be viewed as a significant activity if a substantial profit will be made by you. However, your activity will not take place in a commercial setting or be part of a business operation.

There has been no repetition and regularity of activity on your part that might suggest an enterprise was being undertaken, and there have been no organised and businesslike activities beyond the typical activities that any property owner might need to engage in prior to privately selling a property.

When considering your arrangement, we have weighed up the following facts:

•         you have no other assets;

•         your profit will not be business income from a trading asset since you will not sell the land in the course of carrying on a business operation or commercial transaction;

•         you originally acquired the land primarily for investment reasons only;

•         the scale of your activities is small;

•         your activities are not especially complex;

•         you have not undertaken any activities to increase the value of the land;

•         you have not had any previous dealings in property;

•         you have no history as a developer and did not purchase for development purposes and did not enter into a small-scale development;

•         your sale of the Property involves a single transaction of an unimproved and undivided block; and

•         you have owned the land for a significant period of time.

These factors indicate that any profit will not be made in the course of an enterprise.

Your activities were not carried on in the form of a business or adventure or concern in the nature of trade, there has been no leasing or licencing of the property to another party, and the Property has not been used in any other business activity - for example, as business premises.

Accordingly, given there is no enterprise, you are not required to be registered for GST purposes. Therefore, your sale of the vacant land will be on capital account and GST will not apply.

Conclusion

As the supply will not satisfy the positive limbs of section 9-5 of the GST Act and will be neither a GST-free nor input-taxed supply, your proposed sale of the Property (consisting of vacant land) will not be a taxable supply.

Issue 2

Capital gains tax on sale of vacant land.

Question 2

Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income.

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

•         Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business; or

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

•         As statutory income under the CGT provisions, where the proceeds of sale are a mere realisation of a capital asset.

Carrying on a business

Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on whether a taxpayer is carrying on a business. 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 subdivision and 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 Transactions

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

Paragraph 6 of TR 92/3 states profit from an isolated transaction is generally income when both of the following elements are present:

(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.

Paragraph 7 of TR 92/3 goes on to state the relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 13 of TR 92/3 lists some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction:

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

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

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

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

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

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

(g)  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.

If a transaction satisfies the elements set out above, it is generally not a mere realisation of an investment.

Capital Gains Tax

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. Section 102-5 of the ITAA 1997 includes a capital gain as assessable income.

A capital gain or capital loss may arise if a CGT event happens to a capital gains tax asset. Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

The most common CGT event is CGT event A1, and this occurs when an entity disposes of their ownership interest in an asset (section 104-10 of the ITAA 1997). The sale of vacant land would be considered to be a CGT event A1.

Application to your situation

You purchased a vacant [relevant measurement] parcel of land in the [relevant year] as an investment asset with the intent of long-term capital growth.

You have no other assets, and your trustees and beneficiaries have never carried on a business of land or property development or undertaken any land development activities.

This is a one-off project that is not considered to being carried out in a manner similar to other property development businesses. It does not have a commercial purpose or character; you are selling the vacant land as is. There is no repetition or regularity to the activity. The activity is on a small scale in comparison to that of ordinary trade. The activity is not planned and organised in a businesslike manner and the activity size is small and a one-off activity. The activity is not complex and is not considered to be a hobby.

Conclusion

Therefore, on consideration of the facts and circumstances outlined above, it is considered that the activities do not have the indicators of carrying on a business or an isolated commercial transaction. Any proceeds received on the disposal of the vacant land will represent a mere realisation of a capital asset and will be subject to CGT pursuant to 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997.