Edited version of private advice

Authorisation Number: 1052304147908

Date of advice: 12 September 2024

Ruling

Subject: Subdivision - isolated transaction

Question 1

Will the profit from the sale of your property (the Property) be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis the profit will be from an isolated transaction?

Answer

Yes.

Question 2

Can part of the assessable profit from the sale of the Property be reduced by the proportion of the profit that relates to your residence situated on the Property?

Answer

No.

Question 3

Will you be making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the Property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Around XX years ago, you purchased X hectares of land (the Property).

The Property largely consists of natural bushland, except for a large shed which has been turned into a residence (with a portion of bushland cleared around the shed), a garden shed, and a shipping container used for storage.

Around two years after purchase, a Development Application from the local council approved clearing of the land and construction of the shed.

The dwelling includes two bedrooms, one bathroom, kitchen, dining room, lounge room, built in laundry and patio. It also includes sanitation facilities and a septic tank. You have lived in the dwelling for XX years.

Over XX years ago, you held an ABN and were registered for GST.

Over XX years ago, you and your then spouse obtained a loan from a Bank.

The loan funds were initially used to seek approval of a subdivision Development Application (DA) and also for building alterations to the dwelling.

Over a period of three years, you incurred expenditure in the vicinity of $X in regard to reports and assessments required for the DA which included bush fire risk management plan, flora and fauna survey, traffic assessment, flood assessment, Aboriginal object report, wastewater management, surveying fees and council fees.

Over XX years ago, you lodged a DA to subdivide the land into over XX blocks.

At that time, you had no previous experience in land sub-division or development.

The council consented to the subdivision of the lots, and it was a requirement that the subdivision works be commenced within 5 years.

Several years later, you applied to register the pegging of some blocks. This was done to preserve the longevity of the DA.

Following the pegging, no further steps were taken to proceed with the development or sale of the blocks.

In your income tax returns for a number of years, you claimed net non-primary production income losses in relation to property development expenses.

Some years ago, you also suffered a workplace injury and were unable to work.

Several years later, you and your spouse separated.

Your ex-spouse subsequently filed an application for property adjustment in the Federal Circuit and Family Court of Australia.

The Family Court recently ordered that the Property be listed for sale with a real-estate agent with sale proceeds to be distributed pending further order of the Court.

The Property is to be sold (with the DA approval) on the one title, with the residence being sold as part of it.

You entered into a contract for sale; however, the contract did not proceed.

You are currently trying to find another buyer for the Property.

You have not derived income from the use of any part of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 118-20

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

Reasons for decision

Question 1

Will the profit from the sale of the Property be included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis the profit will be from an isolated transaction?

Reasoning

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

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

(b) those transactions entered into by non-business taxpayers.

Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a 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.

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.

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.

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, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

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.

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.

Paragraph 13 of TR 92/3 states that 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.

Transactions with a profit-making purpose

In FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 376; 82 ATC 4031 at 4042; 12 ATR 692 at 705 (Whitfords Beach), Mason J agreed with the view that a profit made on the sale of property acquired for the purpose of profit-making by sale, when the purchase and sale is an isolated transaction not undertaken in the course of carrying on a business, could be income.

The view of Mason J was accepted and elaborated upon by the Full High Court in FC of T v The Myer Emporium Ltd (1987) at 163 CLR 209-210, 87 ATC 4366-7, 18 ATR 697 (Myer):

Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (Whitfords Beach 150 CLR at 366-367, 376; 82 ATC at 4036-4037, 4042; 12 ATR at 695-696, 705). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Profits or gains in the ordinary course of business

In Myer, the High Court spoke of profits or gains made in the ordinary course of carrying on a business being income. The Court went on to say that, because a business is carried on with a view to profit, such profits or gains are invested with a profit-making purpose and are thereby stamped with the character of income.

Profits or gains from isolated transactions

In Myer, at 163 CLR 213; 87 ATC 4369; 18 ATR 699-700, the Full High Court stated the following about the nature of profits from isolated transactions:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profitmaking by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

Paragraph 36 of TR 92/3 notes that 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 (Myer at 163 CLR 213; 87 ATC 4368-4369; 18 ATR 699-700).

The intention or purpose of the taxpayer (of making a profit or gain) referred to in Myer 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. The court stated:

'..it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income..'.

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.

As stated in paragraphs 41 and 42 of TR 92/3, 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. However, that is not always the case as the High Court decision in Whitfords Beach demonstrates.

For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either:

(a) as the capital of a business; or

(b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction,

the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Whether there must be a purpose of profit-making by the very means by which the profit was in fact made

Paragraph 14 of TR 92/3 explains that it is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. That is:

a)   it is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose;

b)   it is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means (Westfield Limited v FC of T 91 ATC 4243; 21 ATR 1408; Steinberg v Federal Commissioner of Taxation (1972-75) 134 CLR 640; 75 ATC 4221; 5 ATR 594).

Consequently, the Commissioner's view is that a profit made in either of the following situations is income:

a)   a taxpayer acquires property with a purpose of making a profit by which ever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

b)   a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit.

We also consider that an assessable profit arises if a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means. Thus, a taxpayer may contemplate making a profit by sale but may ultimately obtain it by other means (such as compulsory acquisition, through a company liquidation or a distribution in specie) that were not originally contemplated (paragraph 57 of TR 92/3).

Case law - profit making intention

In Whitfords Beach, the taxpayer was formed to acquire land to secure to the shareholders continued access to, and use of, their fishing shacks. It was intended, when possible, to subdivide the land and to give each of the original shareholders a separate title to a separate lot on or near the beachfront. Some years later, the shareholding in the company was sold and the new shareholders had the intention that the taxpayer should cause the land to be developed, subdivided and sold. The taxpayer then set about an involved course of activity in relation to the subdivision and sale of the resulting blocks.

The Commissioner assessed the taxpayer to tax on the profit arising from the sale of the various lots. On appeal by the taxpayer, the Federal Court, by majority, held that the taxpayer's activities in relation to the land did not go beyond the mere realisation of the capital asset in the most enterprising way and to the best advantage and therefore the sale proceeds were not assessable as income. However, on appeal by the Commissioner to the High Court, it was held that what the taxpayer did amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. Accordingly, the proceeds from the sale of the land were assessable as income.

In McCarthy v FC of T [2021] AATA 1511, the taxpayer acquired a residential property, demolished the existing house and lodged an application for approval of the subdivision of the property into two lots. The resulting lots were sold within 15 months of the original date of purchase of the property.

It was held that the profit generated by the purchase and subdivision of the property and the sale of the subdivided lots was assessable income. The taxpayer's claim that it was the couple's intention to hold onto the property as a rental investment with the potential at some time in the future to subdivide and sell was not supported by the evidence. Rather, the actions taken by the couple were equally, if not more consistent with, an intention to subdivide and sell the property. It was clear that at the time of purchase it was firmly part of the couple's considerations that an option for the property was to subdivide.

Case law - profit making does not need to the sole or dominant purpose

In Moana Sands Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1853 the taxpayer acquired beachfront land with the twofold purpose of working and/or selling the surplus sand and holding the land until it became appropriate to sell it at a profit. The land was ultimately resumed by the government which paid compensation for it. In a joint judgment, the Full Federal Court held that an intention to sell need only be a purpose and need not be the sole or dominant purpose.

It was found that the taxpayer acquired the property with the twofold purpose of working and/or selling the sand and thereafter holding the property until sometime in the future when it became appropriate to sell it for subdivision. The amount received by the taxpayer was assessable income according to ordinary concepts, notwithstanding it was received as the result of a single and, in a sense, isolated transaction. The gain was made in an operation of business in carrying out a scheme for profit-making.

In Doyle v FCT [2020] AATA 345, it was held that the net proceeds of each land sale were income, not capital, in nature. The requirement that the acquisition of a property be actuated by the sole or dominant purpose of making a profit by sale for the proceeds to be characterised as income was an unduly narrow test. The correct test was whether the property was acquired as part of a profit-making scheme that included, as one of its purposes, profit-making by sale. Here, each sale arose in the ordinary course of the business of the Doyle Group and of the trust that owned the property. Furthermore, each sale arose as part of a transaction that was entered into with a purpose that included developing the land to sell as industrial lots for profit.

Case law - mere realisation

In Statham & Anor v Federal Commissioner of Taxation (1988) 20 ATR 228, the taxpayers owned farmland that was used for a time for raising beef cattle. Subsequently, due to a number of reasons, the taxpayers decided to subdivide and sell the property and they obtained the necessary approval from the local council. The actual subdivision work was carried out by the local council, although the owners obtained professional advice from an engineering firm. While the owners provided a bond to the council by way of a bank guarantee, they did not borrow any money. The subdivided land was marketed by local real estate agents. No site office was set up to cater for the sale of lots and no office was set up to conduct the affairs of the owners.

The Commissioner argued that the profits should be income according to ordinary concepts on the basis that while the farm was originally acquired by the owners for domestic purposes, the property was later committed to the business of subdivisional land development.

It was held that it was erroneous to conclude that, because the owners decided not to persist with farming the land but instead sold it by means of subdivision, the proceeds of realisation necessarily became taxable. The mere realisation of an asset at a profit did not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The manner by which the owner subdivided and sold the land indicated that the owners were not conducting a business or engaging in a profit-making undertaking or scheme.

In Casimaty v Federal Commissioner of Taxation (1997)37 ATR 358, the taxpayer conducted a primary production business on land he owned. In order to alleviate the effects of financial hardship and deteriorating health, the taxpayer decided to sell off parts of the farm. The taxpayer developed the subdivisions only to the extent necessary to comply with conditions placed on the development consent. Over a period of 20 years the taxpayer made eight subdivisions amounting to nearly two thirds of his property.

It was held that the sales from the relevant subdivisions occurred as part of the mere realisation of a capital asset of the taxpayer. The taxpayer acquired and continued to hold the farm property for use as a residence and the conduct of a primary producer. Apart from the activities necessarily undertaken to obtain approval from time to time for subdivision of parts of the property, there was nothing to suggest a change in the purpose or object with which the property was held.

Case law - mere realisation: abandonment of profit making scheme

In Kratzmann v FCT (1970) 1 ATR 827, the Court concluded that the taxpayer bought the land, not to sell at a profit, but to carry out a profit-making scheme involving the borrowing of money to erect a building and the realisation of units in the building to cover the repayment of loans and the cost of the project, leaving him with a substantial asset which would constitute a surplus or a profit. For financial reasons, the idea of developing the land as intended was abandoned and it was sold, resulting in a profit.

It was held that the profit was not assessable. It arose, not from the purchase of the land, but from its sale, and because the sale was not part of the profit-making scheme the profit did not arise from the carrying on or carrying out of that scheme.

In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, a trustee purchased two adjacent parcels of land with the original intention to develop and sell the two properties. However, this intended plan was ultimately abandoned as funding could not be secured. The trustee subsequently rented out the two properties until they were sold several years later.

The Court held the properties were capital assets and the sale therefore resulted in capital gains, rather than being the sale of trading stock or sold as part of an isolated or commercial transaction that was entered into with a profit-making intention and resulting in ordinary income. It was held that this was due to a change of the original intention. Logan J emphasised that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities. When the property was subsequently sold, the profit arose not from the purchase but from the sale, and because the sale was not part of the profit-making scheme, the profit did not arise from the carrying on or carrying out of that scheme.

Application to your circumstances

As stated further above and relevantly to your situation, 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. However, that is not always the case.

For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either as the capital of a business, or into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Further, it is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. Therefore, a profit made in the following situations is income:

•         a taxpayer acquires property with a purpose of making a profit by which ever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose; or

•         a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit; or

•         a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means.

It is also noted that with business like activities, activities may not be continuous or may be minimal over long periods of time. As with business taxpayers, profits can be realised in various ways that may not have been previously anticipated, and similarly with a 'business like' isolated transaction.

We consider your intention on purchasing the property was partly for establishing your personal residence. However, that intention subsequently changed to a profit making intention as evidenced by the size of the proposed subdivision, the scale of the DA related activities you undertook, registering for an ABN, and claiming property development expenses over several years. The actions you undertook were similar to what a person in business would have undertaken.

It is considered that you decided to undertake the subdivision to make a profit and although you did not see through the entirety of this, you enhanced the value and sale price of the land with the approval of the DA. As per the relevant case law, profit from the sale of a property can still be assessable as income even though the profit is derived by a different means to what was originally anticipated.

Therefore, the profit from the sale of the Property will be included in your assessable income under section 6-5 of the ITAA 1997 on the basis the profit will be from an isolated transaction.

Question 2

Can part of the assessable profit from the sale of the Property be reduced by the proportion of the profit that reasonably relates to your residence situated on the Property?

Reasoning

The sale of a dwelling that was a taxpayer's residence does not preclude the profit or gain from being a profit from an isolated transaction and therefore being included in assessable income.

In Bowerman v FC of T [2023] AATA 3547, the taxpayer lived in a dwelling for a period of time before selling it; no improvements whatsoever were made to the property. The tribunal held that the loss on sale was an isolated transaction and therefore a deductible loss. The evidence including the fact that, even before its purchase, the taxpayer intended to re-sell the unit for a profit instead of holding onto it for long-term investment) pointed to the taxpayer having the requisite profit-making intention at the time they purchased the unit and that their intention to live in it was a subsidiary purpose.

The ATO view on property flipping illustrates that even 100% private use of a dwelling (that is, living in it while renovating) does not preclude the market value cost of the property being taken into account for the net profit calculation in an isolated transaction. In these situations, it is the main residence that is the property ventured into the isolated transaction. Although a property flipping scenario is different in that physical improvements are made to the home, in your case, the fact that the improvements to the land surrounding your residence are not physical is not necessarily determinative.

In your case, you have effectively made efforts to improve the land on your property, albeit not in a physical way, in order to sell both the main residence and the surrounding land at a higher price than if you had not undertaken these activities.

Therefore, you are unable to reduce part of the assessable profit from the sale of the Property by the proportion of the profit that relates to your residence situated on the Property.

Where you dispose of a property which includes a residence as part of an isolated profit making transaction, your income tax position may be briefly summarised as:

•         your net profit is included in your income tax return. It is calculated as the difference between your proceeds from the sale of the property and the total costs incurred in buying, holding, improving, renovating and selling the property.

•         the CGT discount and the main residence exemption do not reduce your net profit.

•         although you will also make a capital gain from the sale of the property, your capital gain is effectively reduced by any amount of net profit included in your return under the 'anti-overlap' rule in section 118-20 of the ITAA 1997.

Question 3

Will you be making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell the Property?

Reasoning

In this part of the reasons for decision, unless otherwise stated:

•         all legislative provisions refer to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

•         all reference materials referred to are available on the ATO website (www.ato.gov.au).

You make a taxable supply under section 9-5 if:

a)   you make a supply for consideration (payment); 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 (Australia); and

d)   you are registered, or are required to be registered, for GST.

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

In this case, of relevance for consideration is whether you will be selling the Property in the course or furtherance of an enterprise that you carry on. That is, whether paragraph 9-5(b) will be satisfied.

Carrying on an enterprise

An enterprise is defined widely by section 9-20 to include (amongst other things) an activity or series of activities done 'in the form of a business' or 'in the form of an adventure or concern in the nature of trade'. The phrase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Relevant guidelines are available in Goods and Services Tax Ruling GSTR 2003/6 Goods and service tax: transfer of enterprise assets as a result of distribution under the Family Law Act 1975 or in similar circumstances (GSTR 2003/6). GSTR 2003/6 includes the following:

41. We consider that there is no 'discernible relationship' between the supply of an asset under an MPD and the enterprise. Our view is based on a combination of factors. The main factor is the private nature of a marriage breakdown. Other factors include the binding nature of an FLA order or agreement and the lack of commercial flavour in the absence of consideration.

42. Where the overriding essential character of the supply is that of something being disposed of due to the personal circumstances of the spouse, upon marriage breakdown or otherwise under the FLA, rather than business circumstances of the enterprise, that supply is not made in the course or furtherance of the enterprise.

In your case, the following factors are relevant:

•         Whilst the subdivision was of significant scale, you did not take further steps to proceed with this subdivision following the pegging of several lots. This development was not pursued to completion.

•         You are now selling the Property as the result of a Family Court matter.

The relevant facts including the above factors indicate that the sale of the Property is due to spouse relationship breakdown rather than circumstances relating to an enterprise under section 9-20.

Accordingly, the principles in GSTR 2003/6 apply to your circumstances and the supply of the Property will not be made in the course or furtherance of an enterprise that you carry on. This means the requirement of a taxable supply under paragraph 9-5(b) will not be met. That is, not all of the requirements specified under section 9-5 will be satisfied and your supply of the Property will not be a taxable supply. GST will not be payable on the supply.