Edited version of private advice

Authorisation Number: 1052311748877

Date of advice: 30 September 2024

Ruling

Subject: CGT - subdivision

Question 1

Will the proceeds from the sale of Lot 1 and Lot 2 (the Lots) be assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer 1

Yes

Question 2

Will the proceeds from the sale of the Lots be assessable under Parts 3-1 and 3-3 of the ITAA 1997?

Answer 2

Yes

Question 3

Is the first element of your cost base for the Lots the market value of the Property at the date of death of the Deceased?

Answer 3

Yes

Question 4

Is the capital gain on the sale of the Lots a discount capital gain?

Answer 4

Yes

Question 5

Will the sale of the two blocks of subdivided vacant land located at XXX (the Lots), be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 5

Yes

Question 6

If the answer to Question 5 is yes, can you apply the margin scheme under section 75-5 of the GST Act to the sale of the Lots?

Answer 6

Yes

Question 7

If the answers to Question 5 and Question 6 are yes, are you eligible to use Item 2 of the table to subsection 75-10(3) of the GST Act when using the margin scheme to calculate the GST payable on the sale of the Lots?

Answer 7

Yes

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased owned a property (the Property).

The Property consisted of a dwelling on a single lot.

The Deceased purchased the Property with their spouse as joint tenants prior to 20 September 1985.

The Property was the Deceased's main residence until the time of their death.

The Deceased acquired their spouse's interest in the Property on their death on Date One, after 19 September 1985.

The Deceased died on Date Two, several years later.

The Deceased was neither registered nor required to be registered for GST prior to their death.

The executors of the Deceased's will are their relatives, Person A and Person B (the Executors).

Person A and Person B are also the sole beneficiaries of the Property and the residue of the Deceased's estate.

The Trustee for the Estate (You) are not registered for GST.

Person A and Person B are also your trustees.

Person A works as a manager. Residential subdivision is outside the scope of Person A's normal work.

Person B works as a director and employee of a company. Person B has no current or past involvement in residential subdivision.

Neither Person A nor Person B are registered for GST in their own capacity.

The Property was vacant for several years following the death of the Deceased.

During that time the Deceased's personal and household effects were removed from the Property and the Property was prepared for rent.

Probate was granted on Date Three.

Following the death of the Deceased and prior to renting out the Property, you also obtained some conceptual drawings from an architect. This was done with a view to potentially improving the rental income received from the Property.

You made the decision to rent out the Property without undertaking any work beforehand.

You began using the Property to earn assessable income in early 20XX.

You continued to rent the Property until late in 20XX, at which time they considered the possibility of transferring it in specie to the beneficiaries or selling the Property and distributing the proceeds from sale to conclude administration of the Estate.

In the later part of 20XX, Person A received a call from a local real estate agent (Person C).

Person C advised that you should consider subdividing the Property into several lots to maximise the sale value.

Person C advised that other landowners in the area had done the same thing and achieved good results.

You agreed that the value of the Property would be maximised by demolishing the dwelling on the Property and subdividing the block into several vacant residential lots of equal size.

You made a development application to the relevant council on Date Four. The application was to reconfigure the Property from one lot into several lots.

No separate subdivision application was required as it could be considered within a development application.

No rezoning application was required as the land was already zoned residential.

On Date Five, you received a letter advising that your development application had been approved.

In preparation for the subdivision, the following activities have been undertaken:

•                     You have engaged a town planner and surveyor.

•                     A licenced contractor has been engaged to attend the demolition of the dwelling on the Property.

•                     A civil engineer has been engaged to design services connections (sewer and water) on the Property. The civil engineer was managed by the town planner.

•                     A civil contractor will shortly be engaged to carry out minor on-site works including driveways and footpaths.

Due to the scale of the subdivision, you did not need to engage a project manager or developer to manage the subdivision.

The cost of subdivision was paid for using cash from the Estate.

The dwelling on the Property was demolished in early 20XX.

You engaged Person C's real estate agency to sell the lots which were listed for sale on Date Six.

The Lots are currently listed for sale.

No formal offers have been received. The agents received an Expression of Interest (EOI) for the Lots but no offer resulted from the EOI.

Towards the middle of 20XX, Person C's real estate agency used an image produced by Company A as an example of a house that could be built on either lot.

Company A advised Person C's real estate agency that such a design could be built for a particular amount.

Person C's real estate agency took the initiative with your consent to advertise a house and land offer including the image.

No building contracts have been entered into by you and any other parties.

You are not offering to provide built homes to purchasers of the Lots and are not participating financially or otherwise in any potential building project.

No development plan has been lodged in respect of either of the Lots.

Buyers are not required to engage Company A for house building.

Person C's real estate agency has been instructed to offer prospective buyers either Lot.

The plan of subdivision was expected to be lodged by the surveyor for the relevant council several months ago.

Lodgment of the plan would conclude the subdivision.

You are not registered for GST.

You will dispose of the Lots in the income year ending 30 June 20XX.

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

A New Tax System (Goods and Services Tax) Act 1999 section 75-35

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

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

A New Tax System (Goods and Services Tax) Act 1999 Division 11

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The proceeds from the sale of the Lots will be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Generally, there are three ways profits from the subdivision of land can be treated for taxation purposes. These are as follows:

•                     as ordinary income under section 6-5 of the ITAA 1997,on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock

•                     as ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated commercial transaction entered into by a non-business taxpayer outside the ordinary course of business, with a profit-making purpose

•                     as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997 as a mere realisation of a capital asset

Carrying on a business of property development

Section 995-1 of the ITAA 1997 states that the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11) outlines the principles to consider when determining whether a taxpayer is carrying on a business of primary production. However, the same principles can be applied to the question of whether a taxpayer is in the business of property development.

Paragraph 13 of TR 97/11 considers the following indicators when 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.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole.

Isolated business transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income discusses profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in FCT v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693. This ruling states that profits on isolated transactions may be income in certain circumstances. These circumstances are outlined below.

Profit from an isolated transaction will be ordinary income where:

•                     the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and

•                     the transaction was entered into, and the profit was made, in the course of carrying on a business operation or commercial transaction.

Paragraph 38 of Taxation Ruling TR 92/3 outlines that 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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997 if the taxpayer's subdivisional activities amount to a business operation or commercial transaction.

Paragraph 13 of TR 92/3 outlines some of the factors to consider when deciding 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

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

All of the above factors are considered together and not in isolation.

As outlined in paragraph 43 of TR 92/3, 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 (FC of T v. Spedley Securities Limited 88 ATC 4126 at 4130; 19 ATR 938 at 942). TR 92/3

There is no requirement that the transaction and resulting profit be of a certain scale, or involve a large sum of money, or be complex, or involve individuals not corporations, in order to be considered a 'commercial transaction', and for the profit to be deemed to be income.

Paragraph 42 of Taxation Ruling TR 92/3 provides that 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, then 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.

For a transaction to be characterised as a business operation or a commercial transaction, paragraph 47 of TR 9/3 states that it is sufficient if the transaction is business or commercial in character. However, whether a particular transaction has a business or commercial character depends very much on the circumstances of the case.

In McCarthy v Commissioner of Taxation [2021] AATA 1511 (McCarthy), the applicant and her husband purchased a residential property. Shortly after, they lodged an application for subdivision. This plan was approved and the dwelling on the property was demolished after the tenant had vacated it. At the time of purchase of the property, there was a long-term tenant in residence.

The two lots resulting from the subdivision were sold and the applicant applied for a private ruling to determine whether the profits derived were assessable income under section 6-5 of the ITAA 1997. The Commissioner found that the profits were assessable income under section 6-5 of the ITAA 1997 and the applicant objected to the private ruling decision.

In McCarthy, the applicant argued that the transaction could not be considered a business operation or commercial transaction, as it did not satisfy any of the commercial transaction indicators set out in paragraph 49 of TR 92/3.

As stated at paragraph 48 in McCarthy v Commissioner of Taxation [2021] AATA 1511;

The Tribunal makes two observations about the above argument. The first is that '... the applicable test is ... that the transaction must be the sort of thing a businessperson or person in trade does' (Steward J's propositionfrom Greig v Commissioner of Taxation at [242](2020) 275 FCR 445.The test is not whether the transaction was carried out in an efficient or business-like manner, the test is whether the transaction is of the sort that a person in business would undertake. In this case, is the purchase and subdivision of a block and the sale of the resulting lots the sort of transaction that a person in business would undertake? Clearly the answer is yes.

At paragraphs 56 and 57, Taxation Ruling TR 92/3 explains that a profit is income where it is made in any of the following situations:

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

•                     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.

The relevant intention or purpose need not be the sole or dominant intention or purpose for entering into the transaction (Federal Commissioner of Taxation v Cooling) [1990] FCA 297; (1990) 22 FCR at 57. Paragraphs 7 and 8 of TR 92/3 provide that it will be sufficient if the profit-making was a significant purpose for entering into the transaction.

Mere realisation

Where the sale of land is a 'mere realisation', the sale is on capital account and CGT rules will generally apply. These proceeds are not ordinary income. As stated in Paragraph 36 of TR 92/3, the courts have often said that the profit on the mere realisation of an investment will not be income, even where the taxpayer goes about the realisation in an enterprising way. However, where the original asset is transformed, this goes beyond a mere realisation of an investment. The extent of the transformation will be relevant when determining whether the undertaking is profit making in nature.

In Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (79 ATC 4648) Justice Deane stated:

Thus a goldsmith who sells in his shop his patrimony of a single gold bar does not necessarily receive the proceeds of sale as income merely because he takes advantage of his shop to sell his capital asset more advantageously. On the other hand, the master goldsmith who labours to turn such a gold bar into finely wrought brooches which he displays and sells with his other gold wares, could not be said to receive the whole of the proceeds of sale of those particular brooches as capital merely because the gold from which they had been fashioned had not been acquired by him for the purposes of his business but had been received as a gift from his father.

The paragraph above indicates that where the original asset acquired has been transformed so that it no longer retains its original character, the disposal of that asset will go beyond a mere realisation.

Application to your circumstances

You are not in the business of property development. It is therefore necessary to examine whether the sale of lots will be an isolated profit making transaction.

At the time of acquisition of the Property, you did not have the intention to demolish the Property and subdivide it. The property was left vacant for XX months, during which time you engaged an architect to draw up some plans. This was done with a view to increasing rental income.

You commenced renting out the Property in early 20XX. Late in 20XX, you considered transferring the Property to the beneficiaries in specie or selling the Property and distributing the proceeds.

At about the same time, you were approached by a real estate agent who advised that you would maximise your value on disposal of the Property if you demolished the existing dwelling and subdivided the vacant block.

Your intention to make a profit commenced on or about the time you made the decision to demolish the Property and subdivide the block. At the time of submitting the application for subdivision, you did this with the not-insignificant purpose of obtaining a higher sale price than if the Property had been sold as it was.

You could have sold the dwelling as is and obtained a market value at the relevant point in time. However, you made the decision to demolish the dwelling and subdivide the block into two. By doing this, you transformed the original asset with the objective of obtaining a sale price of a higher amount than when the lots are sold.

While it is the case that maximising the profit on disposal of an asset will not mean that it ceases to be a mere realisation, where a sufficient transformation has occurred to change the nature of the original asset acquired, the transaction will be an isolated profit making transaction.

The transactions you entered into when demolishing and subdividing the Property and the sale of the two lots will constitute an isolated profit making transaction. Therefore, the sale of the lots will be assessable under section 6-5 of the ITAA 1997.

Question 2

Summary

The proceeds from the sale of the Lots will be assessable under the capital gains tax (CGT) provisions in Parts 3-1 and Parts 3-3 of the ITAA 1997.

Detailed reasoning

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable interest that is not property.

Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset.

Section 118-120 of the ITAA 1997 contains anti-overlap provisions which operate to reduce capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 of the ITAA 1997, for example, as ordinary income under section 6-5 of the ITAA 1997.

Application to your circumstances

As discussed in Question 1, the sale of the Lots will be assessable under section 6-5 of the ITAA 1997. The proceeds from the sale of the Lots will also be assessable under the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

Any capital gain will be reduced by section 118-120 of the ITAA 1997, which allows a reduction to the extent of amounts included in your assessable income in accordance with section 6-5 of the ITAA 1997.

Question 3

Summary

The first element of the cost base for the Lots will be the market value of the Property at the date of death of the Deceased.

Detailed reasoning

In Taxation Determination 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?(TD 97/3), the Commissioner considers that the effect of registering separate new titles under the subdivision is, for the purposes of Parts 3-1 and 3-3 (ITAA 1997), to divide the original land parcel into two or more assets.

The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.

Item 3 of the table in subsection 128-15(4) provides that for a dwelling that was the deceased's main residence just before they died, the first element of the cost base is the market value of the CGT asset on the day the deceased died. The exceptions to this are where the dwelling was being used for the purpose of producing assessable income and the deceased was not then an excluded foreign resident.

Application to your circumstances

You acquired the Property upon the death of the Deceased. Just before their death, the Property was the deceased's main residence and was not being used to produce assessable income. As outlined in TD 97/3, when you subdivide blocks, they are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired. As a result, the first element of the cost base will be the market value at the date of death.

As you have subdivided the Property into two lots, the first element of the cost base should be attributed to the Lots on a reasonable basis.

Question 4

Summary

The capital gain on the sale of the Lots is a discount capital gain.

Detailed reasoning

Under section 115-100 of the ITAA 1997, a trust is entitled to discount the capital gain made as a result of a CGT event by 50 percent provided:

•                     the trust is an Australian resident for tax purposes

•                     the CGT event happens after 21 September 1999; and

•                     the CGT asset was acquired at least 12 months before the CGT event happened.

Section 995-1 of the ITAA 1997 provides that a trust will be a resident trust for CGT purposes if at any time during the income year:

•                     for a trust that is not a unit trust, a trustee is an Australian resident or the central management

•                     and control of a trust is in Australia.

Application to your circumstances

Person A and Person B are residents of Australia and trustees for the Estate.

Your interest was acquired in 20XX, at least 12 months before the CGT event happened and after 21 September 1999.

As you meet the requirements in section 115-100 of the ITAA 1997, the capital gain on the sale of the lots is a discount capital gain.

Question 5

Section 9-5 provides that a supply is a taxable supply if:

(a)           the supply is for consideration

(b)           the supply is made in the course or furtherance of an enterprise that the entity carries on

(c)           the supply is connected with the indirect tax zone, and

(d)           the supplier is 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.

The sale of the Lots satisfies paragraphs (a) and (c) of section 9-5. That is, when the Lots are sold, the supply will be for consideration and the Lots are connected with the indirect tax zone as the Lots are in Australia.

There are no provisions in the GST Act relevant to your circumstances that would make the sale of the Lots GST-free or input taxed.

Whether or not your sale of the Lots will be a taxable supply depends on:

•                     whether or not the sale is in the course or furtherance of an enterprise you carry on; and

•                     whether or not you are required to be registered for GST (as you are not currently registered for GST).

Enterprise

Section 9-20 defines enterprise widely to include 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.

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 guidelines on the meaning of carrying on an enterprise.

Paragraph 1 of 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.

Paragraphs 170 to 176 and 233 to 242 of MT 2006/1 discuss the meaning of the phrase 'in the form of' a business and an adventure or concern in the nature of trade, respectively.

The phrase 'in the form of a business' clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own (refer to paragraph 170B of MT 2006/1). However, the phrase 'in the form of' does not have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. The activity must still be reasonably intended to be profit-making. (refer to paragraph 170A of MT 2006/1)

Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. (refer to paragraph 234 of MT 2006/1)

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.

Paragraphs 262 to 302 of MT 2006/1 discuss isolated transactions and sales of real property.

Paragraphs 262 and 263 of MT 2006/1 provides that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. The issue to be decided is whether the activities 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.

Paragraph 265 of MT 2006/1 provides a list of factors we consider in determining whether a property subdivision activity is a business or an adventure or concern in the nature of trade. It states:

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:^[107]

•                     there is a change of purpose for which the land is held;

•                     additional land is acquired to be added to the original parcel of land;

•                     the parcel of land is brought into account as a business asset;

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

•                     there is a business organisation - for example a manager, office and letterhead;

•                     borrowed funds financed the acquisition or subdivision;

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

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.

Example 31 in MT 2006/1 (paragraphs 284 to 287) describes a scenario where two individuals decided to demolish their family home and subdivide the block into two blocks to maximise the sale proceeds. Their activities go beyond minimal activities needed to subdivide the land.

Example 31

284. Prakash and Indira have lived in the same house on a large block of land for a number of years. They decide that they would like to move from the area and develop a plan to maximise the sale proceeds from their land.

285. They consider their best course of action is to demolish their house, subdivide their land into two blocks and to build a new house on each block.

286. Prakash and Indira lodge the necessary development application with the local council and receive approval for their plan. They arrange for:

•                     their house to be demolished;

•                     the land to be subdivided;

•                     a builder to be engaged;

•                     two houses to be built;

•                     water meters, telephone and electricity to be supplied to the new houses; and

•                     a real estate agent to market and sell the houses.

287. Prakash and Indira carry out their plan and make a profit. They are entitled to an ABN in respect of the subdivision on the basis that their activities go beyond the minimal activities needed to sell the subdivided land. The activities are an enterprise as a number of activities have been undertaken which involved the demolition of their house, subdivision of the land and the building of new houses.

Unlike the scenario in Example 31, your activities did not include the building of new houses on the Lots. However, we consider that your activities go beyond a mere realisation of a capital asset. You demolished the dwelling on the Property and subdivided the land into the two vacant residential lots in order to maximise the value of the Property. Prior to the demolition, you lodged a development application with the relevant council, engaged a town planner, a surveyor, a civil engineer to design services connections, and a civil contractor to carry out on-site works.

Your activities and your purpose in conducting those activities were reasonably intended to be profit-making as to maximise the sale proceeds. This means that your activities are of a revenue nature and you are carrying on an enterprise for GST purposes. Your activities fall within the scope of enterprise as defined in section 9-20, being a series of activities done in the form of an adventure or concern in the nature of trade. As such, the sale of the Lots would be 'in the course or furtherance' of the enterprise that you carry on.

GST Registration

As you are not registered for GST, we will have to consider whether or not you are required to be registered for GST.

Section 23-5 provides that an entity carrying on an enterprise is required to be registered for GST if its GST turnover meets the registration turnover threshold (currently $75,000 or $150,000 if the entity is a non-profit body).

For the reasons discussed above, we consider you are carrying on an enterprise.

The meaning of GST turnover is contained in Division 188.

Section 188-10 provides that you have a GST turnover that meets the turnover threshold if:

(a)           your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b)           your projected turnover is at or above the turnover threshold.

Section 188-15 defines your 'current GST turnover' as the sum of your turnover for the current month and the previous 11 months other than:

(a)           supplies that are input taxed

(b)           supplies that are not for consideration

(c)           supplies that are not made in connection with an enterprise that you carry on.

Section 188-20 defines your 'projected GST turnover' as the sum of your turnover for the current month and the next 11 months other than:

(a)           supplies that are input taxed

(b)           supplies that are not for consideration

(c)           supplies that are not made in connection with an enterprise that you carry on.

Further, section 188-25 requires you to disregard the following when calculating your projected GST turnover:

(a)           any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

(b)           any supply made, or likely to be made, by you solely as a consequence of:

                            (i)                ceasing to carry on an enterprise, or

                          (ii)                substantially and permanently reducing the size or scale of an enterprise.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses what is regarded as a 'capital asset' at paragraphs 31 to 36.

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction...

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

In addition, on the distinction between capital assets and revenue assets, paragraph 260 of MT 2006/1 provides that assets can change their character but cannot have a dual character at the same time.

In this case, the Property was acquired by the Deceased together with their spouse prior to 20 September 1985 and the Deceased became the sole owner upon their spouse's death on Date One. The Property was the Deceased's primary place of residence until the time of their death.

Following the Deceased's death, you leased the Property for a period, at which time you decided to develop it.

From the date you started leasing the Property up to late 20XX, the Property would be classified as a capital asset because it was an asset used to generate rental income (refer to paragraph 31 of GSTR 2001/7).

However, as per the principles set out in GSTR 2001/7, from the date you made the decision to develop the Property and sell the Lots, the character of the Property has changed from a capital asset to a revenue asset. The sale of the Lots itself is inherent in, or incidental to, the enterprise you carried on from that point (refer to paragraphs 34 and 36 of GSTR 2001/7).

Given the above, the turnover from the sales of the Lots would not be excluded when calculating your projected GST turnover and given your sales prices for each of the Lots, your turnover will meet the registration threshold. Therefore, you have a turnover that meets the registration threshold because your projected GST turnover exceeds $75,000.

Conclusion

Given the facts of this case, your sales of the Lots will satisfy all the positive limbs of section 9-5 and are neither GST-free nor input taxed. Therefore, the sales will constitute a taxable supply as defined for GST purposes. GST is payable on the sale of the Lots because all the requirements of section 9-5 are satisfied. You are required to be registered for GST because you meet the registration threshold as your projected GST turnover exceeds $75,000.

Question 6

Subsection 75-5(1) provides that you can apply the margin scheme in working out the amount of GST on a taxable supply of real property that you make by:

•                     selling a freehold interest in land or

•                     selling a stratum unit, or

•                     granting or selling a long-term lease

if you and the recipient of the supply have agreed in writing that the margin scheme is to apply.

The agreement in writing must be made on or before the date of settlement, or within such further period as the Commissioner allows.

Notwithstanding the above, subsection 75-5(2) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Further, a supply is ineligible for the margin scheme if any of the circumstances described in subsection 75-5(3) are present. We consider that your supply of the Lots is not ineligible for the margin scheme as none of the circumstances described in subsection 75-5(3) are present.

Therefore, provided that you and the recipient of the supply have a written agreement within the required time, you can apply the margin scheme in working out the GST payable on the supply of the Lots.

Question 7

Subsection 75-10(1) provides that, if the margin scheme applies, the amount of GST on the supply is one eleventh of the margin for the supply.

The margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the interest, unit or long-term lease unless subsection 75-10(3) or section 75-11 applies.

Section 75-11 considers how to calculate margins for supplies of real property in particular circumstances and does not apply to your case.

If you choose to apply the margin scheme, and to calculate the margin for the supply under subsection 75-10(3), then you will be required to obtain a valuation.

The table in subsection 75-10(3) sets out the particular circumstances and the date on which a valuation is required. Relevantly, Item 2 of the table in subsection 75-10(3) provides:

Table 1. Subsection 75-10(3)

As the Lots were acquired prior to 1 July 2000 and you became required to be registered for GST after 1 July 2000, you are eligible to use a valuation as at the date of effect of your GST registration in accordance with Item 2 of the table in subsection 75-10(3).

Approved valuation

Subsection 75-35(1) provides that the Commissioner may, by legislative instrument, determine in writing requirements for making valuations for the purposes of Division 75.

The Commissioner has made the legislative instrument, A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination 2020 (MSV 2020/1). This means that the valuation you use in working out the margin for the supply must comply with the requirements of MSV 2020/1.

Other relevant information

Once you are registered for GST, you are entitled to the GST credits for any creditable acquisitions that you make in carrying on your enterprise (Division 11).