Edited version of private advice

Authorisation Number: 1052342688619

Date of advice: 20 December 2024

Ruling

Subject: GST - sale of real property

Issue 1 - GST

Question 1

Will you, be making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell address of properties (the Remaining Land)?

Answer

Yes.

Question 2

If the answer to question 1 is 'yes', will you be entitled to use the margin scheme under section 75-5 of the GST Act?

Answer

Yes.

Issue 2 - Income tax and Capital Gains

Question 1

Will you be required to include in your assessable income statutory income pursuant to section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) from the sale of the Remaining Land as a result of capital gains tax (CGT) event A1 occurring in accordance with subsection 104-10(1)?

Answer

No. Rather, you will be required to include amounts in your assessable income from the sales pursuant to section 6-5 of the ITAA 1997.

Question 2

If the answer to Question 1 is yes, will the capital gain be a discount capital gain pursuant to Division 115-A of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.         You made reference to two previous private rulings of reference # and # issued on DD MM YYYY and DD MM YYYY respectively.

2.         You retired approximately # years ago and are not registered for GST.

Address of propert> (the Property)

3.         In YYYY, you and your spouse purchased a #-acre parcel of vacant land located at address of property (the Land/the Property). Your spouse has since passed away.

4.         Approximately # years after you purchased the Property, you decided to build a house with the intention of making it your principal place of residence. Relevant permits were obtained, and construction commenced. However, after the house slab was laid, you changed your decision to live at the Property and chose instead to use it as a hobby farm. At that time, the Property was vacant, except for some minor outbuildings.

5.         The Property was predominantly used as a hobby farm. It was never hired out or used for primary production. Over the years, you have consistently maintained a vegetable garden and a brood of hens on the Property. From time to time the Property has also carried a couple of horses and/or up to # head of cattle and/or sheep and/or goats. You would often conduct family barbeques at the Property.

6.         The Property has also been used for recreational purposes (camping).

7.         You have never had a business plan in relation to the use of the Property.

8.         You do not have an existing mortgage over the Property.

9.         In YYYY, you built a house on the Property, which became your principal place of residence.

Development of the Property

10.      The Developer approached an associate of yours (Owner's Representative) with the following proposals:

1)            to develop the Property as a staged sub-division with the expectation to create # vacant residential and commercial lots;

2)            the developer to undertake all 'Project Services' in relation to the Project. These include:

              I.       procuring the planning permit;

              II.       obtaining all Approvals;

              III.       undertaking all required work required by the planning permit or under the Approvals;

              IV.       subdividing and attending to registration of any proposed plan of subdivision for the land for the purposes of sale; and

              V.       selling the lots under the plan of subdivision

11.      Under the plan, a total of # lots were proposed for development. To date, # lots have been developed and sold.

Land Development Agreement (LDA)

12.      On DD MM YYYY, you and your spouse (the Owners) entered into a Land Development Agreement (LDA) with the Developer concerning the Land.

13.      Clause # of the LDA defines a number of terms, including:

1)            "Approvals" as any planning approvals, building approvals, certificates, construction certificates, permits, endorsements, licences, conditions or requirements (and variations to them) which may be required by Law in relationship to the Project;

2)            "Development Works" as any work undertaken, or to be undertaken, to complete the Project;

3)            "Land" as Lot # of Plan of Subdivision # Volume # Folio #. Commonly known as address of property;

4)            "Parent Title" as the title of the Land, which at the Commencement Date, and subsequent to any land subdivision under the Project, is the land on which the Owners' principal place of residence is built;

5)            "Project" as procuring a planning and/or amending a planning permit for the Land, obtaining all Approvals, funding and undertaking all works required by the planning permit or under the Approvals, subdividing and attending to registration of any proposed plan of subdivision for the Land for the purpose of sale and selling the lots under the Plan of Subdivision;

6)            "Sale Contacts" as the contracts of sale under which the Owner (in accordance with a direction of the Developer) sells the Lots;

7)            "Sales Proceeds" as the whole of the proceeds of sale under the Sale Contracts including, but not limited to, deposit monies, any interest earned on deposit monies, or any forfeited deposits; and

8)            "Surplus Proceeds" as the remaining proceeds from the Sale Proceeds after the provision or payment of Project Costs.

14.      Clause # of the LDA provides that nothing in the LDA will be interpreted to constitute between the Owner and the Developer a partnership, joint venture, association or other relationship in which either parties may be liable for the acts or omissions of the other.

15.      Clause # of the LDA provides that for the avoidance of doubt, the parties acknowledge and agree that the LDA does not vest any proprietary, beneficial or other interest in the Land to the Developer.

16.      Clause # provides that the parties shall acknowledge their commitment to the Project and agree to cooperate and collaborate and share information in order to achieve the success of the Project, while complying with clause # and comply with all obligations set out in this LDA.

17.      The Project services, Project Costs and Holding Costs associated with the development are to be incurred by the Developer in accordance with Clause # of the LDA.

18.      Clause # of the LDA provides that the Developer will have complete authority with respect to the management of the Project (development of the Land), including such actions as:

1)            designing the proposed development;

2)            applying for and obtaining all Approvals necessary for the Project;

3)            the appointment, procurement liaison with and, if required, removal or contractors, quantity surveyors, engineers, architects, sale agents and all other principal consultants;

4)            obtaining or procuring the Project Finance;

5)            constructing all services and carrying out all work necessary to subdivide the Land;

6)            arranging and promoting the sale of the Lots.

19.      Clause # of the LDA provides that all Project Costs must be paid by the Developer.

20.      Clause # of the LDA provides the Owner's Obligations under the LDA and in summary:

1)            grants the Developer an irrevocable licence, which cannot be assigned to another, to enter the land at any time to undertake the development;

2)            in consideration for the Developer undertaking the Development Works and associated costs, the Owner will grant the Developer a charge and right to lodge a caveat over the land to secure its interests;

3)            execute all relevant documents, and do all other things, required in connection with the Project, at the direction and written request of the Developer;

4)            pay any Land Tax (if any) attributable to the Parent Title of the Land as it falls due and payable; and

5)            must not assign, sell, lease, mortgage, charge, create any encumbrance over or in respect of, or otherwise dispose or deal in a manner with any interest in the Land without the prior written consent of the Developer.

21.      The Project can be terminated, or placed on hold, in accordance with the terms in Clause # of the LDA.

22.      Clause # of the LDA outlines how the proceeds from the sale of the Land will be distributed between the Owner and the Developer, stating that the Owner shall receive a portion of the Sales Proceeds in accordance with the following formula:

Total Area of the development State in which the Lot is located (ha) divided by the total area of Land (# ha) multiplied by $#; divided by the total number of Lots in the Stage.

23.      Clause # of the LDA further provides, that in addition to the Owners portion of the Sales Proceeds, the Owner shall receive #% of all Surplus Proceeds.

24.      Clause # of the LDA provides that the Developer will determine the selling price of each Lot and prepare a price list for each development stage. The Owner's Representative shall have the opportunity to review and approve the price list. In the case of any disagreement in pricing, a licensed valuer shall be engaged to set Lot pricing at an equal cost to both parties.

25.      Clause # of the LDA provides that the Developer will convene a meeting with the Owner's Representative, at the Owner's Representative's written request but no more than a fortnightly basis, to discuss, inform and advise the Owner's Representative of the progress of the Development and the Owner will be entitled to inspect all work undertaken by the Development.

26.      Clause # of the LDA provides that the Developer will be carrying on the enterprise of the Project Services, will arrange for registration under the GST Act and shall be responsible for GST payable in respect of any payment relating to the Project Services against the proportion of the revenue earned.

27.      Clause # of the LDA provides that if a supply under this agreement is a taxable supply, the recipient must pay the additional amount to the supplier.

28.      Funds due to you are payable upon the settlement of each individual lot.

29.      The Developer is required to maintain appropriate public liability insurance in connection with the land.

30.      There have been no amendments or variations to the LDA since it was executed.

Deed of Release

31.      On DD MM YYYY, you received a notice from the Developer that the LDA will end due to irreconcilable differences, and that Stage # would be the last Stage completed by the Developer.

32.      On DD MM YYYY, the Developer obtained registration of title of all lots in Stage #. The management of the remaining portions of land (Lot #) being Stages # and # and the # Terrace blocks in address were reverted to you.

33.      On DD MM YYYY, you and the Developer executed the Deed of Release.

34.      The Deed of Release sets out the Developer's ongoing obligations for further works in the previous development stages and will fund the works from the retained earnings.

35.      The Developer will distribute surplus proceeds in the sum of $# to you pursuant to the Deed of Release. In addition to that, you will receive further surplus proceeds in the sum of $# at the end of the Project.

36.      Address of property (Lot #) has approximately # acres of undeveloped land, which will be sold as a single lot. You will not be conducting any further development on this lot. The original development approval and planning permit will be sold together with the lot. There are # residential lots included in the planning permit for Lot # within development stages # and #.

37.      The # Terrace Blocks have now been fully developed by the Developer and are as follows:

Lot #, address of property - Size #sqm

...

38.      For the purposes of this ruling, Lot # and the # Terrace Blocks will be referred to as the Remaining Land.

39.      There are no houses built on the lots listed above. You do not plan on building any houses on these lots. As of this stage, all seven lots are unsold.

40.      You are the sole owner of the Remaining Land.

41.      To date, # lots have been sold under the Project. Up to DD MM YYYY, you have received a total of $# as proceeds from the sale of the lots under the Project, as recorded in Table 1.

Table 1: Proceeds from the sale of lots

Proposed Draft Contract of Sale

42.      The proposed draft contract of sale provides the following:

1)            The purchaser will be Name (ACN #).

2)            The purchaser will purchase address of properties.

3)            The estimated sale price of the Remaining Land is around $# (inclusive of GST).

4)            The parties agree to apply the margin scheme to the taxable supply made under the proposed contract.

5)            The parties will use reasonable endeavours to do all things reasonably necessary to apply the margin scheme to the taxable supply made under the proposed contract.

6)            The Vendor will, at the Purchaser's cost, determine the GST payable in respect of the Vendor's margin on the supply of the real property being supplied under the proposed contract (excluding any other things being supplied under the proposed contract).

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 Division 38

A New tax System (Goods and Services Tax) Act 1999 Division 40

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

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 section 195-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 70-30

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-220

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Reasons for decision

Issue 1

In this ruling, unless otherwise stated,

•                     all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•                     all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•                     all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au

Question 1

TAXABLE SUPPLY

Section 9-5 provides you make a taxable supply if:

(a)           you make the supply for consideration; and

(b)           the supply is made in the course or furtherance of an enterprise that you carry on; and

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

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

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

For the supply of the Remaining Land to be a taxable supply, all of the requirements in section 9-5 must be satisfied.

The sale of the Remaining Land will be for consideration and the supply is connected with the indirect tax zone as the Remaining Land are located in Australia, you will satisfy paragraphs 9-5(a) and (c).

Division 38 and 40 provide for certain supplies to be GST-free supplies and input taxed respectively. We consider division 38 and 40 do not apply to the facts of your case. That is, your supply will not be GST-free or input taxed.

The issue in this case is whether the sale of the Remaining Land will be made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b). If so, as you are not registered for GST, we will also consider whether you are required to be registered for GST.

Enterprise

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

The definition of enterprise is provided under section 195-1 to have the meaning given by section 9-20. Subsection 9-20(1) states that an enterprise includes, among other things, an activity or series of activities done:

(a)          in the form of a business, or

(b)          in the form of an adventure or concern in the nature of trade, or

(c)          on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraph 9-20(2)(c) states that enterprise do not include, among other things, an activity, or series of activities, done by an individual, without a reasonable expectation of profit or gain.

Carrying on an enterprise is defined in section 195-1 to include doing anything in the course of the commencement or termination of the enterprise.

The meaning of enterprise is also considered 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, and Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT2006/1 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. Some of the principles outlined in these documents have been applied in this case.

MT 2006/1 provides the following:

159. Whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

In the form of a business

178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are:

•                    a significant commercial activity;

•                    a purpose and intention of the taxpayer to engage in commercial activity;

•                    an intention to make a profit from the activity;

•                    the activity is or will be profitable;

•                    the recurrent or regular nature of the activity;

•                    the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

•                    activity is systematic, organised and carried on in a businesslike manner and records are kept;

•                    the activities are of a reasonable size and scale;

•                    a business plan exists;

•                    commercial sales of product; and

•                    the entity has relevant knowledge or skill.

234. 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.

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

Characteristics of trade, including the 'badges of trade'

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

•                     The subject matter of realisation;

•                     The length of period of ownership;

•                     The frequency or number of similar transactions;

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

•                     The circumstances that were responsible for the realisation;

•                     Motive; and

•                     Trade v investment assets.

MT 2006/1 also explains:

Isolated transactions and sales of real property

262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions.

263. 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...

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 profitmaking 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.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

In applying the above provision of the GST Act and guidelines to the factors to this case, we note that you have owned the Property for a significant duration and have used it as a hobby farm. Due to the breakdown in your relationship with the Developer, a Deed of Release was executed on DD MM YYYY. Consequently, the Project will not advance through Stages # and # as initially planned, and you are now in the process of selling the Remaining Land.

To assess this situation, we apply the principles outlined in MT 2006/1 to examine your activities regarding the development. This will help determine whether the nature of the asset has changed and, as a result, whether the sale of the Remaining Land is made in the course or furtherance of an enterprise.

You submit that your involvement in the development is minimal, limited to signing agreements and sale contracts as instructed by the Developer, and that you have not participated in any previous development activities. Additionally, you submit that you do not have a business plan or the necessary skills and expertise to undertake the development. We consider that the following factors support the conclusion that your activities constitute supplies made in the course or furtherance of an enterprise in the property development business:

The Developer approached an associate of yours, referred to as the Owner's Representative, with a proposal to undertake the development on your behalf. You subsequently granted a power of attorney authorising the Developer to enter into contracts regarding the development. Although the Developer initiated contact with the Owner's Representative, you (through the Owner's Representative) have actively negotiated the terms of the development, as outlined in the LDA. From the outset, there has been a mutual agreement regarding project services, project costs, the obligations of both the Developer and owner, and the distribution of proceeds from the sale of land, which stipulates a minimum number of lots to be developed. Moreover, the terms and conditions of the LDA reflect the characteristics of a business agreement.

While you may not have a personal business plan for the development, there exists a comprehensive plan detailing how the development of the Land will be executed, as outlined in the terms of the LDA with the Developer. The Developer has established a coherent strategy for the Project, to be carried out on your behalf. You have granted all necessary authority for the Developer to proceed with the development. The case of Collins & Anor ATF the Collins Retirement Fund v FC of T 2022 ATC 10-627 (Collins) addressed the issue of engaging experts to assist in a property subdivision and provides:

"63. that the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land, is, I would have thought, a hallmark of modern subdivision projects. While that may mean Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work."

In evaluating the arrangements made between you and the Developer, we consider that this type of arrangement is usually undertaken by property owners who, as laypersons, may not have the knowledge and skills to engage directly in the development and sale of the property.

Additionally, you have granted the Developer an exclusive license to access the land at any time to carry out the necessary work related to the development. Granting a licence of an interest in property is defined as an enterprise in paragraph 9-20(1)(c).

There was a purpose and intention to engage in commercial activity aimed at generating profit when you entered into the LDA with the Developer. The primary objective of entering into the LDA was to maximise the capital return on the land, as outlined in the Subdivision Development Option Agreement dated DD MM YYYY. Based on the information provided, you have received an estimated sum of $# since the commencement of the development project. According to the proposed draft contract for sale, the proposed value of the Remaining Land is approximately $# (inclusive of GST). Furthermore, there has been repetition and regularity of activity since the LDA was executed. The development was executed in stages and conducted in a planned and organised manner, akin to that of the ordinary practices in the property development business.

While the Developer is said to have full control over day-to-day decisions related to the development, clause # of the LDA stipulates that, upon request from the Owner's Representative, the Developer is required to discuss, inform, and advise on the development. Additionally, clause # of the LDA grants the Owner's Representative the authority to review and approve the price list determined by the Developer. These provisions indicate that you have an active role in the project rather than a purely passive one.

We consider there is a significant commercial activity aligned with the standard practices of property development.

In this case, the subject matter of this ruling application relates only to the sale of the Remaining Land, that is Lot # and the # Terrace blocks.

Further, the GST Act does not define the term 'capital asset'. The meaning of capital asset is discussed in paragraphs 31 to 36 of 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). GSTR 2001/7. 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.'

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. 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. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital.

Accordingly, for the Remaining Land, on weighing up these factors, we consider your activities in relation to the sale of the Remaining Land exhibit commercial characteristics that 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 capital assets. We consider the Remaining Land is held as trading stock. Accordingly, we consider you are carrying on an enterprise as defined in section 9-20 in relation to the sale of the Remaining Land and in turn paragraph 9-5(b) will be satisfied.

We will now consider if you are required to be registered for GST.

Are you required to be registered for GST?

As you are not registered for GST, it needs to be established whether you are required to be registered for GST in relation to the sale of the Remaining Land.

Section 23-5 provides that an entity is required to be registered for GST if:

(a)          it is carrying on an enterprise, and

(b)          its GST turnover meets the registration turnover threshold.

The registration turnover threshold for entities other than non-profit entities is $75,000. In your case, the GST registration turnover threshold is $XX.000.

As determined above, you are carrying on an enterprise, thus satisfying paragraph 23-5(a).

The next issue to consider is whether paragraph 23-5(b) will be satisfied; that is, whether your GST turnover is $75,000 or more.

Section 188-10 is relevant for working out whether your GST turnover meets, or does not exceed, a turnover threshold. under subsection 188-10(1) you have a GST turnover that meets a particular turnover threshold when:

(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 GST turnover is at or above the turnover threshold.

'Current GST turnover' is defined in section 188-15. The definition includes that current GST turnover at any time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during the current month and the preceding 11 months.

'Projected GST turnover' is defined in section 188-20. The definition includes that projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you made, or are likely to make, during that month and the next 11 months.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Relevant guidelines in determining the projected GST turnover of an entity are available from the public ruling GSTR 2001/7.

GSTR 2001/7 includes the following explanations:

Supplies to be disregarded under section 188-25

29. Section 188-25 modifies the effect of section 188-20 by excluding certain supplies made when working out your projected GST turnover. Section 188-25 requires you to disregard the following when calculating your projected GST turnover:

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

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

-                    ceasing to carry on an enterprise; or

-                    substantially and permanently reducing the size or scale of an enterprise.

30. Your projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. Your supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. (See example 3 at paragraph 53 of this Ruling.)

Note: In paragraph 30 above, the reference to paragraphs 188-25(a) and 188-25(b) is a reference to the first and second dot point in paragraph 29 respectively.

As earlier explained, the meaning of capital asset is discussed in paragraphs 31 to 36 of GSTR 2001/7. Generally, the term 'capital assets' refers to those assets that make up the profit yielding subject of an enterprise. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Based on the facts of this case, we consider you held the Remaining Land as revenue assets and, as such, the supply of the Remaining Land will not be made by you as the transfer of ownership of a capital asset to satisfy paragraph 188-25(a). Paragraph 188-25(b) will also not be met as we consider the sale will not be made solely as a consequence of ceasing to carry on your enterprise, but rather your enterprise will cease as the consequence of the sale of the Remaining Land.

As such, the proceeds from the sale of the Remaining Land will not be disregarded in the calculation of your projected GST turnover and your projected GST turnover will exceed the registration threshold. Accordingly, you are required to register for GST in relation to the sale of the Remaining Land under section 23-5 and, in turn, paragraph 9-5(d) will be met.

In summary, as determined earlier your supply of the Remaining Land will not be GST-free or input taxed. You will satisfy all the requirements specified in section 9-5. This means you will be making a taxable supply when you sell the # Terrace Blocks and Lot #, GST will be payable.

Question 2

MARGIN SCHEME

Division 75 provides for the application of the margin scheme.

The provisions of section 75-5 include:

(1)            The *margin scheme applies in working out the amount of GST on a *taxable supply of * real property that you make by:

(a)          selling a freehold interest in land; or

(b)          selling a * stratum unit; or

(c)          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.

(1A)            The agreement must be made:

(a)          on or before the making of the supply; or

(b)          within such further period as the Commissioner allows.

Subsection 75-5(2) states that themargin scheme does not apply if an entity acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme. In your case, subsection 75-5(2) does not apply as you did not acquire the Property through a supply that was ineligible for the margin scheme, as the Property was sold to you pre-GST in 1986 and no GST would have been included at the time of your purchase.

Subsection 75-5(3) outlines particular circumstances where a supply would be ineligible for the margin scheme. Generally, an entity cannot use the margin scheme if when the entity first purchased the property, the sale to the entity was fully taxable and the margin scheme was not used. In your case, we consider subsection 75-5(3) does not apply to exclude eligibility for the margin scheme to be applicable.

Further, the parties agree to apply the margin scheme to the sale made under the proposed contract. Therefore, you are eligible to use the margin scheme.

Guidelines on margin scheme are available on the ATO website, including:

•                     Goods and Services Tax Ruling GSTR 2007/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000(GSTR 2006/7)

•                     ATO Interpretative Decision ATO ID 2004/223 Goods and Services Tax: GST and valuation date for calculating GST under the margin scheme

The Margin

Under the margin scheme, the GST payable on the supply of real property is 1/11th of the margin for the supply (section 75-10).

Subsection 75-10(2) states that subject to subsection 75-10(3) and section 75-11, the margin for the supply is the difference between the consideration for the supply and the consideration for the acquisition of the real property.

In this case, we consider section 75-11 does not apply.

ATO Id 2004/223 states:

Subsection 75-10(3) of the GST Act provides that if:

•                     the circumstances specified in an item in the table in subsection 75-10(3) of the GST Act (the table) applies to the supply, and

•                     an approved valuation of the freehold interest, stratum unit or long term lease, as at the day specified in the corresponding item in the third column of the table, has been made.

the margin for the supply is the amount by which the consideration for the supply exceeds that valuation.

Therefore, the date when the valuation of the interest must be made will depend on which item in the table in subsection 75-10(3) of the GST Act applies.

Item 2 provides that where the supplier acquired the interest unit or lease before 1 July 2000, but does not become registered or required to be registered until after 1 July 2000, the valuation date is the earlier of either the date of effect of the entity's registration or the day on which the entity applied for registration.

That is, Item 2 only applies to determine the valuation date in circumstances where the supplier was not registered or required to be registered until after 1 July 2000.

Based on the facts of your case, under item 2 of the table in subsection 75-10(3), the Remaining Land was subdivided from the original property which was purchased prior to 1 July 2000 and you were not registered for GST or required to be registered for GST until after 1 July 2000. Accordingly, the valuation is to be made on the earlier of either the date of effect of your registration or the day on which you apply for registration.

You will need to apportion the valuation of the Property to ascertain the part of the valuation that relates to lot # and the # Terrace Blocks using a fair and reasonable method of apportionment.

Issue 2

Question 1

ASSESSABLE INCOME

Division 6-1 of the ITAA 1997 provides that assessable income is comprised of both ordinary income and statutory income. Broadly, ordinary income is income according to ordinary concepts while statutory income, such as capital gains, are amounts that are to be included in a taxpayer's assessable income due to provisions of the tax law. There is an important distinction between ordinary income and statutory income, as statutory income (such as capital receipts) may have a substantially different treatment under the tax law than ordinary income. These concepts are discussed in detail below.

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that ordinary income is "income according to ordinary concepts". Guidance on the ordinary meaning of a term can be found with reference to dictionary definitions. The Oxford English Dictionary defines income as "periodical (usually total annual) receipts from one's business, lands work, investments and so on". Similarly, the Macquarie Dictionary defines income as "the returns that come in periodically, especially annually, from one's work, property business, etc; revenue; receipts, or something that comes in".

The main characteristics that are generally applicable to a receipt being considered as income are:

•                     received periodically and regularly;

•                     received for personal services (for example, salary and wages);

•                     received from property and investment returns (for example, dividends and interest);

•                     relied upon or expected;

•                     earned;

•                     for the replacement of income; and

•                     derived by way of a profit making intention or carrying on a business.

Therefore, ordinary income generally bears a direct relationship to some form of input or investment made by the taxpayer. It is important to note, however, that it is not necessary for all of these characteristics to exist in order for a receipt to be considered under ordinary concepts.

Carrying on a business

Determining whether a taxpayer's activities amount to the carrying on of a business involves considering the general indicators of when a business exists. While no single indicator is determinative and the determination is based on the 'large or general impression gained'[1], the prospect of profit is highly significant when assessing if an activity has the character of a business.

The courts have held that the following indicators are relevant in determining whether a business is being carried:

•                     whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

•                     whether the taxpayer has more than just an intention to engage in business;

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•                     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[2].

Therefore, whether the sale of land is a disposal in the course of business is determined by examining and weighing all the relevant facts and circumstances taken as a whole.

The business activities do not need to be physically conducted by the taxpayer in order for the taxpayer to be considered to be carrying on a business. The business activity can be undertaken by the taxpayer, on behalf of the taxpayer or in conjunction with others. In Hance & Anor v Federal Commissioner of Taxation 2008 ATC 20-085, the Court confirmed that businesses can take many forms, and can include a silent partner who delegates all responsibility for the business to another individual and consequently individual investors would be considered to be carrying on a business.

This principle was confirmed recently in Collins:

63. That the applicant, with no professional experience in land development, should engage others to carry out works and market the subdivided lots is scarcely surprising. The engagement of contractors to provide advice and carry out engineering and construction works and real estate agents to market land is, I would have thought, a hallmark of modern subdivision projects. While that may mean Mr Collins was relatively passive in respect of these activities, I do not accept that this weighs heavily in the applicant's favour in the context of a development of this nature which involved the undertaking of extensive skilled work.

Taxation Determination TD 92/124 (TD 92/124) Income Tax: property development: in what circumstances is land treated as 'trading stock' recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced.

When has a business of land development commenced?

When land, which was not originally purchased and held for the purpose of a land development business, is later held for land development, it is necessary to determine the timing of when this change in purpose commenced.

ATO Interpretative Decision ATO ID 2004/532 Income Tax; business of subdivision - time when land becomes trading stock explains that the timing of when an asset is ventured into a business of subdivision, development and sale is a matter of fact.

Statutory income

Not every receipt of cash or non-cash benefit by a taxpayer is ordinary income according to the legislation. Capital receipts are not ordinary income and are not assessable under section 6-5 of the ITAA 1997. Section 6-10 of the ITAA 1997 provides that statutory income comprises of amounts (cash and non-cash benefits) that are not ordinary income but are included in a taxpayer's assessable income pursuant to a specific provision of the Income Tax Assessment Act 1936 or ITAA 1997.

Capital gains tax:

Subsection 102-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

Section 102-20 of the ITAA 1997 provides that a taxpayer may make a capital gain or loss when a CGT event occurs to a CGT asset. A CGT asset is defined in paragraph 108-5(1) of the ITAA 1997 as being any kind of property or a legal or equitable right that is not property.

Section 104-5 of the ITAA 1997 sets out a list of CGT events. CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) of the ITAA 1997 states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

Section 104-220 of ITAA 1997 provides that CGT event K4 happens when a taxpayer commences to hold a CGT asset as trading stock which was not previously held as trading stock.

Subsection 104-220(b) provides that the taxpayer can elect under paragraph 70-30(1)(a) to treat the asset as having been sold at market value.

Division 70 of the ITAA 1997 deems the land to have been disposed of and reacquired. The time of this transaction is discussed in TD 92/124which state:

1. Land is treated as trading stock for income tax purposes if:

•                     it is held for the purpose of resale; and

•                     a business activity which involves dealing in land has commenced

2.Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land.

Broadly, section 118-25 of the ITAA 1997 provides that any capital gain or loss from a CGT asset is disregarded if at the time of the CGT event the CGT asset is trading stock.

Application to your circumstances

In order to determine whether CGT event A1 occurs in relation to the sale of Lot # and the # Terrace Blocks, it is necessary to consider whether the proceeds from the sale are ordinary income or statutory income, such as inclusion of a net capital gain pursuant to subsection 102-5(1) of the ITAA 1997.

The relevant activity is the development, subdivision and sale of your original #-acre parcel of land at address of property. Since YYYY, this has been carried out in accordance with the LDA executed between you and the Developer. The activity involves more than just the mere realisation of an asset. Rather, in accordance with the factors determined relevant by the courts, and as explained in TR 97/11, a business of property development is carried on. This is because:

there is a significant commercial purpose and character of the activity, for instance:

              i.       consistent with common commercial practises, contracts have been entered into between you and the Developer stipulating each parties' rights and obligations;

              ii.       experts have been engaged and plans for the development of the Property were drawn to allow for the subdivision of the Property into # individual residential lots for sale; and

              iii.       required planning permits, all Approvals, registration of plans for subdivision for the purposes of sale, marketing and selling the subdivided lots, amongst other things, have been undertaken.

there is more than just an intention to engage in business as the activity commenced in YYYY, planning approvals, registrations, insurance, marketing and the like have been undertaken such that to date # individual lots have been sold for a profit.

the activity has been conducted with a purpose, and prospect, of profit as you have received $# to the year ended DD MM YYYY and the Developer would have also received unspecified amounts of profit.

since the execution of the LDA, there has been repetition and regularity of the activity.

the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in property development businesses.

the activity has been carried out in a planned, organised and carried on in a businesslike manner such that it is directed, and has made, profits.

the size, scale and permanency of the activity is significant, involving a #-acre block from which # individual lots have already been sold and Lot # (with permit included) and the # Terrace Blocks are proposed to be sold in the near future.

the activity cannot be described as a hobby, a form of recreation or a sporting activity.

As explained earlier, you do not need to physically conduct the activity in order to be considered to be carrying on a business of property developing. As stated in Collins, it is not surprising that a taxpayer, without any previous professional land development experience, should engage others to carry out the works and market the subdivided lots. Despite the fact that the taxpayer had a relatively passive role in respect to the activities, the Court did not find that this weighed heavily in the taxpayer's favour. Similarly, given that you have not previously undertaken property development activities, it is not unreasonable that you would engage and delegate the majority of the works to the Developer.

However, you have more than a passive role in the activity. Although your obligations and involvement in the Project is minimal, pursuant to the LDA you are required to:

•                     cooperate, collaborate and share information with the Developer in order to achieve the success of the Project;

•                     execute all relevant documents, and do all other things, required in connection with the Project;

•                     pay any Land Tax attributable to the Parent Title, and

•                     not to assign, sell, lease, mortgage or otherwise dispose or deal in a manner with any interest in the Land without the prior consent of the Developer.

You also have the right to review and approve the selling price of each lot set by the Developer in accordance with clause # of the LDA, attend meetings (with your Representative) convened by the Developer with regards to the progress of the development in accordance with clause # and you were entitled to inspect all work undertaken by the Developer. Together with the proceeding factors, these elements demonstrate that you have more than just a passive role in the project and are carrying on a business of property development.

In accordance with clause # of the LDA, the Project has been terminated, with a Deed of Release executed between you and the Developer on DD MM YYYY, such that the Project will not progress through Stages # and # as planned. The land not sold under the Project is Lot # and the # Terrace Blocks.

Lot # is approximately # acres in size and the subdivision of this land has not yet been completed. Planning permit for # individual lots has been obtained for Lot #; and

The subdivision of the # Terrace Blocks has been completed, with the lot sizes ranging from #sqm to # sqm.

Although Lot # and the # Terrace Blocks will not be made available for sale under the Project, the sale of the Remaining Land will nevertheless be undertaken as part of completing the final stages of the development of your land and winding up of your business activity. Consequently, the proceeds from the sale of the Remaining Land will be your ordinary income and you will be required to include these amounts in your assessable income pursuant to section 6-5 of the ITAA 1997.

Consistent with ATO ID 2004/532,all the land used in your property development activities become trading stock at the time the purpose of holding the land changed from personal and domestic use to that of an asset of the business. That is, the land became trading stock at a time no later than the LDA was executed between you and the Developer.

CGT event K4 occurred at the time the land ceased to be held as a CGT asset and became trading stock of your business. At this time, you were entitled to elect under paragraph 70-30(1)(a) to treat the land as having been sold at market value.

Although CGT event A1 will occur at the time you dispose of Lot # and the # Terrace Blocks, the Remaining Land will be trading stock at the time of disposal. Consequently, any gain or loss from CGT event A1 will be disregarded and you will be required to include in your assessable income gross earnings from the sales pursuant to section 6-5 of the ITAA 1997.

Question 2

DISCOUNT CAPITAL GAINS

Division 115 of the ITAA 1997 sets out the discount on capital gains and the circumstances in which they are available to a taxpayer.

A taxpayer is entitled to a discount on any capital gains made if they satisfy the requirements outlined in section 115-5 of the ITAA 1997. The necessary requirements are that:

a.            the taxpayer is an individual, complying superannuation entity, trust or certain life insurance companies[3]

b.            the capital gain is made after 21 September 1999[4]

c.            the capital gain does not have an indexed cost base[5], and

d.            the capital gain was made on an asset held for at least twelve months.[6]

Section 115-10 and section 115-100 of the ITAA 1997 state that the discount percentage is 50% if the capital gain is made by an individual or a trust (that is not a complying superannuation entity or FHSA trust.

Application to your circumstances:

As explained earlier, the Remaining Land will be trading stock at the time of the sale and any capital gain from the sale will be disregarded in accordance with section 118-25 of the ITAA 1997. As the capital gains will be disregarded at the time of sale, you are not eligible for a discounted capital gain. You will be required to include the gross earnings from the sale of the Remaining Land in your assessable income pursuant to section 6-5.

[1] Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551.

[2] In this case a better comparison is whether the activity results in a mere realisation of a CGT asset.

[3] Section 115-10 of the ITAA 1997.

[4] Section 115-15 of the ITAA 1997.

[5] Section 115-20 of the ITAA 1997.

[6] Section 115-25 of the ITAA 1997.