Edited version of private advice

Authorisation Number: 1052378361676

Date of advice: 08 April 2025

Ruling

Subject 1: Capital gains tax

Question 1

Will the proceeds from the sale of the subdivided blocks be assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer 1

No

Question 2

Does the CGT 50% discount apply to the capital gain you make on disposal of the subdivided block of land?

Answer 2

Yes

Question 3

Will the sale of the front lot at XXX be a taxable supply?

Answer 3

No

This ruling applies for the following periods:

Period End 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Parties and property holdings

You are not registered for GST.

You purchased a property at Z (the Z property) a few years ago. The property was the residence of the previous owner. You acquired it for $XXX. It was XXX in size and zoned low density residential.

You owned two other residential rental properties at the time of acquiring the Z property being:

(1) Property A (the A property)

(2) Property B (the B property).

You purchased the Z property with an existing house on it that you rented out from 20XX until 20XX.

You borrowed funds on each of the properties:

•                The A property: $XXX borrowed from a bank in 20XX.

•                The B property: $XXX borrowed from a bank and $XXX borrowed from another bank (Top up) in 20XX.

•                The Z property: (for the property initially, not including the subdivision) $XXX borrowed from a bank and $XXX borrowed from relatives during 20XX-20XX.

You declared the rental income from the three properties in your relevant tax returns. All the finance and taxation on the above investment properties was reviewed by ATO in the financial year 20XX-20XX.

In late 20XX you ceased holding the Z property out for rent and demolished it as you had obtained a development approval to subdivide it.

The subdivision was completed in October 20XX.

You retained a professional agent C to manage the subdivision. You first contacted C in 20XX. An email with C indicates initial subdivision design and documentation in preparation for the subdivision, which was to be completed by C.

The subdivision costs during June 20XX to April 20XX in total were $XXX or $XXX on average per month. This was paid for by the loans from relatives.

The two addresses created post subdivision of the Z property were:

•                Z1 (the front lot) and

•                Z2 (the rear lot).

Until February 20XX, your goal was to build two town houses (one in each lot at the Z property) and live in one and rent the other. By February 20XX you had both the front lot and the rear lot on the market however you eventually only sold the front lot. You intend to build a house and lease the rear lot in future.

The front lot sale in the context of financial difficulties.

Due to financial difficulties commencing around May 20XX, you realised you could not complete the subdivision project and decided to sell both Z1 and Z2 lots.

You borrowed approximately $XXX in total in the loans detailed above.

In 20XX interest rates started to rise. You provided bank statement evidence indicating that most of the bank loans were subject to hardship procedures of various financiers.

At the time you applied for hardship assistance you calculated that your household combined income was approximately half of your outgoings.

You also borrowed approximately $XXX from relatives between October 20XX and December 20XX.

In April 20XX you notified your agents that you intended to sell the B property and notices were served on the residents. In June 20XX the tenants of the B property stopped responding to the agents and ceased paying rent which added to your financial problems. As a result, you changed your intention to sell the B property and instead proposed to sell the A property.

The A property went on the market but did not sell initially as the tenants resisted inspections and did not vacate by the deadline. They eventually were evicted in November 20XX and the house was cleaned and marketed for sale in December 20XX but there was no buyer interest. To increase buyer interest, you did some simple renovations. You finally received an offer in February 20XX.

You sold the A property for $XXX in March 20XX. You advised the mortgagor that the sale had occurred and delayed repayments were granted for two months.

You used the proceeds from the A property to pay out costs related to settlement of that property and the associated loans with the one bank and $XXX of other borrowed funds, the subdivision costs of the Z property and loan repayments of $XXX.

Due to financial difficulty you decided to also sell Z1 and Z2 vacant lots in February 20XX and signed a marketing agreement in February 20XX despite that the subdivision works were not yet complete.

You sold Z1 for $XXX; entry into the contract was July 20XX and the property settled in November 20XX. The contract of sale you provided indicated that there was no GST in the price. You got an informal offer for Z2 which you rejected as it was lower than its market valuation. However, the sale of Z1 resolved your financial issues.

You currently rent the property you reside in.

You do not have any property development experience.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 112-25

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 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 40-35

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

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

Reasons for decision

Question 1

Summary

The proceeds from the sale of the subdivided blocks are not ordinary income and not assessable under sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997). The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 of the ITAA 1997.

Detailed reasoning

Section 112-25 of the ITAA 1997 states what happens when you split, change or merge assets, such as subdividing land. If you subdivide a block of land, each block that results is a new asset which is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision. However, you may make a capital gain or capital loss when you sell the subdivided blocks.

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 of the ITAA 1997 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997, or which arises in respect of the sale of property acquired on or after 20 September 1985.

Although the legislation does not define income according to ordinary concepts, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation RulingTR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions refers to:

•                those transactions outside the ordinary course of business of a taxpayer carrying on a business, and

•                those transactions entered into by non-business taxpayers

Paragraph 6 ofTR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

•                your intention or purpose 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 or in carrying out a business operation or commercial transaction.

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

•                as the capital of a business or

•                into a profit-making undertaking with the characteristics of a business operation or commercial transaction,

this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

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.

Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit-making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

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. In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

Although you were not carrying on a business, the profit could still be income if you purchased the land with the intention of making a profit and made the profit through carrying out an isolated business operation or commercial transaction.

However, in you case:

•                you have never been in the business of land development

•                you had minimal involvement in the subdivision of the land

•                the scale of the activities was small, not especially complex and not repetitive

•                you did not undertake further activities to increase the value of the land

•                you held the land for a considerable period prior to the development and sale indicating that the property is a capital asset and was not originally acquired to conduct a development business or profitably resell.

Therefore, the proceeds you receive from the development of your property are not ordinary income and not assessable under sections 6-5 of the ITAA 1997. The proceeds represent a mere realisation of a capital asset which will fall for consideration under the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997.

Question 2 - Summary

As you held the land for more than 12 months, you are entitled to apply to Capital Gain Tax (CGT) 50% discount to the capital gain you made after applying any capital losses.

Detailed Reasoning

A capital gain or a capital loss may arise if a CGT event happens to a CGT asset you own. Land, or an interest in land, is a CGT asset.

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

For an asset to qualify for the CGT discount you must own it for at least 12 months before the CGT event happens. The CGT event is the point at which you make a capital gain or loss. You exclude the day of acquisition and the day of the CGT event when working out if you owned the CGT asset for at least 12 months before the CGT event happens.

As you owned the land for more than 12 months, you are entitled to a 50% discount on the capital gain under Division 115 of the ITAA 1997.

As you owned the land for more than 12 months you can discount your capital gain using the 50% discount method after applying any capital losses (including losses from earlier years).

When calculating the capital gain, the cost base will include costs incurred for rates, land tax, insurance, mowing and the costs associated with obtaining the Development Approval. You must take account of the two ownership interests you held in the land.

Issue 2

Please note all references to GST legislation are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise specified.

Summary

The supply is not taxable supplies as all of the conditions of a taxable supply are not met.

Detailed reasoning

When you sold the front lot, you did not make that supply in the course of a property development enterprise, but you did make the supply in the course of carrying on a leasing enterprise. However, you are not required to register for GST as the sale and other combined rental income is not included in your registration threshold calculations.

You had not constructed a property on the front lot and it was sold as vacant land. 'Potential residential land' is defined in section 195-1 to mean:

land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises.

To determine whether you are making a taxable supply of potential residential land, section 9-5 contains the key elements of a taxable supply and must be applied to determine the answer to the question set out above.

Section 9-5 provides that 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 to the indirect tax zone (Australia); and

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

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

In this case, the property has already been sold so the sale of the property was made for arm's length consideration to a non-related party. This satisfies paragraph 9-5(a). The front lot is located in the indirect tax zone (Australia). This satisfies paragraph 9-5(c). As the front lot was vacant land, it could not be rented and consequently there are no other factors that would make the sale input taxed.

The facts provided do not indicate any possible GST-free treatment of the sale of the front lot. As such, to determine whether the sale of the front lot is a taxable supply will depend on whether the supply was made in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b). Additionally, that answer will determine whether you are registered or required to be registered for GST under paragraph 9-5(d). The analysis below focuses on these two paragraphs of the definition.

In the course or furtherance of an enterprise

The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states:

An enterprise is 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.

Please note an asterisk indicates a defined term in section 195-1.

The phrase '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.

Under the first limb of the definition, subparagraph 9-20(1)(a), an issue to be decided is whether you conducted an activity or series of activities that amount to a business or is in the form of a business of property development. Under the second limb, subparagraph 9-20(1)(b), we need to assess whether your activities are a one off, adventure in the nature of trade in dealing with the front lot which is potentially an activity or a series of activities in the termination of an enterprise.

Finally, under paragraph 9-20(1)(c), the definition of 'enterprise' states that leasing, licencing or other grants of land can amount to an enterprise.

It is noteworthy that subsection 9-20(2) provides an 'enterprise' does not include:

... an activity, or a series of activities, done:...

(b) as a private recreational pursuit or a hobby; or

(c) by an individual... or a partnership (all the members of which are individuals), without a reasonable expectation of profit or gain...

Your activities did not amount to a hobby.

You are a general law or a tax law partnership in that you both were co-owners of the lot and you made a profit which you argued was only $XXX or less if GST is taken into account. Nonetheless, you had some prospect of gain and this excludes the operation of paragraph 9-20(2)(c). Despite the non-applicability of this provision, we still need to ascertain if you were engaged in an enterprise and were required to be registered. These issues are discussed below.

Do the activities of subdividing and selling the front lot amount to an enterprise?

The Commissioner, in Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides guidance on the meaning of the term 'enterprise' for GST purposes.

According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.

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

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

•                a significant commercial activity;

•                the purpose and intention of the taxpayer or taxpayers in engaging in the activity;

•                an intention to make a profit from the activity;

•                the activity is or will be profitable;

•                repetition and regularity of activity; and

•                the activity is organised and carried on in a businesslike manner.

These factors in turn are derived from a number of common law cases. The principles were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. These principles are considered later in these reasons.

These cases indicate that the question whether a business is being carried on is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. You purchased the Z property with an older house on it that you rented at arms' length for at least 6 years. You then demolished it as your intention was to build dual houses allowing one to be your residence (Z2) and the other as a rental property. You changed your intention of use of the property as you had elevated debt levels as interest rates increased and you now no longer intend to live in the rear lot and you will use that as an investment property in keeping with the use of all property you own or have owned, specifically the A and B properties. At no stage did you register for GST and you have not claimed any input tax credits. These facts indicate you did not construct on Z1 and it was a single subdivision. This is not a significant commercial activity.

Based on your acquisition price and the sale price of Z1, the activity was profitable but as you intended to live in one and rent out the other and even when you changed your intention you did not intend to make a profit as you had long term investment intention. There is only one instance of this activity so there is no repetition.

You provided detailed calculations and carried out the subdivision in an organised manner. There is, however, no evidence that you conducted the activities as someone in the business of a property developer may have done.

The facts indicate that the level of commercial activity is on the lower end of the scale. Your initial purpose or intention in this arrangement was to keep the property in its entirety. You retained an expert but only to the extent of hiring an agent who conducted the subdivision and a real estate agent to conduct the sale on your behalf. This factor, of itself, does not point to an enterprise. It is noteworthy that you both are not employed in any sector related to building or construction. This factor suggests it is less likely to be a business-like venture.

On balance, we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit making undertaking or scheme. It is not large scale; you do not have a business plan for developing the property that extends beyond your original intent which was to live in Z2 and rent Z1. Your principal driver for entry into the sale of the front lot is the change in market conditions increasing your interest costs on loans for the other rental properties you owned. As it happened you had to sell the A property as well to reduce your loan costs as you were in significant debt in the period the sales took place.

As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise under section 9-20(1)(b) and whether these activities fall in the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression.

An 'adventure or concern in the nature of trade' refers to transactions that have a commercial nature which are entered into for a profit making purpose.

As the above factors are also relevant to one-off transactions, we conclude that you are not engaged in an enterprise either on the basis of activities you conduct in the form of a business or that you were engaged in an adventure in the nature of trade. This means that paragraph 9-5(b) is not met in relation to whether you are conducting a property development either in the form of a business or as an adventure in the nature of trade.

The sales were not made in the course of a property development enterprise. However, the rear lot was originally part of a property held for use as a rental property prior to its demolition. Paragraph 9-20(1)(c) provides that it is an enterprise where you carry on a series of activities:

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

Section 195-1 also provides that

"carrying on" an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

The effect of these provisions read together means that the sale of the front lot is still made in the course of the rental enterprise. This satisfies paragraph 9-5(b) and the only remaining requirement is whether you are required to be registered for GST under paragraph 9-5(d) as a result of making the sale.

Registration

Section 23-5 states that you are required to be registered for GST if:

a)    you are carrying on an enterprise; and

b)    your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed above, your activities do not fall within the scope of 'carrying on an enterprise' of property development but your activities related to leasing the property may amount to an enterprise. Consequently, as a lessor of real property, you meet paragraph 23-5(a) above and the next issue to be considered is whether the rents you receive are 'GST turnover'. If so, you may have exceeded the $75,000 registration turnover threshold.

Division 188 is about the 'meaning of GST turnover'. Section 188-10 is relevant for working out whether an entity's GST turnover meets, or does not exceed, a turnover threshold. Under subsection 188-10(1) an entity's GST turnover meets a particular turnover threshold when:

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

(b) the entity's projected GST turnover is at or above the turnover threshold.

Section 188-15 defines 'current GST turnover' and that, subject to certain exclusions, the current GST turnover at any time during a particular month is the sum of the values of all the supplies that an entity made, or are likely to make, during the current month and the preceding 11 months.

Section 188-20 defines 'projected GST turnover' and, subject to certain exclusions, the projected GST turnover at a time during a particular month is the sum of the values of all the supplies that an entity made, or are likely to make, during that month and the next 11 months.

For both the current and projected GST turnover, the exclusions include supplies that are input taxed. Subsection 40-35(1) states that a supply of premises by way of lease is input taxed if the supply is of residential premises, where the premises are to be used predominantly for residential accommodation.

The lease of the B property is an input taxed supply under section 40-35 and the rental will be excluded from the calculation of the current and projected GST turnover.

A final issue to consider is whether the sale of Z1 should have been included in your current turnover.

It is relevant to also consider the projected GST turnover position despite the fact that you have stabilised your debt position and do not intend to make any further sales of real property within the next year as we can illustrate your GST position at the time you decided to sell Z1.

Guidelines on GST turnover are also available in 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 includes the following guidelines:

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 188-25(a) and paragraph 188-25(b). When you make a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once. ...

Given our finding above that the sale of the property is not pursuant to activities in the course of a development enterprise, and as it is capital in nature, it would have been excluded from the projected turnover calculation of the leasing enterprise. Alternatively, it is also arguable that it would be excluded as you were, in making the sale of Z1, substantially and permanently reducing the scale of your leasing enterprise.

As the sale was excluded from projected turnover, you are not required to be registered for GST as the GST turnover is less than $75,000 for the leasing enterprise as paragraph 23-5(b) is not satisfied.

Conclusion

The original Z property was not intended to be acquired for the primary purpose of resale at a profit and that intention did not change in a material way. Even though the supply will be made for consideration and is located in the indirect tax zone (Australia), it is not made in the course or furtherance of a development enterprise you carry on. Additionally, despite being engaged in a rental enterprise, you are not required to be registered for GST as the sale proceeds and the rental are excluded from the GST turnover calculation. Consequently, you will not be making a 'taxable supply' as defined when you sell Z1.

Additional Information

Any expenses you have claimed as rental deductions, such as interest on a loan, cannot be included in the cost base of the property. This means that these expenses will not reduce your capital gain.

The way you have calculated what you consider is the profit is not correct as you cannot include your rental loss or the undeducted depreciation cost.

You may wish to consult a tax professional to ensure the capital gain is calculated correctly.