Edited version of private advice

Authorisation Number: 5010078468034

Date of advice: 18 January 2022

Ruling

Subject: Tax on sale of land subdivision

Issue 1 - Income Tax & Capital Gains Tax (CGT)

Question 1

Will the profit from the sale of 5 subdivided lots be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the profit from the sale of the 5 subdivided lots be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997?

Answer

Yes.

Issue 2 - Goods & Services Tax (GST)

Question 1

Are you carrying on an enterprise for the purposes of the goods and services tax (GST) and as a consequence be required to register for GST?

Answer

No.

Question 2

Will the supply of the 5 subdivided lots be taxable supplies under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 May 20XX

Relevant facts and circumstances

You acquired a property ('the property') in State of A at a specified date.

At the time of the purchase, you were both living in State of B.

You made the decision to relocate to the XXX State of A and reside at the acquired property.

You engaged the services of a buyer's agent to identify properties that would suit as a long-term family home. You gave general instructions to the buyer's agent that included your requirements for a modern family home with space to raise your family, minimum X bedrooms, in a nice bush setting. The buyer's agent was also provided with a list of areas on the XXX which would be considered given the geographical location to good schools and shopping facilities.

The property was considered to suit the selection criteria. The residence located on the property had been built at a specified date and was a spacious X-bedroom home with XXsqm floor space. The total land size of the property was XXXsqm.

You moved into the property within six months of settlement and have resided in this property as your main residence.

At the time of purchase the land had in place a "Reconfiguration of a Lot Approval" issued at a specified date by the XXX Council to sub-divide the block into 6 lots. The approval was set to expire at a specified date. Although this act was known to you, you didn't consider it particularly relevant at the time of purchase given the fact that the predominant purpose of acquiring the property was to find a long-term place to call home.

You received correspondence at a specified date explaining that the "reconfiguration of the Lot" would expire at a specified date, and that the Lot approval was impossible to execute at this time due to the requirements in the approval.

At a specified date you requested an extension to the "Reconfiguration of Lot approval" for a further 2 years, should any infrastructure around the area chance. The same request was made to the XXX Council in 20XX and 20XX.

In or around 20XX, a decision was taken for a marriage separation.

In, or around 20XX the XXX Council amended its zoning rules. Recently another developer had built infrastructure which allowed the reconfiguration of your lots to be a feasible proposition.

At a specified date, you engaged a third party to submit on your behalf, a minor change to the "Reconfiguration of Lots Approval", for an increase from 6 to 7 lots.

In July 20XX, you engaged Company A, to commence works on the engineering required for both the development approval and the operational works. These included surveying, landscaping, geo-technic, power and NBN.

The XXX Council issued its development approval at a specified date and work started on operational works thereafter.

You engaged Company B, at a specified date to provide advice and financing strategies for the subdivision. Company A will also act as the development manager for you. They have obtained some expressions of interest for some pre-sales.

You agree that the sale of the blocks will facilitate a cleaner separation of financial interest. At the time of lodging the Private Ruling application, you understood that the following would occur:

•         Lots 4 lots would be sold.

•         Person A may retain Lot 1 which includes the existing family home.

•         Person B may consider developing 2 lots by engaging professionals to construct residences on those blocks. If this was to occur, it is likely that these lots would be transferred to a separate entity.

•         In later correspondence you confirmed that an additional lot will also be sold.

You do not hold an Australian Business number or GST registration.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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 9-40

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

Reasons for decision

Issue 1 - Income Tax & CGT

Generally, there are three ways profits from a sub-division can be treated for taxation purposes:

•         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 of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired by a profit making purpose.

•         As statutory income under the capital gains tax (CGT) regime (sections 10-5 and 102-5 of the ITAA 1997) on the basis that a mere realisation of a capital asset has occurred.

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.

The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11). Although TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development.

Paragraph 13 of TR 97/11, uses the following indicators to determine 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 reaction 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. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

Isolated business transactions

Profits arising from an isolated transaction as a result of entering into a profit-making undertaking or scheme will be ordinary income under section 6-5 of the ITAA 1997, on revenue account, (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium)). This is distinguished from a 'mere realisation' which is not ordinary income.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 provides that the term isolated transactions refers to:

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

•         those transactions entered into by non-business taxpayers.

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

•         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.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case.

Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or a commercial transaction include:

•         the nature of the entity undertaking the operation or transaction;

•         the nature and scale of other activities undertaken by the taxpayer;

•         the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

•         the nature, scale and complexity of the operation or transaction;

•         the manner in which the operation or transaction was entered into or carried out;

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

•         if the transaction involves the acquisition and disposal or property, the nature of that property; and

•         the timing of the transaction or the various steps in the transaction.

In determining whether activities relating to isolated transactions are a profit-making undertaking or are the 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.

Mere Realisation

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

A sale that is more than a 'mere realisation' will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit-making undertaking scheme.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme.

Profits made on the realisation of capital assets can still be ordinary income if the activities go beyond a mere realisation and instead become a separate business operation or commercial transaction even though the taxpayer did not have a purpose of profit-making at the time of acquiring the asset.

In McClelland v FC o T [1970] HCA 39, for example, the Pricy Council held that the question can be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

Lord Justice Clark, in distinguishing between proceeds that is mere realisation of capital and ordinary income, stated in California Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166 that:

...What is the line which separates the two classes of cases ay be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, Gibbs CJ similarly said (at p. 4034) that:

When the owner of an investment chooses to realize it and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within the ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in California Copper ... 'what is done is not merely a realisation of change or investment, but an act done in what is truly that carrying on, or carrying out, of a business'.

Application to your situation

It is accepted that the taxpayer's primary intention was to hold the land as their primary place of residence and it was not acquired with the intention of reselling it. The land has been part of your primary residence for over XX years. Due to your marriage breakdown you have decided to subdivide some of the land.

To dispose of the excess land, as the taxpayers (or the underlying owners) have no experience in property development, the taxpayers will engage experts to undertake the subdivision of the land the sale of the lots.

It is considered the proposed size and scale of the activity does not reflect a business of land development.

Having regard to these factors, the Commissioner considers that, on balance, the taxpayer would not be undertaking a business operation or commercial transaction when developing the land.

The subdivision of the land and the sale of the subdivided lots would be the mere realisation of an asset: it is the disposal of a CGT asset that is subject to capital gains tax. Upon the execution of the sale contract CGT event A1 will happen in relation to each lot.

Issue 2 - GST

Under section 9-5, an entity makes a 'taxable supply' where the supply:

1.    is made for consideration; and

2.    is made in the course or furtherance of an enterprise that you carry on; and

3.    is connected with the indirect tax zone; and

4.    is made by a supplier who is registered, for GST.

If the properties were to be sold, the supplies would consist of properties which are located in the indirect tax zone and supplies would be for consideration. Therefore, the sale of the properties would satisfy two elements outlined above (1&3). Accordingly, we need to determine whether the other two elements (2&4) would be satisfied. If this were the case, the supply of the properties would satisfy all requirements of section 9-5 and would be taxable supplies.

Are you carrying on an enterprise?

The term enterprise is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done:

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

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

The phase 'carry on' in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

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 the Tax Office view on the meaning of 'entity' and 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and Services Tax: does MT 2006/1 have equal application to the meaning of 'entity' 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999, provides that the discussion in MT 2006/1 applies equally to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

In the form of a business

Paragraphs 170 to 179 of MT 2006/1 discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production, lists indicators of carrying on a business:

•         a significant commercial activity;

•         an intention of the taxpayer to engage in commercial activity;

•         an intention to make profit from the activity;

•         the activity is or will be profitable;

•         the recurrent or regular nature of the activity;

•         the activity is systematic, organise and carried on in a business-like manner and records are kept;

•         the activities are of a reasonable size and scale;

•         a business of product;

•         the entity has relevant knowledge or skill.

Paragraph 179 of MT 2006/1 states, that there is no single test to determine whether a business is being carried on. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Application in your case

Given the facts of this case, we consider that the activity you have undertaken in purchasing a property in 20XX, which included an existing residential home, with the intention of making the property your family home was not in the nature or the indicators of a 'business' as listed above.

Paragraph 244 of MT 2006/1 explains that 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.

Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have characteristics of 'trade' and are held for income producing purposes, or either as an investment or for personal enjoyment.

While an activity such as selling an asset may itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is being carried on.

You originally purchased the property as a whole with the intention of residing on the property as your family home. Although the property was purchased with an existing "Reconfiguration of Lot approval" this was not a deciding factor in your decision to purchase the property.

The purchase of the property was not done in a business-like manner, and the current proposed subdivision of the property was bought about by personal circumstances and not business related reasons.

Given the above, we do not consider your activities in relation to the property, to constitute an adventure or concern in the nature of trade and as such will not be an enterprise for the purposes of GST.

GST registration

Section 23-5 provides that you are required to be registered for GST in you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000).

As discussed above, it is considered that the sale of the subdivided lots would not constitute an 'enterprise' for GST purposes. As such you are not required to be registered for GST and the subsequent sales of the lots will not be taxable supplies under section 9-5 of the GST Act.