Private ruling: CGT and GST - subdivision and sale of vacant land
Date of advice: 30 June 2015
Published: June 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the proceeds received from the sale of the subdivided blocks be assessable pursuant to sections 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the proceeds received from the sale of subdivided blocks be taxed under the capital gains tax provisions of the ITAA 1997? | A2: Yes. | Q3: Will any capital gain or capital loss you make on the disposal of each subdivided block be disregarded for CGT purposes? | A3: Yes. Issue 2 | Q4: Are you required to be registered for the goods and services tax (GST) in respect to the sale of any of the vacant block of land that will be subdivided land from the property? | A4: No

Relevant facts and circumstances: You acquired X acres of vacant land (the property) prior to 20 September 1985 with the intention of building a home for your family. You commenced building the dwelling in 19XX and the dwelling was completed prior to 20 September 1985, and has been your main residence since that time. As time passed, you have found it more difficult to manage and maintain the property, especially adhering to the fire prevention and pest control measures required in the region. You have consulted with a local real estate agent and a local civil engineering project manager/consultancy firm and they have advised that subdividing the property will maximise the proceeds from the sale of the property. You intend to subdivide the property into XX blocks. You will be funding the subdivision costs without the need to borrow funds. One block (block 1) will contain the existing dwelling, which you will continue to live in during the subdivision. Block 2 will be in front of the existing dwelling on block 1 and you intend to build a new dwelling on this block. Once completed, the new dwelling will become your main residence and you intend to sell the existing dwelling and block 1. You intend to use funds from the sale of the subdivided vacant blocks to build the new dwelling. The remaining blocks will be sold as vacant land. You have not been involved in any previous subdivision or property development activities. You will have no direct involvement in the subdivision as you will be engaging a project manager to oversee the subdivision and a real estate agent to manage the marketing and sale of the subdivided blocks. You expect the first subdivided blocks would be available for sale by June 20XX, and you anticipate the vacant blocks to be sold by December 20XX. The only development works carried out will be those required under the development approval from Council. You currently are not jointly registered for GST.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Subsection 108-70(3) | Income Tax Assessment Act 1997 Section 108-80 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision: Summary: The subdivision and sale of the land is considered to be a mere realisation of a capital asset and will be subject to the capital gains tax provisions of the ITAA 1997. Provided the costs of the development (for example, the construction of roads and the provision of electricity, water and gas to the blocks) do not exceed the relevant improvement threshold, then the entire capital gain made on the disposal of the subdivided blocks will be disregarded. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Additionally, section 15-15 of the ITAA 1997 specifies that your assessable income 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. 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 Ruling TR 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 of TR 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. 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. In your case, you do not carry on a business of buying, selling or developing land. You purchased the property as your main residence. You will have minimal involvement in the subdivision of the land and will only change the land to the extent that you are required for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: As the land was acquired before 20 September 1985, it is a pre-CGT asset. Disposal of a pre-CGT asset does not give rise to a taxable capital gain in accordance with paragraph 104-10(5)(a) of the ITAA 1997. Furthermore, subdivision of the land does not alter its pre-CGT status. Taxation Determination TD 7 states: Where pre-CGT land is subdivided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA 97. Therefore, as the land was acquired pre-CGT the capital gain made on the disposal of the subdivided blocks will be disregarded under subsection 104-10(5) of the ITAA 1997, subject to the value of the capital improvements. | Detailed Reasoning - Further issues for you to consider: Under subsection 108-70(3) of the ITAA 1997, capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event happens (for example a disposal) in relation to the asset is: • more than the improvement threshold for the relevant income year (for the year ended 30 June 2015, the threshold is $140,443), and • more than 5% of the capital proceeds from the event. In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80 of the ITAA 1997. The total cost of these capital improvements is to be allocated over all of the subdivided blocks when determining if the capital improvements will be treated as a separate CGT asset. Therefore, the expenditure apportioned to each subdivided block will have to be less than the improvement threshold for the relevant year. Where this is the case, the capital improvement expenditure for the purposes of any subsequent disposal of any of these blocks of land will not be taken to be a separate CGT asset. | Detailed Reasoning - Issue 2: Under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if: a) You are carrying on an enterprise; and b) Your GST turnover meets the registration turnover threshold (currently $75,000). The definitions of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) an activity or series of activities done in the form of an adventure or concern in the nature of trade. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of carrying on an enterprise. Paragraph 265 of MT 2006/1 outlines factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade'. Based on the information received, the purpose for which the land is held remains unchanged; it will be your principal place of residence after the subdivision is made. You will have a coherent plan for the subdivision by engaging a project manager to oversee the subdivision and a real estate agent to manage the marketing and sale of the nine subdivided blocks. However, the level of development on the land will consist only of that necessary to obtain Council approval for the subdivision and no buildings will be erected on the vacant blocks of land that will be sold. You will fund the subdivision yourself. We consider that while some factors listed in paragraph 265 of MT 2006/1 will be present, on balance the subdivision will not amount to an enterprise and will be a mere realisation of a capital asset. Accordingly, you will not be required to register for GST under section 23-5 of the GST Act as you will not be carrying on an enterprise under subsection 9-20(1) of the GST Act when selling the subdivided vacant blocks of land