Private ruling: Sale of subdivided land
Date of advice: 19 December 2025
Published: 9 February 2026
Ruling period: DD MM YYYY to DD MM YYYY
Date scheme commenced: DD MM YYYY

Ruling: Q1: Will the supply of the subdivided lot containing the dwelling for the property situated at XXXX (Proposed Lot XXXX) be a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: No. | Q2: Will the supplies of the vacant lots subdivided from XXXX be taxable supplies in accordance with section 9-5 of the GST Act? | A2: Yes. Issue 2 | Q3: Will your share of the proceeds from the proposed sale of the subdivided portion of the property be assessable as ordinary income, on the revenue account, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development or as a result of an isolated profit-making transaction? | A3: Yes. | Q4: Will your share of the proceeds from the proposed sale of the subdivided portion of the property be assessable as statutory income, on the capital account, as the mere realisation of an asset under Parts 3-1 and 3-3 of the ITAA 1997? | A4: No.

Relevant facts and circumstances: In the facts below, the expressions 'you', and 'your' refer to Taxpayer1, Taxpayer2, Taxpayer3, and Taxpayer1 as a collective group. You, Taxpayer1(T1), Taxpayer2 (T2), Taxpayer3 (T3), and Taxpayer4 (T4) identified a property situated at XXX (Lot X) (the Property) that you were interested in acquiring. Your initial intentions were to: • subdivide the land into X or more lots • retain the existing dwelling for use as a residential premises by T1 and T2, • construct a purpose-built residential premises on the subdivided vacant lot for T3 and T4 to accommodate their child's mobility needs. On DD MM YYYY, based on advice from a friend, you engaged XXXX, a Planning Manager from XXXX (Planning company), for assistance with due diligence before settlement of the property purchase. On DD MM YYYY, an Investment Home Loan of $XXXX with XXXX Bank was approved to facilitate the subdivision of the Property. The loan was obtained by T1 and T2 to cover their share of the subdivision costs (professional costs, council fees, fences, nature strips, utilities etc) and the loan term is XXXX years. T3 and T4 did not require a loan to cover their portion of the subdivision costs. On DD MM YYYY, you entered a contract to purchase the Property as tenants in common for $XXXX Each of you holds a XXXX% ownership interest in the Property. You have no agreements in writing regarding the purchase or development of the Property. After your engagement with Planning company, and before the settlement of the Property, your intentions for the Property changed to the following: • subdivide the Property into XXXX lots of approximately XXXX m 2 each • X lots to be sold as vacant land • renovate the existing dwelling, and sell the lot with the existing dwelling after completion of the subdivision (Proposed Lot XXXX) • remaining XXXX lots to be retained by you, with the intention of constructing a dwelling for investment purposes on each lot, while also keeping a medium-term option for both families to move into them in years to come if and/or when your personal circumstances allow. The change of intention was due to changes in circumstances for both families. T3 and T4 experienced significant shifts in their situations and work commitments, making it impractical to change schools for their child with mobility needs, as well as manage the X-hour round-trip commute to work in XXXX. Additionally, both families agreed to relocate only as a group to provide mutual support for childcare and other commitments. This decision was influenced by the fact that both T1 and T3 work on rosters with irregular hours. On DD MM YYYY, your Investment Home Loan of $XXXX with XXXX Bank was approved to facilitate the purchase of the Property. The loan term is XXXX years. The loan was intended to cover the cost of the property purchase, stamp duty, legal fees, and initial repairs of the property to make it rentable. Settlement of the Property occurred on DD MM YYYY. The Property is zoned Low density residential which has not changed during your ownership period. When you acquired the Property, it measured at XXXX hectares and included a dwelling. The Property was purchased from XXXX(Vendor). The Vendor was not registered for goods and services tax (GST). The existing dwelling is a X-bedroom, X-bathroom house, featuring an inground pool and a large shed with space for X cars. The dwelling is currently tenanted and has been tenanted since the purchase of the Property. Towards the end of DD MM YYYY, it was decided that both families would remain in XXXX and not relocate to the Property site. This meant you no longer intended to build a purpose-built residence on any of the proposed subdivided lots to accommodate the mobility needs of T3 and T4's child. On DD MM YYYY, you submitted a planning application with the XXXX for the Property to be subdivided into X lots. No application was made to subdivide the Property into X lots. The development application was approved on DD MM YYYY. The renovation of the existing dwelling will mostly be cosmetic with the following works to be undertaken: • renovate the bathroom • new tiles • new carpet, and • painting. You will continue to lease the dwelling on the Property for as long as possible, until the subdivision has been completed and the renovation works commence. This arrangement is intended to ensure the continuation of cash flow. The following activities in relation to the subdivision have been completed: • replanting trees • planting of vegetated buffer zones, and • removal of plants, gardens, and rocks around the swimming pool area to make the pool fence compliant for tenants. The following activities in relation to the subdivision have not been completed yet: • building fences along boundaries, and • other landscaping. Planning company will oversee the subdivision, and fees will be paid as invoices are received. The expected date of completion for the subdivision activities is around mid to late YYYY. The only approval provided (and sought) thus far is for the subdivision of the Property into X lots. No consultation has occurred yet in relation to the X houses you plan to build. No works or building on site has occurred. The investment loans obtained include excess funds that are intended to be used for the subdivision activities. However, at this stage, you are not in a financial position to proceed with the construction of the X new houses. The proposed sale of the X vacant lots, and the lot containing the existing dwelling resulting from the subdivision will assist in securing the necessary finance for the construction of the X new houses. The estimated market values for the subdivided lots are as follows: • vacant lots will be approximately $XXXX and • the lot with the existing dwelling will be approximately $XXXX to $XXXX. You will engage the services of a local real estate to assist with the sale of the subdivided lots. You have no preference regarding which of the subdivided lots are sold; the sale will depend on which lots are more marketable and will sell the fastest. This is the only subdivision/development that you have undertaken, and you have no further development activities planned. Your total expenses, excluding the purchase price, in relation to the Property from the time of purchase to the present amount to $XXXX. You provided a breakdown of the expenses. You registered an Australian Business Number (ABN: XXXX) and GST under the name The Trustee for XXXX Unit Trust (Unit Trust). Both the ABN and GST registrations were effective from DD MM YYYY. The Unit Trust has never been used and has had no activity. The Unit Trust registration was completed based on advice from your previous accountant. Ther trustee of the Unit trust is XXXX.

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 9-40 | 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 40-65 | A New Tax System (Goods and Services Tax) Act 1999 section 40-75 | A New Tax System (Goods and Services Tax) Act 1999 section 184-1 | A New Tax System (Goods and Services Tax) Act 1999 Division 188 | 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 102-5 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Issue 1: For this section, • 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. | Detailed Reasoning - Question 1: Will the supply of the subdivided lot containing the dwelling for the property situated at XXXX (Proposed Lot X) be a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | Summary: No, your supply of Proposed Lot X will not be a taxable supply pursuant to section 9-5. The supply will be an input taxed supply of residential premises pursuant to section 40-65. | Detailed Reasoning - Taxable supply: Section 9-40 provides that an entity is liable for GST on any taxable supplies that it makes. 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 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. | Detailed Reasoning - Are you making supplies as a partnership?: We first need to consider if your supplies in relation to the Property will be as a partnership or in your own right as individuals. Section 9-5 has a primary step requiring identification of the entity making the supply as it states that "you make a taxable supply if..." 'You' is defined in section 195-1 as: if a provision of this Act uses the expression you , it applies to entities generally, unless its application is expressly limited. Note: The expression you is not used in provisions that apply only to entities that are not individuals. 'You' appears in paragraph 9-5(a): 'you make a supply' and 'you' is also connected to any identifiable enterprise and in the course or furtherance of whose enterprise are the supplies being made under paragraph 9-5(b). Additionally, 'you' is tied to the entity that is registered or required to be registered. Section 184-1 sets out the definition of 'entity'. Subsection 184-1(1) provides that an entity is any of the following: (a) an individual; (b) a body corporate; (c) a corporation sole; (d) a body politic; (e) a *partnership; (f) any other unincorporated association or body of persons; (g) a trust; (h) a *superannuation fund. Section 195-1 defines partnership with reference to the definition in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states: partnership means: (a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or (b) a limited partnership. Paragraph 24 of Goods and Services Tax Ruling GSTR 2004/6: Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) states: 24. Persons who are in receipt of income jointly are, therefore, an association of persons and a tax law partnership for GST purposes. Paragraphs 25 to 26 and 30 of GSTR 2004/6 further state: | Detailed Reasoning - Receipt of income: 25. A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. We consider that there is receipt of income jointly if there is a joint entitlement to income. 26. In our view, the expression 'in receipt of' may be read broadly to include, not only the actual receipt of income, but also all the steps leading to the right or entitlement to that income. ... | Detailed Reasoning - Formation of a tax law partnership: Time of association approach 30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach. You purchased the Property as tenants in common under a single contract for $XXXX. To fund the acquisition, you jointly secured an investment home loan of $XXXX with XXXX Bank, with all four of you listed as borrowers. Since the time of purchase, the property has been used for leasing purposes, generating rental income jointly. Together, you have agreed to sell Proposed Lot X and the subdivided vacant lots. Accordingly, the lots subdivided from the Property will be supplied in your capacity as a partnership entity, rather than as individuals. On this basis, we consider that the reference to 'you' in section 9-5 refers to a partnership constituted by its four members. The partnership is considered to have commenced at the time the Property was purchased, as it was acquired with the intention of leasing the existing dwelling and subdividing the surrounding land for development into additional investment properties or for sale as vacant land. | Detailed Reasoning - GST-free or input taxed supply: Division 38 and 40 provides for certain supplies to be GST-free and input-taxed respectively. There are no provisions in the GST Act under which your supply of Proposed Lot X will be GST-free. We need to consider whether the supply of the subdivided lot containing the dwelling will be input taxed. Subsection 40-65(1) provides that a sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, subsection 40-65(2) provides that the sale of real property is not input taxed to the extent that the *residential premises are: (a) *commercial residential premises; or (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Residential premises Section 195-1 defines 'residential premises' to mean land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation) and includes a *floating home. Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) provides guidance in determining whether particular premises are residential premises. Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities. In your case, the Property has the physical characteristics of a residential dwelling consisting of bedrooms, bathrooms, a kitchen and living areas. The Property has an existing residential lease agreement in place and is being occupied as a residence. Following the renovations, the Property will be occupied or intended to be occupied as a residence or for residential accommodation. Therefore, the Property satisfies the definition of 'residential premises' for the purposes of section 195-1. Commercial residential premises Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides guidance on determining whether particular premises are commercial residential premises. It describes the features of commercial residential premises such as a hotel, motel, inn, hostel or boarding house. Based on the information that you provided, Proposed Lot X does not display the features of commercial residential premises. As such, your supply of Proposed Lot X is not a supply of commercial residential premises. New residential premises Subsection 40-75(1) defines the term 'new residential premises' to include residential premises that: (a) have not previously been sold as residential premises (other than *commercial residential premises) and have not previously been the subject of a *long-term lease; or (b) have been created through *substantial renovations of a building; or (c) have been built, or contain a building that has been built, to replace demolished premises on the same land. Goods and Services Tax Ruling GSTR 2003/3 Goods and services tax: when is a sale of real property a sale of new residential premises? (GSTR 2003/3) explains when real property is new residential premises pursuant to section 40-75. Paragraphs 32 to 35 and 38 to 39 of GSTR 2003/3 contain the following guidance: Changes in the size of the land 32. Subdivision of land, of itself, does not create new residential premises. 33. In deciding whether land and a building have previously been sold as residential premises or been the subject of a long-term lease, it is necessary to consider the land and building together. Have that land and that building together previously been sold as residential premises, or been the subject of a long-term lease? 34. Where land with a residential building has previously been sold as residential premises, or the subject of a long-term lease, and the area of land is reduced in size, we consider that a subsequent sale of the excised area of land is not a sale of new residential premises. The reduced land area and building, as a 'package', have previously been sold as residential premises, or been the subject of a long-term lease. It is necessary to consider whether a supply of the excised land is a taxable supply in its own right. 35. For example, a house is located in the corner of 1,000 sq m of land. The house and land have previously been sold together as residential premises. A 200 sq m piece of land is subdivided from the existing land and sold. The 'package' of the house and the remaining 800 sq m of land has previously been sold as residential premises and, therefore, is not new residential premises. This is because the remaining 'package' has previously been sold as part of a larger 'package'. The 200 sq m lot is not residential premises. To this extent, subdividing the original property did not create new residential premises under paragraph 40-75(1)(a) as the dwelling and the reduced land area on which it now sits has been previously sold as residential premises. GSTR 2003/3 discusses the circumstances in which residential premises are new residential premises created through substantial renovations. The term 'substantial renovations' is defined in section 195-1: substantial renovations of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. Paragraphs 53 to 59 of GSTR 2003/3 consider the term 'substantial renovations' as defined in section 195-1 and contain guidance on new residential premises created through substantial renovations. The criterion for substantial renovations is discussed at paragraphs 60 to 62 of GSTR 2003/3: 60. Whether renovations are substantial is to be determined in the light of all the facts and circumstances. 61. We consider that for substantial renovations to occur for the purposes of the GST Act, the renovations need to satisfy the following criteria before it is necessary to make further inquiry to establish whether the renovations are substantial: (i) the renovations need to affect the building as a whole; and (ii) the renovations need to result in the removal or replacement of all or substantially all of the building. 62. Where one of the above criteria is not satisfied substantial renovations have not occurred and no further inquiry needs to be made. Further paragraphs 77 to 79 of GSTR 2003/3 state: 77. As part of renovations, work is often undertaken which does not impact on the structure of the building but is more in the nature of renewing or refreshing what is already there. We consider work of this nature to be cosmetic. Cosmetic work by itself does not amount to substantial renovations. We consider cosmetic work includes: • Painting; • Sanding floors; • Removing and replacing worn or out of date fittings such as light fittings; • Replacing curtains or carpets. 78. Cosmetic work may be undertaken to obtain a better price when selling a property (sometimes referred to as a 'makeover') or to obtain a higher rent. While this is often referred to as a renovation, this is not what the legislation contemplates as 'substantial renovations'. One example of where the work undertaken is largely cosmetic and does not result in substantial renovations, is contained in Example 4 at paragraphs 109 to 110. 79. Where structural or non-structural work amounts to substantial renovations that create new residential premises, any cosmetic work undertaken will form part of the new residential premises. Example 4 of GSTR 2003/3 provides: | Detailed Reasoning - Example 4 - non substantial renovations - renovations largely cosmetic: 109. Bob, a property speculator, is registered for GST. He acquires Tangalooma, a historic federation style residence, in July 2000. Bob does not live in the house and immediately patches some of the walls in a few of the bedrooms with gyprock cement, repaints the whole house, inside and out, and replaces the kitchen. 110. Although Bob has made changes to all the rooms the work done is largely cosmetic in nature. We do not consider that Bob has substantially renovated Tangalooma. The sale of the property will be an input taxed supply. Whether or not a person resides in the premises does not alter the analysis. | Detailed Reasoning - Application to your circumstances: The following renovation works are to be undertaken at the dwelling on Proposed Lot X: • renovate bathroom • new tiles • new carpet, and • painting. In order for renovations to be considered substantial renovations, the renovations and work done need to affect the building as a whole. Based on the facts of the case, it is considered that the planned renovation works to the dwelling on Proposed Lot X are not extensive, as the works will be largely cosmetic. These works will not result in the creation of a new residential premises under paragraph 40-75(1)(b). | Detailed Reasoning - Conclusion: The supply of Proposed Lot X will satisfy the requirements of section 40-65 as it is residential premises to be used predominantly for residential accommodation and is neither commercial residential premises nor new residential premises. Accordingly, the supply of Proposed Lot X will not be a taxable supply in accordance with section 9-5 of the GST Act and GST will not be payable pursuant to section 9-40. | Detailed Reasoning - Question 2: Will the supplies of the vacant lots subdivided from XXXX be taxable supplies in accordance with section 9-5 of the GST Act? | Summary: Yes, your supplies of the proposed subdivided vacant lots will be taxable supplies in accordance with section 9-5 of the GST Act. Your activities related to subdividing the Property, and selling the resulting vacant lots will be carried out as part of a profit-making undertaking or scheme. | Detailed Reasoning - Taxable Supply: Your supplies of the subdivided vacant lots will be taxable supplies if all the requirements of section 9-5 are satisfied. However, the supplies will not be taxable supplies to the extent they are GST-free or input taxed. Division 38 and 40 provides for certain supplies to be GST-free and input-taxed respectively. There are no provisions in the GST Act under which your sales of the proposed subdivided vacant lots will be GST-free or input-taxed. Your supplies of the proposed subdivided vacant lots will satisfy paragraphs 9-5(a) and (c) as the supplies will be for consideration and will be connected with the indirect tax zone as the lots are situated in Australia. However, you are not registered for GST. In relation to the supplies of the proposed subdivided lots, the issues to be resolved are whether: • your supplies will be made in the course or furtherance of an enterprise that your carry on (paragraph 9-5(b)), and • you are required to be registered for GST pursuant to section 23-5 (paragraph 9-5(d)). | Detailed Reasoning - Enterprise: The term 'enterprise' is defined in section 9-20 of the GST Act. 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; or ... The phrase 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise. This definition ensures that activities done in the course of the commencement or termination of the enterprise are included in determining whether the activities of the entity amount to an 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) contains the Commissioner's view on what constitutes an enterprise for the purpose of eligibility for an Australian business number. Paragraph 1 of Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the guidelines in MT 2006/1 are considered to apply equally to the term 'enterprise' as used in the GST Act and can be relied upon for GST purposes. In the form of a business Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business, and state: Indicators of a business 177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. 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. 179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that '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'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business. Based on the facts of this case, we consider your activities relating to the subdivision of the Property, and the sale of the proposed subdivided vacant lots do not reflect the indicators of a 'business' as listed above. The indicators set out in paragraph 178 of MT 2006/1 are not present to a sufficient degree to warrant the conclusion that you are carrying on an enterprise in the form of a business pursuant to paragraph 9-20(1)(a). We will now consider whether your activities will be in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: The commercial nature of a transaction or scheme is significant in determining whether the activities are done in the form of an adventure or concern in the nature of trade. This is further explained in paragraph 234 to 237 of MT 2006/1: 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. ... 237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, See McClelland v Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority said: It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'. 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. 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. Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provide 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset, or a capital/investment asset for investment or personal enjoyment. While an activity such as selling an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on. The Commissioner has made the following comments about the badges of trade in MT 2006/1: The subject matter of realisation 247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset... The length of period of ownership 249. A trading asset is generally dealt with or traded within a short time after acquisition... The frequency or number of similar transactions 251. The greater the frequency of similar transactions the greater the likelihood of trade. Supplementary work on or in connection with the property realised 252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade. The circumstances that were responsible for the realisation 253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties. Motive 254. If the activities on an objective assessment have the characteristics of trade, the person's motive is not relevant. It is relevant in those cases where the evidence is not conclusive. An intention to resell at the time of acquisition may be an indicator of the resale being an adventure or concern in the nature of trade. 255. Motive is also important in cases if there is a change in character of the asset. For example, a trading asset becoming an investment asset when the person decides to keep the asset, either for income producing purposes or personal enjoyment. Paragraph 258 to 261 of MT 2006/1 further considers the character of an asset and distinguishes between trade/revenue assets and capital/investment assets as follows: Trade v. investment assets 258. United Kingdom cases categorise assets as either trading assets or investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. 259. Examples of investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of investment assets does not amount to trade. 260. Assets can change their character but cannot have a dual character at the same time. 261. Investment assets such as business plant and machinery are used by entities in carrying on a business. The purchase and disposal of those types of assets is ordinarily considered not to be an adventure or concern in the nature of trade for UK income tax purposes. Isolated transactions and sales of real property Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. Paragraph 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 ( Statham ) and Casimaty v FC of T 97 ATC 5135 ( Casimaty ). Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a 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 profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • 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 land; • there is a business organisation - for example, a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. In addition to the above, paragraphs 266 and 267 of MT 2006/1 provide that there may be other relevant factors outside this list that are present on the facts of a given case, and that no single factor is determinative to the question of whether an enterprise is present: 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. 267. No two cases are likely to be exactly the same. For instance, while the conclusions reached in the Statham and Casimaty cases were similar, different facts and factors were considered to reach the respective conclusions. Paragraphs 270 of MT 2006/1 states the following: Land bought with the intention of resale 270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. Paragraphs 271 to 276 (Example 28 and 29) of MT 2006/1 illustrates scenarios with some similarities to the circumstances in your case: Example 28 271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit. 272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner. Example 29 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise. 276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units. | Detailed Reasoning - Application to your circumstances: You entered a contract on DD MM YYYY to purchase the property with the initial intentions of: • subdividing the land into X or more lots • retaining the existing dwelling for use as a residential premises by T1 and T2, • constructing a purpose-built residential premises on the subdivided vacant lot for T3 and T4 to accommodate their child's mobility needs. However, before the settlement of property, your intentions changed to the following: • subdivide the Property into X lots of approximately XXXX m 2 each • X lots to be sold as vacant land • renovate the existing dwelling, and sell the lot with the existing dwelling after completion of the subdivision (Proposed Lot X) • remaining X lots to be retained by you, with the intention of constructing a dwelling for investment purposes on each lot, while also keeping a medium-term option for both families to move into them in years to come if and/or when your personal circumstances allow. Your intentions changed again after the purchase of the Property, when both families decided the Property would no longer be used as a main residence in the foreseeable future. You have a coherent plan for the development, subdivision, and sale of the proposed subdivided vacant lots. In assessing your investment options for the Property, you: • sought expert advice about your subdivision options for the Property, and • obtained a market appraisal of the proposed subdivided vacant lots, as well as the lot with the existing dwelling. You will have oversight of the operation and will be the decision-maker at every stage. We note you have not previously acquired and sold other properties in a manner like your proposed sale of the subdivided lots. However, despite your lack of experience in property development, you sought advice and engaged the services of experts to assist with the process. Examples of experts you consulted include: • Planning Manager from the Planning company to assist with the subdivision process, and • Real estate agent to get a market valuation of the proposed subdivided lots. You have maintained a profit-making intention in relation to the Property since its purchase. This intention has not ceased, as the purpose of subdividing and selling the vacant lots is to generate funds to facilitate the construction of X new dwellings on the remaining subdivided lots. You obtained a loan of $XXXX from the XXXX Bank to purchase the Property, with part of the funds intended to support the subdivision activities. An additional loan of $XXXX was obtained by T1 and T2 from the XXXX Bank to cover their share of the subdivision costs. While you maintained records of your expenditure, the Property was not treated as a business asset for accounting purposes. You will engage a real estate agent to sell the subdivided vacant lots once the subdivision is completed. On balance, having considered the facts of the case against the badges of trade and other factors listed above, we consider your development activities amount to an enterprise for GST purposes pursuant to paragraph 9-20(1)(b). | Detailed Reasoning - Registration: As you are not registered for GST, it needs to be established whether or not you are required to be registered for GST in relation to the sale of the proposed subdivided vacant lots. Section 23-5 of the GST Act 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 (in your case the threshold is $75,000). Note: It is the entity that carries on the enterprise that is required to be registered (and not the enterprise). As discussed previously, your activities associated with the subdivision and sale of the proposed subdivided vacant lots fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above. The next issue to consider is whether your GST turnover meets the registration turnover threshold of $75,000 or more. Subsection 188-10(1) provides that you have a GST turnover that meets the registration turnover threshold if: (a) your *current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your *projected GST turnover is less than $75,000; or (b) your projected GST turnover is at or above $75,000. Your 'current GST turnover' is defined in section 188-15 of the GST Act as the sum of the values of all of your supplies made in a particular month and the preceding 11 months. Your 'projected GST turnover' is defined in section 188-20 of the GST Act as the sum of the values of all of your supplies made in a particular month and the following 11 months. Paragraphs 188-15(1)(a) and 188-20(1)(a) of the GST Act provide that input taxed supplies are disregarded when calculating your current and projected turnovers respectively. The sale of Proposed Lot X containing the dwelling is an input taxed supply of residential premises pursuant to section 40-65 of the GST Act and is therefore also excluded from the calculation of your 'current GST turnover' or your 'projected GST turnover'. Section 188-25 of the GST Act 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: In working out your *projected GST turnover, disregard: (a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and (b) any supply made, or likely to be made, by you solely as a consequence of: (i) ceasing to carry on an * enterprise; or (ii) substantially and permanently reducing the size or scale of an enterprise. Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) discusses this issue. The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7: Meaning of 'capital assets' 31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'. 32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill. 33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a). 34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'. 35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling. 36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply. In relation to isolated transactions, paragraphs 46 to 47 of GSTR 2001/7 provide: | Detailed Reasoning - Isolated Transactions: 46. An enterprise may consist of an isolated transaction or a dealing with a single asset. For example, an enterprise may consist solely of the acquisition and refurbishment of a suburban shop for resale at a profit. Where an entity engages in acquiring a single asset for resale at a profit, the activity will be an enterprise under paragraph 9-20(1)(b), because it is an activity in the form of an adventure in the nature of trade. [20] As discussed in paragraph 35 of this Ruling, the disposal of that single asset is not the transfer of a capital asset. Consequently, that supply is not excluded from your projected GST turnover. 47. The disposal of that single asset, or the completion of that isolated transaction, is also not a transfer solely as a consequence of ceasing to carry on an enterprise. In such circumstances the enterprise ceases as a consequence of the disposal of the single asset, rather than the single asset being disposed of in consequence of the ceasing to carry on the enterprise. At the time of sale, the nature of your assets will be revenue (trading) assets. The sales of the proposed subdivided vacant lots do not constitute the transfer of a capital asset and paragraph 188-25(a) will not apply. Per paragraph 35 of GSTR 2001/7, the sale of the proposed subdivided vacant lots will be a means by which you derive income and will be revenue in nature and not capital. Therefore, the sale of the proposed subdivided vacant lots will not be excluded from the calculation of your projected GST turnover and the value of the sales must be included in the calculation of your current and projected GST turnovers. Given the estimated market value of the proposed subdivided vacant lots, you will be required to be registered for GST pursuant to section 23-5 when you sell the subdivided vacant lots. | Detailed Reasoning - Conclusion: The supply of the proposed subdivided vacant lots will be taxable supplies pursuant to section 9-5 of the GST Act, and GST will be payable on the supplies. Your supplies of the proposed subdivided vacant lots will be in your capacity as a partnership and not in your capacity as individuals. | Detailed Reasoning - Question 1: Will your share of the proceeds from the proposed sale of the subdivided portion of the property be assessable as statutory income, on the capital account, as the mere realisation of an asset under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Detailed Reasoning - Detailed reasoning: Broadly, there are three main ways profits from a land development, subdivision and sale can be treated for taxation purposes: • as ordinary income under section 6-5 of the ITAA 1997, on the 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 the revenue account as a result of an isolated business transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit-making purpose • as statutory income under the CGT legislation. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. We will consider each of these in relation to your situation as follows. | Detailed Reasoning - Carrying on a business: Section 995-1 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. 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? which 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 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. 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. | Detailed Reasoning - Am I in business?: When assessing whether a taxpayer is carrying on a business, no single indicator is determinative. Instead, the indicators should be considered collectively to form an overall impression. The conclusion depends on whether the indicators suggest that the activity has a commercial nature. In your situation the following indicators are relevant: | Detailed Reasoning - 1. Does the taxpayer have more than just an intention to engage in business and is there activity?: Though the activity involves land subdivision and possible future construction, you have given no clear statement of intent to carry on a business of property development. Your activity appears to be driven by personal investment goals as opposed to a broader business strategy. | Detailed Reasoning - 2. Does the activity have a purpose and prospect of profit?: The activity does have a profit motive. However, the primary driver appears to be the generation of income to fund the construction of investment properties, which may be retained for personal use in the future. This suggests a mixed purpose rather than a business one. | Detailed Reasoning - 3. Is the activity regular and repeated?: There is no indication of plans to undertake further property development projects. The activity appears to be a one-off transaction rather than part of a series of ongoing or repeated developments. | Detailed Reasoning - 4. Is the activity systematic, organised and carried out in a business-like manner?: You engaged a professional to assist with the subdivision process that reflects a degree of planning. However, this appears to be limited to short-term goals. You have provided no broader business plan or systems in place to support ongoing operations or future developments. | Detailed Reasoning - 5. Does the activity have a significant commercial purpose or character?: While the activity involves financial investment and professional advice, the overall scale and structure do not reflect a significant commercial business. The subdivision of one lot into X, with only X lots intended for sale, is not consistent with the scale typically associated with a property development business. | Detailed Reasoning - 6. Size and scale, including capital invested in the activity?: The project involves a relatively small subdivision and capital investment. This level of activity is more consistent with a personal investment or isolated transaction than a business operation. | Detailed Reasoning - 7. The activity cannot be described as a hobby, a form of recreation or a sporting activity?: The activity would not be considered recreational or hobby-like. However, the intention to potentially use the constructed home for personal purposes introduces a personal element that may detract from the nature of a business activity. | Detailed Reasoning - 8. Is the activity of the same kind that is carried on in a similar manner to that or ordinary trade in that line of business?: Compared with other entities that are carrying on a property development business, your activity does not reflect a similar level of engagement or structure. Your activity is small in scale, and this is your one and only property development activity to date. | Detailed Reasoning - Conclusion: Based on the above analysis, the Commissioner is of the view that you are not carrying on a business. The one-off nature of the transaction, coupled with the absence of repetition, clear commercial intent, and a business-like structure, indicates that the activity does not amount to a business operation. This conclusion is consistent with the principles outlined in Taxation Ruling TR 97/11, which emphasises the importance of continuity, intention, and a systematic approach when determining whether a business is being carried on. | Detailed Reasoning - Profits from isolated transaction: Profits arising from an isolated commercial transaction will be ordinary income if the purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the taxpayer's usual or recurring activities (as per FC of T v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199; (1987) 87 ATC 4363). Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are ordinary income and assessable under section 6-5 of the ITAA 1997. The term isolated transaction 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. Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Paragraph 35 of TR 92/3 provides that a profit from an isolated transaction will be ordinary income where: • the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. Paragraph 13 of TR 92/3 provides that some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction: • 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 of property, the nature of that property • the timing of the transaction or the various steps in the transaction. Based on an objective view of considering some of the matters listed above or other matters specific to a transaction, it is sufficient for the purpose or intention of the profit-making activity to be a significant purpose. It is not necessary for an objective view of the matters that the intention or purpose of profit making to be the sole or dominant intention of purpose for entering into the transaction. Paragraphs 56 and 57 of TR 92/3 explains that a profit is income where it is made in any of the following situations: • a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose, or • a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit, or • a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means. In very general terms a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations (as per paragraph 49 of TR 92/3). In McCarthy v. FC of T [2021] AATA 1511 ( McCarthy ) and McCurry v. FV of T (1998) 39 ATR 121; 98 ATC 4487 ( McCurry ), the taxpayers demolished the dwelling on a property, subdivided it and then sold the two vacant lots for a profit. The taxpayer's argued that the development was of such a small scale it was not a commercial transaction. However, the Tribunal held that it was the sort of transaction that a person in business might undertake and therefore it was a commercial transaction. The taxpayers in McCarthy also argued that their original intention had been to hold the property as a rental investment to generate income but due to financial reasons they had to change their plan to hold the property long-term. The Tribunal stated that a taxpayer's stated intention must be considered in light of all the evidence and what eventually transpired. It also stated that a profit-making purpose does not have to be the sole or even the predominant purpose for entering into a transaction; it just has to be a not insignificant purpose. The Tribunal concluded that even if the taxpayer originally had another purpose for entering into the transaction, the possible subdivision and sale of the property was also a live option that the taxpayers considered at the time. Therefore, the Tribunal found that the profit made on the sale of the two subdivided lots was assessable as ordinary income under section 6-5 of the ITAA 1997. In McCurry , the taxpayers purchased a property, demolished the existing dwelling on it, and built three townhouses which were placed on the market a year after construction was completed. The taxpayers claimed that their original intention had been to construct townhouses to rent out and that they were only sold because of the financial difficulties they were encountering. The Federal Court in McCurry held that: • The development was a sufficiently businesslike venture to constitute a commercial transaction. • A taxpayer may have more than one intention or purpose in mind when entering into a property development. • Although the taxpayers may originally have had the intention to rent out the townhouses on completion, having regard to all the facts and events that occurred, it was considered that they also had in mind the possibility of selling the developed property at a profit. • The profit on the sale of the townhouses was a profit from an isolated commercial transaction and therefore assessable as ordinary income. The relevant intention or purpose need not be the sole or dominant intention or purpose for entering into the transaction as per Federal Commissioner of Taxation v Cooling [1990] FCA 297; 22 FCR at 57. Paragraphs 7 and 8 of the TR 92/3, provide that it will be sufficient if the profit-making was a significant purpose for entering into the transaction. In McCorkell v FCT [1998] AATA 562; (1998) 39 ATR 1112; (1998) 98 ATC 2199, the Administrative Appeals Tribunal held that profits from the subdivision and sale of orchard land were assessable as ordinary income. The taxpayer undertook organised steps including permits for two stages, engaging consultants, and contracting estate agents to market and sell lots. These actions showed a systematic and commercial approach, going beyond mere realisation and amounting to a profit-making scheme. As outlined in paragraphs 41 and 42 of TR 92/3, when a taxpayer's intention in relation to an asset acquired with the intention of using it for personal enjoyment changes, and the taxpayer decides to venture into a profit-making scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer will constitute the carrying out of a profit-making scheme, although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. However, paragraph 44 of TR 92/3 explains when a taxpayer derives a profit from a transaction outside the ordinary course of carrying on its business and the taxpayer did not enter that transaction with the purpose of making a profit, the profit is not assessable income. | Detailed Reasoning - Profit making transaction: With consideration to the above authorities and relevant factors in determining whether the property subdivision and development would be viewed as an isolated transaction with a view to a profit, the following general observations have been made in this case: • The four parties initially intended to purchase the land collectively for personal residential use with the intent to always subdivide the land into X or more lots. • Subsequent changes in circumstances led you to reconsider residing at the location, primarily due to the desire not to disrupt T3 and T4's child's life and the significant travel distance for work. • The parties engaged Planning company to develop a proposal for the property X weeks prior to entering into the Contract for Sale. • The proposal involved subdividing the property into X lots, X of which would be vacant. • X vacant lots were intended to be sold to generate funds for the construction of X investment dwellings. • Both families wished to retain the option of occupying the dwellings in the future should circumstances permit. • The parties have no prior experience in property development and no current intention to undertake further subdivisions. The initial intention was to acquire the property to convert into a dwelling. As stated previously, a profit-making purpose does not need to be the sole or dominant purpose for entering into a transaction. However, such a purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character depends on the circumstances of each case. TR 92/3 outlines some matters to consider for determining whether the purpose or intention of the transaction was to make a profit. In this case, the following factors are relevant: • Engaged a town planner and outlined a subdivision plan. • At the time of purchasing the property, you intended to subdivide and sell part of the land for a profit. • Developing and outlining a plan to sell X vacant lots, construct dwellings on the remaining lots, and rent them out. • Some parties facilitated the subdivision using an investment loan. A critical factor is that the parties resolved to pursue a profit-making scheme following consultation with a town planner and prior to entering into the contract for the property. These circumstances strongly support the conclusion that a profit-making purpose was a primary purpose at the time of acquisition. | Detailed Reasoning - Conclusion: Based on the above analysis, it is the Commissioner's view that the subdivision and proposed sale of the X lots of land amount to a profit-making scheme. In weighing of the factors outlined in TR 93/2 and case authorities to your facts and circumstances, the purpose or intention for profit making is a significant purpose in your case. Accordingly, the profit from the subdivision and sale of the vacant lots will be included in your assessable income under section 6-5 of the ITAA 1997, on the basis that the profit arises from an isolated transaction. | Detailed Reasoning - Question 2: Will your share of the proceeds from the proposed sale of the subdivided portion of the property be assessable as statutory income, on capital account as the mere realisation of an asset, under Parts 3-1 and 3-3 of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: As detailed in question 1 the subdivision and proposed sale of the lots of land are considered to amount to a profit-making scheme. The profit from the subdivision sale will be in included as part of your assessable income under section 6-5 of the ITAA 1997. Therefore, the CGT provisions will only apply to reduce any capital gains by any amounts which are included in your assessable income as section 118-20 of the ITAA 1997 contains anti-overlap provisions. | Detailed Reasoning - Capital gain: As a general rule, a taxpayer is required to include in their assessable income any capital gain they make from a CGT event that happens to a CGT asset the taxpayer acquired on or after 20 September 1985. Pursuant to section 108-5 of the ITAA 1997, a CGT asset is any kind of property, or a legal or equitable right that is not property. Accordingly, land and buildings are CGT assets. The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes their net capital gain (if any) for the income year. CGT event A1 happens if you dispose of your ownership interest in a CGT asset. You make a capital gain if the proceeds from the sale of the CGT asset are more than the CGT asset's cost base. You make a capital loss if the proceeds from the sale of the CGT asset are less than the cost base of the CGT asset. When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event. Each of the new assets, being each subdivided lot, will be viewed as having been acquired on the same date as the original asset for CGT purposes. Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under the provision of the ITAA outside of Part 3-1 as a result of the sales. | Detailed Reasoning - Application to your circumstances: As previously discussed, it is the Commissioner's view that the future sale of the subdivided vacant lots will be more than a mere realisation of a capital asset. After considering and weighing of all the indicators, to determine whether you are in business of property development or isolated profit-making transaction, your intention and the level of planning and organisation involved indicate a deliberate profit-making purpose rather than passive disposal. Accordingly, the disposal of the lots would be treated as an isolated profit-making transaction and any profit made on their sale will be included in the assessable income of each individual under section 6-5 of the ITAA 1997. | Detailed Reasoning - Conclusion: In conclusion, the Commissioner considers that the sale of the subdivided lots is not a mere realisation of your asset, and the CGT provisions would not apply for income tax purposes. Instead, the profits will be assessable as ordinary income under section 6-5 of the ITAA 1997 because the activities undertaken demonstrate a profit-making intention and organised approach. Further, the CGT provisions will only apply to reduce any capital gains by any amounts which are included in your assessable income as section 118-20 of the ITAA 1997 contains anti-overlap provisions.