Private ruling: Property development
Date of advice: 13 August 2025
Published: 20 October 2025
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the profit or gain made on the disposal of the 2 lots be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will any capital gain made on the disposal of the 2 lots be reduced by the amount of profit included as ordinary income? | A2: Yes. Issue 2 Subdivision and enterprise | Q3: Was the supply of the property situated at Lot Y of the property a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A3: No. | Q4: Will the supply of the subdivided vacant land situated at Lot X of the property be a taxable supply in accordance with section 9-5 of the GST Act? | A4: Yes.

Relevant facts and circumstances: In the facts below, the expressions 'you' and 'your' refer to both taxpayers (A and B) to which the ruling applies and are used interchangeably throughout. You (Person A and Person B) are each other's spouse. You do not hold an ABN, and you are not registered for GST. You have not applied for or received a partnership ABN. In early 20XX, you purchased a residential property (the Property) as joint tenants. The contract to purchase was signed in early 20XX and settlement occurred a couple of months after that. At the time Person A had been retired since 20XX and Person B was employed full time and planning on retiring in mid-to-late 20XX. You purchased the property as an investment to support you in retirement. You held various assets at the time of purchase (excluding the purchase) which included a family home, an Apartment, Superannuation (held by Person B) and cash. At the time of the property purchase you had no liabilities. The purchase price of the property was $X and was fully funded via a bank loan. You also borrowed to pay the stamp duty. The total loan at the time of settlement was $X. The property dimensions were Xm2 (Xm x Xm) and contained a house that was located in the middle of the property. You intended on subdividing the property into two equal sized smaller blocks of land of around Xm2 each (to be known as Lot X on Survey Plan (SP) (number) and Lot Y on SP (number) and moving the existing house so that it was located solely on one of the resulting blocks (Lot Y), with Lot X to be a vacant block. You engaged specialised services to take on the process of relocating the house to Lot Y. Once the house was moved and once the subdivision was to be completed, you intended on renting out the block containing the house and holding the block of vacant land as a long-term investment. The house would be negatively geared and if you had difficulty repaying the loan you would sell the vacant block of land. In mid-20XX you submitted a planning application, and you leased the property in mid-20XX for a 12-month period whilst the planning application was being assessed by the local council. The development application was approved in mid-to-late 20XX. You initiated the proposed subdivision of the land yourself, and the reason you acted so quickly was to secure funding from the Bank whilst you were still employed. At the end of the 12-month lease the tenant was advised that they would need to vacate the property whilst the existing house was moved. In mid-20XX, during a phone conversation between the tenant and your nominated real estate agent, the tenant was offered an option to return to the property once the subdivision was completed. However, the tenant declined the offer as they had found another rental property which was available in line with the end of the lease agreement. The tenant moved out of the property in mid-20XX, and the subdivision activities commenced shortly after this. In mid-20XX a family member was arrested for a serious criminal offense and has been held on remand in an Australian Correctional Centre since that time. You have been assisting your family member and their family financially since the arrest by paying your family member's legal fees, their weekly costs and assisting your family member and their family with their living expenses (your family member has a partner and several children). These costs to date exceed $X with an expectation of significant ongoing legal fees. Due to this, you have borrowed money from your bank and other family members. Person B has also postponed their planned retirement. The subdivision application was submitted in early 20XX and the certificate of title for the lots were received a short time later. The only preliminary steps you took prior to entering into the subdivision arrangement was receiving advice from the Town Planner and Engineer. You have engaged trade and consulting services in relation to the subdivision of the land (including costs incurred in relation to the services, and the service obtained). These services included: - Surveying. - Engineering. - Plumbing and gas. - Town planning. - Electrical. - House relocation services. - NBN. - Water infrastructure. - Driveways and Car Port. - Block levelling. - Electricity supplier. - Civil safety. - Local Council. - Landscaping. The tasks associated with the planning permit have now been completed, and the house has been relocated to sit solely on one of the proposed blocks. The following tasks were completed: - disconnected all current services to the house - moved the house - renovated the existing house (new laundry, new back deck, new back door, painting, carport). - installed and connected new sewerage connections for both blocks - installed a new water meter to one block and reconnected to existing house - installed and reconnected new electricity connection (underground) for both blocks and house - installed new driveways, and carport to existing house - other associated concreting as per Council requirements, and - erected a new centre boundary fence. You completed the abovementioned renovations (small modifications to the house) yourself as owner builders, and you also project managed the project funding, along with organising trades and services. You have supplied floor plans of the dwelling before and after the renovation (with the addition of the carport). The development activities were completed around mid-20XX following the completion of building the carport for the house. You borrowed a further $X on in mid-to-late 20XX to fund the subdivision and move the existing house. This was a variable investment loan for a term of X years, with the loan repayments in the first X years being a variable interest only, followed by principal and interest repayments thereafter. Additional variable investment loans were obtained with the following details: - $X in mid-20XX for a term of X years, and - $X in early 20XX with the term unchanged. You estimate that total additional borrowings including interest will be around $X. Nearing the completion of the house renovation, you made further enquiries into the rental potential of Lot Y by seeking a rental appraisal from your real estate agent in early 20XX (prior to the completion of the renovations). Due to the change in your circumstances you opted to sell both lots. You appointed a real estate agent to attend to the sales. The market value of the property prior to the subdivision activities (un-subdivided) was somewhere between $X (the purchase price) and the real estate estimate of $X. Your real estate agent estimates the value of the subdivided lots as follows: - Lot X $X to $X; and - Lot Y (where the house was relocated to) $X to $X You estimate that you will make a net profit from the sale of the two lots. The sale proceeds would be enough to cover any tax liability resulting from a capital gain, along with funds lent to your family member and their family, whilst still leaving a small excess. Lot X was originally listed for sale in early 20XX and was paused in early-to-mid 20XX to await the outcome of your private ruling request. The listing was relaunched again in mid-20XX. Lot X remains on the market as at mid-20XX. You did receive a verbal offer to purchase Lot X for $X, however no formal written offer resulted from this. Lot Y was listed for sale in mid-20XX, and you requested an updated rental appraisal from your real estate agent in mid-20XX. An offer of $X for Lot Y was accepted in mid-20XX with settlement scheduled for a few weeks after this. There are no planning documents such as projected cash flow statements, projected financials, financial or economic modelling, budgets, or business plans. Previous land subdivision activities In 20XX you planned to subdivide and build on land next door to your Australian family home to provide accommodation for your disabled family member. However, this proved unnecessary due to them receiving assisted accommodation elsewhere. You subsequently sold the land. In 20XX you financed a subdivision project managed by a family member to assist them to purchase a property. You did this via a family trust, and you were registered for GST at the time (you used a margin scheme). You do not intend on undertaking any further subdivision activities in the future.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Parts 3-1 and 3-3 | Income Tax Assessment Act 1997 section 118-20 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 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 Division 188 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: The profit or gain derived from the sale of the 2 lots is considered to be a profit from an isolated profit-making commercial transaction and therefore included in your assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Despite the profit or gain being treated as ordinary income, it will also be treated as an assessable capital gain in accordance with section 102-5 of the ITAA 1997. However, section 118-20 of the ITAA 1997 will apply to prevent any double taxation by reducing the capital gain made on the sale of the units by the amount assessed as ordinary income. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income. There are 3 ways the proceeds from a property development can be treated for taxation purposes: • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or • A mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 of the ITAA 1997 as statutory income. | Detailed Reasoning - Carrying on a business: Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view on whether a taxpayer is carrying on a business. Although TR 97/11 deals with the issues in 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 carrying on any type of business including property subdivision and development. Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business: (a) whether the activity has a significant commercial purpose or character; (b) whether there is repetition and regularity of the activity; (c) 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; (d) 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 (e) whether the activity is better described as a hobby, a form of recreation or a sporting activity. Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Isolated commercial transactions: Taxation Ruling TR 92/3: Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. The term 'isolated transactions' in paragraph 1 of TR 92/3 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. Whether a profit from an isolated transaction is ordinary income is a question of fact and depends very much on the individual circumstances of the case. Paragraph 6 of TR 92/3 provides that profits from an isolated transaction is generally income when both of the following elements are present: • the intention or purpose of the 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 or in carrying out a business operation or commercial transaction. Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when 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 the property, and • the timing of the transaction or the various steps in the transaction. TR 92/3 makes it clear at paragraph 42 that even if a taxpayer did not originally acquire a property with a profit-making intention, the profit made on its eventual sale will be income if the taxpayer later ventured the property into a profit-making commercial transaction: 42. For example, if a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset either: (a) as the capital of a business; or (b) into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business or a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. The profit from the activity is income although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset. If a property is entered into a property development sometime after it was acquired, it is the taxpayer's intention at the time the property is committed to the development that must be considered. In considering the taxpayer's intention, TR 92/3 states that it is not the subjective intention or purpose of the taxpayer that is relevant. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. TR 92/3 also states that it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. Rather, a taxpayer may have multiple intentions or purposes and all that is required is that sale for a profit be 'a not insignificant' intention or purpose ( McCarthy v. FC of T [2021] AATA 1511 ( McCarthy ) and McCurry v. FV of T (1998) 39 ATR 121; 98 ATC 4487 ( McCurry )). In McCarthy , the taxpayers demolished the dwelling on a property, subdivided it and then sold the two vacant lots for a profit. The taxpayers 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. • When considering intention, the court is entitled to have regard not only to the taxpayer's stated intention but also the surrounding facts and to the events which actually occurred, as those events, by hindsight, can throw light on the considerations the taxpayer had at the time the transaction was entered into. The court stated: 'That which a person does is a guide to that which he had in mind to do'. • 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 profit from an isolated commercial transaction and therefore assessable as ordinary income. | Detailed Reasoning - Mere realisation: Where the sale of land is a 'mere realisation', rather than sold in the course of carrying on a business or an isolated profit-making transaction, the sale is on capital account and CGT rules will generally apply. These proceeds are not ordinary income. As stated in paragraph 36 of TR 92/3, the courts have often said that the profit on the mere realisation of an investment will not be income, even where the taxpayer goes about the realisation in an enterprising way. However, where the original asset is transformed, this goes beyond a mere realisation of an investment. The extent of the transformation will be relevant when determining whether the undertaking is profit making in nature. In Whitfords Beach Pty Ltd v. Federal Commissioner of Taxation 79 ATC 4648; (1979) 44 FLR 312, Justice Deane's judgement which was approved on appeal by the Full High Court stated: Thus a goldsmith who sells in his shop his patrimony of a single gold bar does not necessarily receive the proceeds of sale as income merely because he takes advantage of his shop to sell his capital asset more advantageously. On the other hand, the master goldsmith who labours to turn such a gold bar into finely wrought brooches which he displays and sells with his other gold wares, could not be said to receive the whole of the proceeds of sale of those particular brooches as capital merely because the gold from which they had been fashioned had not been acquired by him for the purposes of his business but had been received as a gift from his father. The paragraph above indicates that where the original asset acquired has been transformed so that it no longer retains its original character, the disposal of that asset will go beyond a mere realisation. | Detailed Reasoning - Capital Gains Tax: Profits from the sale of property may be treated as statutory income under the CGT provisions contained in Part 3-1 of the ITAA 1997 as a mere realisation of a capital asset. Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. Most CGT events happen in respect of a CGT asset. Real estate property is a CGT asset (section 108-5 of the ITAA 1997). CGT event A1 happens if you dispose of a CGT asset. If profit from the sale of property gives rise to both ordinary income and a capital gain, section 118-20 of the ITAA 1997 will apply to reduce the capital gain to the extent that the profit from the sale of the property is otherwise included as assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: Given the facts in your case, especially the 'one-off' nature of the activity and it's relatively modest scale, we do not consider you were carrying on a business of property development. However, the profit will still be assessed as ordinary income under section 6-5 of the ITAA 1997 if it resulted from an isolated commercial transaction which was entered into with a view to making a profit. Although your property development was not large in scale, it is comparable to those in McCarthy and McCurry which were held to be commercial transactions as although they were not large or complex, they were of a sort that a person in business might undertake. Similarly, it is considered that your property development, consisting of the repositioning of the house, subdivision of the land, and renovation of the house, is also a transaction that a businessperson might undertake. Consequently, your property development was a commercial transaction. As your property development has been determined to be a commercial transaction, it will be assessable as ordinary income if you had a profit-making intention at the time of the transaction. You used the property to produce rental income before the development. Therefore, the relevant time to consider your intention is when the commercial transaction commenced, that is, when you committed the property to the development. This occurred when you moved the house to the proposed Lot Y, following the tenant moving out of the property. As discussed previously, it is not the subjective intention or purpose of the taxpayer that is relevant; rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Also, it is not necessary for profit-making to be the sole or dominant intention or purpose for entering into the transaction. Rather, as stated in McCarthy and McCurry ,a taxpayer may have multiple intentions or purposes and all that is required is that sale for a profit be 'a not insignificant' intention or purpose. That is, it is sufficient that the taxpayer had in mind the 'live option' of selling for a profit when they commenced the development. Your private ruling application stated that your original intention for undertaking the development was to hold the block with the house as a rental property, along with retaining the vacant block as a long-term investment. The application went on to state that both Lot X and Lot Y are now required to be sold in the short term due to financial hardship resulting from the debt you incurred not only to fund the property purchase, but to also assist your family member and their family due to the circumstances and hardship they faced. | Detailed Reasoning - The vacant block (Lot X): Your private ruling application also stated that the house would be negatively geared, and if you had difficulty repaying the loan, you would sell the vacant block of land (Lot X). That is, you advised that you contemplated from the outset that you may have sold Lot X in the short-term. | Detailed Reasoning - The block containing the property (Lot Y): Your private ruling application stated that towards the end of the 20XX calendar year, it became apparent that the amount of debt held was too high and given the circumstances with your family member and the likelihood of further significant legal fees you decided to sell both properties. Although the ultimate decision to sell the property was made in late 20XX, we consider that you would have had the possibility of selling in mind when the development commenced shortly after the tenants moved out. When you moved the house to the proposed Lot Y, following the tenant moving out of the property, your family member had already been arrested and held on remand, with you paying their legal and family living expenses from that time onwards. Therefore, at the time you commenced the development after the tenant moved out of the property in mid 20XX, you were aware of your additional financial commitments and consequently we consider that, you would have also contemplated the possibility of selling the lot with the house on it (Lot Y) due to those commitments. The fact that you made the ultimate decision to sell the property only a short time later is consistent with this. | Detailed Reasoning - Borrowings: You incurred significant borrowings to undertake the development. This was a factor taken into account by the Federal Court in McCurry to conclude that, contrary to the claims made by the taxpayers, they would have had in mind the possibility of selling the developed property at a profit when entering into the development. The Federal Court stated: The project did not represent an investment of surplus funds and it was likely that, at some stage, the property would have to be sold to repay to the Bank the moneys borrowed. Similarly in your case, the development did not represent an investment of surplus funds. Rather, you still owed the bulk of the amount borrowed on the original purchase of the property and then substantially increased your debt on the property by borrowing to fund all the development costs. As in McCurry , it was likely that at some stage, given the amount of funds borrowed, along with the estimated values of each lot (provided by your real estate agent), at least one of the lots would have to be sold to repay or pay down your borrowings. | Detailed Reasoning - Conclusion: As discussed previously, it is not the subjective intention of the taxpayer that is relevant but rather their intention as discerned from an objective consideration of the facts and circumstances of the case. Also, as stated in McCurry and McCarthy , what actually eventuated sheds light on the taxpayer's intention on commencement of the development. Having regard to all the objective facts and circumstances, including the events that transpired, we consider that, when you committed the property into the development by moving the house to the proposed Lot Y, following the tenant moving out of the property, you had at least a 'not insignificant' purpose of selling the entire property (both lots) in the short term. You may also have had other purposes. That is, you may have undertaken the development with dual purposes of holding the property long term but also selling it short term if you thought it was appropriate at the time. In any case, selling in the short term was at least a 'not insignificant' purpose contemplated by you when you entered the property into the development. Consequently, your profit on the sale of the 2 lots is assessable as ordinary income under section 6-5 of the ITAA 1997. That is, the sale of the 2 lots is considered to be an isolated profit-making transaction rather than the mere realisation of an asset. Section 118-20 of the ITAA 1997 will apply to prevent any double taxation by reducing the capital gain made on the sale of the lots by the amount assessed as ordinary income. | Detailed Reasoning - Issue 2: 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: Was the supply of the property situated at Lot Y on Survey Plan XnumberX, XaddressX (Lot Y) a taxable supply in accordance with section 9-5 the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | Summary: No, your supply of Lot Y was not a taxable supply pursuant to section 9-5. The supply of Lot Y was an input taxed supply of residential premises pursuant to section 40-65. Although there were renovations to the dwelling after it was relocated to Lot Y, the subsequent renovation of the dwelling is not considered substantial renovations as defined in section 195-1. Therefore, the renovations did not create new residential premises pursuant to section 40-75. | 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 to the indirect tax zone (Australia); and (d) you are registered or required to be registered for GST. However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed. 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 sale of Lot Y was GST-free. We need to consider whether the supply of Lot Y was input taxed. | Detailed Reasoning - Input-taxed Supply: 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. Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides guidance in determining whether particular premises are commercial residential premises by describing the features of commercial residential premises such as a hotel, motel, inn, hostel or boarding house. Based on the information that you provided, Lot Y does not display the features of commercial residential premises. As such, your supply of Lot Y is not a supply of commercial residential premises. 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 40-35 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. This may include bedrooms, bathroom, kitchen, living areas, etc. Paragraph 20 of GSTR 2012/5 states: Fit for human habitation 20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation. Further paragraph 49 of GSTR 2012/5 states: Transportable buildings 49. A transportable building such as a demountable dwelling or moveable home [4] that is designed as a residence, or to provide residential accommodation, is residential premises when placed on land and installed ready for occupation. The existing dwelling on the original property was a transportable building, and when it was relocated to Lot Y, it retained the characteristics of residential premises (bedrooms, kitchen, living area, toilet and bathroom). The dwelling when placed on Lot Y became fit for human habitation when the sewage and electricity connections were completed, and the premises became capable of providing shelter and basic living facilities. New residential property Subsection 40-75(1) defines the term 'new residential premises' and includes 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 sqm lot is not residential premises. ... New residential premises where building relocated 38. A residential building may be relocated on the same land. For example, a house may be located in the centre of 1600 sq m of land. The house and land have previously been sold together. The house is moved so that it is wholly located within one half of the allotment to enable the land to be subdivided into two 800 sq m blocks. The house and the 800 sq m of land on which it now sits have previously been sold as residential premises. 39. Similar principles apply where, for example, a house located in one corner of 2½ hectares of land is relocated to the opposite corner of the site following the subdivision of the land into 20 smaller lots. Where the original land and residential building had previously been sold as residential premises, or been the subject of a long-term lease, we consider that the house and smaller area of land on which it now sits would not be new residential premises. This is because the 'package' has been sold previously, or been the subject of a long-term lease, as part of the larger 'package'. To this extent, subdividing the original property and relocating the existing dwelling to one half of the allotment - Lot Y, 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 56 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: 55. This definition requires consideration of what work has been done to the building since it was acquired by the current owner. 56. The word 'building' is not defined in the GST Act. 'Building' means 'a substantial structure with a roof and walls, as a shed, house, department store etc'. In the context of the provision, we consider that an individual strata title unit or apartment is a 'building' and its structure is enclosed within the external walls of the unit, rather than the entire complex. 57. The general usage of the term 'renovate' is 'to make new or as if new again; restore to good condition; repair; to reinvigorate; refresh; revive'. However, the term needs to be considered in the light of the surrounding words in the definition of substantial renovations. 58. The section 195-1 definition of 'substantial renovations' stipulates that the renovations are substantial by requiring all or substantially all of the building to be removed or replaced. We consider the statement '...the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases', means that the renovations may, but need not, involve the removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases. 59. A building comprises a number of components, which can be termed either structural (i.e. the foundations, external walls, interior supporting walls, floors, roof, etc) or non-structural (including fixtures, fittings, plumbing, mechanical, fire systems, electrical, lifts, air conditioning, etc. The criteria 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. Paragraphs 63 to 64 and 67 to 69 of GSTR 2003/3 state: | Detailed Reasoning - Substantial renovations need to affect the building as a whole: 63. Under this heading we discuss the concept of a building in its entirety, works on surrounding land (for example curtilage) and additions to the building. Building in its entirety 64. Whether substantial renovations have occurred should be based on consideration of the building in its entirety, that is, the building as a whole and not by reference to specific or individual rooms. For renovations to be substantial they must directly affect most rooms in a building. The renovation of only one part of a building, without any work on the remaining parts of the building, would not constitute substantial renovations. ... Additions 67. Additions that are undertaken with renovations are not included in determining whether a building has been substantially renovated. However, once it is determined that a building has been substantially renovated and new residential premises created, all additions to the building form part of the new residential premises. This will occur, for example, where all or substantially all of a two-bedroom bungalow is removed and replaced and a covered rear deck is added. | Detailed Reasoning - Removal or replacement of all or substantially all of the building: 68. The extent to which parts of a building are removed or replaced will determine whether the above criterion is satisfied. The definition of substantial renovations states that it is not necessary for foundations, external walls, interior supporting walls, floors, roof or staircases to be removed or replaced for renovations to be substantial. 69. This criterion is satisfied where there is a removal or replacement of a substantial part of the: • structural components of the building; or • non-structural components of the building. Paragraphs 70 to 77 of GSTR 2003/3 state the following: 70. Structural work may give rise to substantial renovations in its own right. Structural work includes such work as: • Altering, or replacing of, foundations; • Replacing, removing or altering of floors or supporting walls, or parts thereof (interior or exterior); • Lifting or modifying of roofs; • Replacing existing windows and doors such that it is necessary to alter brickwork (for example replacing a single door with a double sliding door). 71. Structural work is also undertaken in the course of building an extension to a house or adding new bedrooms to a house. 72. Where a substantial part of the structural components of a building is removed or replaced this will often mean that a substantial part of the non-structural components is also removed or replaced. 73. However, substantial renovations may also occur where a substantial part of the non-structural components is removed or replaced but the structural components are not substantially affected. For example, in a unit, it is not essential that both components are substantially removed or replaced for substantial renovations to have occurred. 74. Non-structural building work includes: • Replacing electrical wiring; • Replacing, removing or altering non-supporting walls, or parts thereof (interior or exterior); • Plastering or rendering an entire wall or walls; • Plumbing (e.g. replacing old metal pipes with copper pipes or plastic pipes); • Removing or replacing kitchen cupboards, bathroom fixtures, etc; • Removing or replacing air-conditioning or security system. 75. Guidance is provided on what we regard as substantial renovations in Examples 3 to 5 at paragraphs 104 to 114 and Examples 8 to 9 at paragraphs 124 to 130 of this Ruling. For instance, in Example 8, the removal and replacement of the exterior walls, the removal of some internal walls, and the replacement of the flooring and the kitchen in a house are considered collectively to amount to substantial renovations. 76. However, the removal and replacement of a kitchen and bathroom with little else done to the building, apart from repainting and minor repair work, in most circumstances would not be sufficient for substantial renovations to have occurred. 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. Further paragraphs 78 and 79 of GSTR 2003/3 state: 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. Guidance is provided on what we regard as non-substantial renovations in Example 3 of GSTR 2003/3: | Detailed Reasoning - Example 3 - non-substantial renovations - large part of the building not affected: 104. Indira, a property speculator who is registered for GST, acquires a large 2 storey, 4-bedroom Victorian terrace house with a separate kitchen, lounge room, music room and bathroom on the ground floor. Indira regularly buys, renovates and sells houses (usually two a year on average). She employs a builder to undertake the following work. 105. The old kitchen is replaced with beech panelled cupboards, which have expensive granite benchtops, and stainless steel appliances. The kitchen walls and ceiling are repainted and new linoleum is added to replace the existing floor covering. A small bathroom that existed off the kitchen is removed and a new bathroom is constructed in one of the upstairs bedrooms. The two walls between the former bathroom and kitchen are removed so that the kitchen is much larger and can now also be used as a dining room Indira replaces the door and back window of the kitchen with French doors that open out onto the courtyard. The removal of the bathroom and addition of the French doors have opened up the back part of the ground floor of the house and the courtyard is now more accessible. The dilapidated slate roof of the house is replaced with a new tile roof. The floorboards, joists and bearers in all of the ground floor rooms are also replaced due to water damage. The ceilings in most of the downstairs rooms are replaced due to cracking and mould damage. 106. Although the renovation work is significant we do not consider the renovations to be substantial renovations. The house in its entirety has not been substantially renovated, as a number of rooms have not been affected. The 4 bedrooms upstairs are untouched with the exception of one room which has become a bathroom. If Indira was to sell the house, she would be making an input taxed supply. 107. However, where the changes described above are combined with further renovations such as the creation of a larger lounge room by removing a wall between the existing lounge room and music room, and the modernisation of the upstairs bedrooms by replacing the existing plaster on the walls and ceiling with gyprock, installing skylights, repainting, and replacing old carpets with parquetry and cupboards with new walk-in robes, we would consider that substantial renovations have occurred. 108. After the renovations, Indira puts the terrace house on the market for $480,000. If Indira sells the residence in the course of her enterprise after undertaking the extra work described in paragraph 107, she would be making a taxable supply. | Detailed Reasoning - The works undertaken: The following works were completed in renovating the dwelling on Lot Y: • constructed/added a new laundry, back deck, carport and driveway (including associated concreting) • installed new back door • installed and connected new sewage and electrical plumbing • painted • erected a new centre boundary fence. 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 whilst there was extensive renovation works undertaken to the dwelling on Lot Y, not all or substantially all of the building has been removed or replaced, and the renovations do not affect the building as a whole. The dwelling on the original property when purchased was a transportable building, and when the dwelling was relocated from the centre of the property to Lot Y, the installation and connection of new sewerage and electricity, was necessary for the dwelling to be fit for human habitation. In considering the building in its entirety and the works completed, the works neither result in the removal or replacement of all or substantially all of the building, nor affect most rooms in the building. We do not consider the renovations to be substantial renovations as defined in section 195-1. As such, the sale of Lot Y was not a supply of 'new residential premises' as defined in paragraph 40-75(1)(b). The supply of Lot Y will satisfy the provision of subsection 40-65(1) as it's a residential premises to be used predominately for residential accommodation. | Detailed Reasoning - Conclusion: The supply of the property situated at Lot Y on Survey Plan XnumberX, XaddressX was not a taxable supply in accordance with section 9-5 of the GST Act. The supply of Lot Y was an input taxed supply of residential premises pursuant to subsection 40-65(1). GST is not payable on the supply of Lot Y. | Detailed Reasoning - Question 2: Will the supply of the subdivided vacant land situated at Lot X on Survey Plan XnumberX, XaddressX (Lot X) be a taxable supply in accordance with section 9-5 of the GST Act? | Summary: Yes, your supply of Lot X will be a taxable supply in accordance with section 9-5 of the GST Act. Your activities relating to the subdivision of the Property, the marketing and eventual sale of the subdivided vacant land (Lot X) were or will be undertaken in the conduct of a profit-making undertaking or scheme and therefore an enterprise in the form of an adventure or concern in the nature of trade in accordance with paragraph 9-20(1)(b) of the GST Act. While due to unforeseen circumstances, you are forced to sell Lot X sooner than expected, you always held an intention to sell the vacant land (Lot X) if the repayment of the loan became too difficult. This means, you purchased the Property with the intention to subdivide and re-sell a portion of the land - Lot X, at some point in time for a profit. | Detailed Reasoning - Taxable Supply: Your supply of Lot X will be a taxable supply if all of the provisions of section 9-5 are satisfied, however your supply will not be a taxable supply to the extent the supply is 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 sale of Lot X is GST-free or input-taxed. Your supply of Lot X will satisfy subsection 9-5(a) and (b) as the supply will be for consideration and is connected with the indirect tax zone as Lot X is situated in Australia. However, you are not registered for GST. The issue to be resolved is whether the supply of Lot X will be made in the course or furtherance of an enterprise that your carry on pursuant to subsection 9-5(b). If so, a further issue to be considered is whether you are required to be registered for GST pursuant to section 23-5. | 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, the marketing and eventual sale of the subdivided vacant land (Lot X) do not reflect the indicators of a 'business' as listed above. The indicators set out in paragraph 178 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). On a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property Paragraphs 303 to 322 of MT 2006/1 discuss activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. Goods and Services Tax Determination GSTD 2000/9 Goods and services tax: if you let out residential premises do you need to get an ABN for PAYG purposes or register for GST? explains at paragraph 7 that the letting of a property is an activity in the nature of a lease, licence or other grant of an interest in property. If it is done on a regular and continuous basis, the activity will meet the definition of enterprise. In this case, you purchased the Property with the intention of subdividing the land, relocating the dwelling to one of the allotments, renovation the dwelling and leasing the lot with the dwelling (Lot Y) as a negatively geared rental. The Property was leased while you waited for the planning application to be assessed by the local council. The leasing of the Property is an enterprise as it meets paragraph 9-20(1)(c) of the GST Act. That is, the Property was supplied on a regular or continuous basis in the form of a lease. Therefore, we consider you were carrying on a residential leasing enterprise in relation to the Property prior to the development activities. We consider your activities relating to the transfer of the dwelling and its renovation were also conducted in the continuation of the leasing enterprise even though your intention to lease Lot Y did not eventuate. This is because you held an intention to lease Lot Y after the relocation and renovation of the dwelling, with the termination of the leasing enterprise occurring when you decided to sell Lot Y instead of leasing it. Although the sale of Lot Y was in the course of the leasing enterprise, it was an input taxed supply of residential premises under section 40-65. Lot X was set aside for a purpose unrelated to leasing, that is it was intended to be held for long term investment and/or sold if the repayment of the loan became too difficult. Lot X was not used in and did not form part of your leasing enterprise after the subdivision the Property.Therefore the supply of Lot X was not made in the course or furtherance of the leasing enterprise that you carried on. 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: Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a 'business' and those done in the form of 'an adventure or concern in the nature of trade'. This paragraph provides that: • a business encompasses 'trade engaged in, on a regular or continuous basis' • an adventure or concern in the nature of trade includes 'an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal'. Paragraph 237 of MT 2006/1 states: 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 provides '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 held for either investment or personal enjoyment. While an activity such as the selling of 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's view on 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. Paragraphs 262 to 302 of MT 2006/1 specifically consider isolated transactions of sales of real property. Paragraph 263 of MT 2006/1 provides that the issue to be decided is whether these activities are of a revenue nature (that is, have the characteristics of a business deal) and therefore an enterprise. Where they are not of a revenue nature, then the transaction could be a mere realisation of a capital asset. The activities which are a mere realisation of a capital/investment asset are not a business or an adventure or concern in the nature of trade and therefore no enterprise is being carried out. Paragraph 265 of MT 2006/1 outlines some factors which could determine whether or not the activity is done in the form of a business or in the form of an adventure or concern in the nature of trade. They are: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; • buildings have been erected on the land. 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. In your case, you purchased the Property with the intention of subdividing the land, relocating the dwelling to one of the allotments, and holding on to the vacant land for long-term investment. However, you always held an intention to sell the vacant land (Lot X) if the repayment of the loan became too difficult. The purpose for which the original property was held did not change. Although there was no additional land purchased to add to the original parcel of land, there was a coherent plan for the subdivision. As set out in the facts you: • submitted the planning application to council • obtained an additional loan of $XamountX to fund the development activities for the Property • arranged for the existing dwelling to be relocated to sit solely on of one of the subdivided lots (Lot Y) • submitted the subdivision application for the realignment of Property creating two lots comprising of Lot X and Lot Y You considered that these steps were the minimum number of steps required to comply with the planning permit and complete the sub-division. Since the completion of the subdivision, no construction has taken place on Lot X. You have prior experience with developing properties, having untaken development activities in XyearX and XyearX. You obtained a market valuation of the Property prior to the commencement of the development activities. The value was assessed to lie between $XamountX (the purchase price) and $XamountXbased on the real estate agent estimate. Your real estate agent subsequently provided an estimated value for the subdivided lots as follows: • Lot X was estimated to be worth between $XamountX and $XamountX, and • Lot Y where the dwelling was relocated - was estimated between $XamountX and $XamountX. The significant difference between the original purchase price and the projected post- development values indicates that there was a reasonable expectation to profit from the development of the Property. You held the property for a relatively short period (approx. XnumberX months) before applying for subdivision/development approval. The purpose of the purchase and subsequent development activities was to fund your retirement. You initially planned to retire by XdateX which was only within XnumberX months of purchasing the Property in XdateX. Your retirement plans were delayed due to unforeseen circumstances out of your control. Due to these circumstances, you decided to sell Lot X sooner than expected. Prior to and despite these unforeseen circumstances, you were nonetheless aware that had you proceeded with leasing Lot Y, this asset was expected to be negatively geared and you planned from the outset, to sell the Lot X if the repayment of the loan became too difficult. This means, you purchased the Property with the intention to subdivide and re-sell a portion of the land - Lot X, at some point in time for a profit. As per paragraph 270 of MT 2006/1, in isolated transactions, where land is sold that was purchased with the intention of 'resale at a profit', the Commissioner considers these activities to be an enterprise because the activities are activities in the conduct of a profit-making undertaking or scheme and therefore an enterprise in the form of an adventure or concern in the nature of trade. 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). We will now consider whether you are required to register for GST. | Detailed Reasoning - Registration: 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 (currently $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 the Property, and subsequent marketing and sale of Lot X fall within the scope of 'carrying on an enterprise' thus satisfying paragraph 23-5(a) above. Additionally, the leasing of a property (whether commercial or residential property) on a regular or continuous basis will also fall within the scope of an enterprise for GST purposes (paragraph 9-20(1)(c)). The activities associated with the commencement or termination of a leasing enterprise will also fall within the scope of an enterprise for GST purposes. In your case, you leased the Property on a regular and continuous basis and intended to lease the residential premises relocated to Lot Y (even though this did not eventuate). Therefore, during your period of ownership of the Property, we consider that you also carried on a leasing enterprise. 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 supply of residential premises by way of lease, hire or licence is an input taxed supply pursuant to section 40-35 of the GST Act (i.e. being a supply of residential premises that are neither commercial residential premises (hotel, motel, etc.) nor accommodation in commercial residential premises). As such, the rental proceeds generated from leasing the Property and/or Lot Y had you proceeded with its lease, are not included in the calculation of your 'current GST turnover' or your 'projected GST turnover'. The sale of the subdivided Lot Y containing the relocated 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 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 transaction paragraphs 46 to 47 of GSTR 2001/7 provides: | 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. Considering the facts of this case, we consider the proposed sale of Lot X would not constitute the transfer of a capital asset for the purposes of section 188-25 and in the ordinary course of events would therefore not be disregarded when calculating your projected GST turnover. Given the estimated market value of Lot X, your GST turnover will meet the registration turnover threshold, and you would be required to be registered for GST pursuant to section 23-5 when you sell Lot X. | Detailed Reasoning - Conclusion: The supply of the subdivided vacant land situated at Lot X on Survey Plan XnumberX, XaddressX will be a taxable supply pursuant to section 9-5 of the GST Act, and GST will be payable on the supply.

Issue 1: Whether the disposal of the 2 lots will be treated as ordinary income or a capital gain