Private ruling: Capital Gains Tax - Subdivision
Date of advice: 6 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2016. | Year ended 30 June 2017. | Year ended 30 June 2018. | Year ended 30 June 2019. | Year ended 30 June 2020. | Year ended 30 June 2021. | Year ended 30 June 2022. | Year ended 30 June 2023. | Year ended 30 June 2024. | Year ended 30 June 2025.
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the subdivision and sale of your property the mere realisation of a capital asset and assessable under capital gains tax provisions? | A1: Yes. | Q2: Will the sale of the subdivided lots be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A2: No.

Relevant facts and circumstances: You purchased a X acre block of land; built your family home and have lived there for the whole period. You and your spouse each own 50% of the land and you have never gained assessable income from the block of land. The land was originally zoned by the local council as rural residential and couldn't be subdivided into less than X acre lots. The local council recently applied to the state government to rezone the land allowing subdivision into smaller lots. You were approached by a neighbour with the idea to subdivide the area. You are considering subdividing as a result of your local councils actions. You and your neighbours hired an architect to draw up plans which you submitted to your local council. Although you submitted the plans as a group; you intent to each deal with the subdivision of your individual lots separately once the plans have been approved. Each land holder will be responsible for their own outgoings separately including building the road. This is so each land holder can start their own development at different stages and at different speeds depending on cash flow. Currently you have plans pending council approval which they have had since mm/yyyy. The commencement date of the development will depend on this. You intend to simply meet the council's standards for subdivision and conduct no further work before sale. You do not intend to create an entity to deal with the subdivision and will manage it directly. There is no developer involved however you have had an offer which you are undecided on. You have no prior experience with subdivision. You have contacted a money lender who has advised you that they would prefer if a management company organised the majority of the subdivision. You intend to keep the main residence and reside there both during and after the development. You intend to sell a couple of lots every year to fund your retirement. You would like to sell the blocks yourself however you may need the services of a real estate agent. You intend to capitalise interest against development costs and form part of the cost base. You have supplied a copy of the subdivision plan that you submitted to council; titles Annexure A. You intend to divide the land into a number of blocks, one of which is a drainage reserve and unsuitable for a property, another to remain as your main residence.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 25(1), | A New Tax System (Goods and Services Tax) Act 1999 section 9-5, | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-5(b) and | A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1).

Reasons for decision: Summary: Subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936) deals with profits from isolated transactions. Assessable income for an income year includes any net capital gain and any ordinary income derived in the year. Any capital gain realised from the sale of a capital asset is usually assessable under the capital gains tax provisions and not as ordinary income. Case law has established that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable as ordinary income ( FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693). Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) discusses profits on isolated transactions. According to paragraph 1 of TR 92/3, the term 'isolated transactions' refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Further, paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. The courts have often found that a profit on the 'mere realisation' of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. If a transaction satisfies the elements set out above it is generally not a mere realisation of an investment (paragraph 36 of TR 92/3). Where the transaction involves the sale of property, it is usually necessary that the taxpayer has a profit-making purpose at the time of acquiring the property for the proceeds to be considered as being income. However, this may not always be the case (paragraph 41 of TR 92/3). Paragraph 49 of TR 92/3 states that the following factors may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: (a) the nature of the entity undertaking the operation or transaction (for example, the existence of a corporate entity may indicate that the transaction is of a commercial nature); (b) the nature and scale of other activities undertaken by the taxpayer; (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (d) the nature, scale and complexity of the operation or transaction; (e) the manner in which the operation or transaction was entered into or carried out (for example, the use of professional agents or advisers may indicate that the transaction was more commercial in nature); (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (for example, the involvement of another family member may indicate a family dealing); (g) if the transaction involves the acquisition and disposal of property, the nature of that property (for example, did the property have a commercial use or nature); and (h) the timing of the transaction or the various steps in the transaction (for example, in regard to the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not of a commercial nature). Application to your circumstances Although the subdivision of the land is a substantial development, it is considered that the subdivision and sale of the blocks will constitute a mere realisation of an asset rather than the carrying out of a business operation or commercial transaction because of the following: • You have no prior experience with subdivision; • You were approached with the idea to subdivide your land; • You are reacting to rezoning applied for by your local council; • You did not acquire your share of the land with the intention of engaging in this subdivision project; and • The period of time that has elapsed between when you acquired the land and the decision to subdivide the land. The proceeds you receive from the subdivided blocks of land will be subject to the capital gains tax provisions of the ITAA 1997. GST is payable on your taxable supplies. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: 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 Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. The definition of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) an activity or series of activities done in the form of an adventure or concern in the nature of trade. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the meaning of carrying on an enterprise. Paragraph 265 of MT 2006/1 outlines factors that indicate whether the activities undertaken are an 'adventure or concern in the nature of trade'. Paragraph 159 of MT 2006/1 explains that whether or not an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case. Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a business and adventures or concerns in the nature of trade. A business encompasses trade engaged in on a regular 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. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. The issue to be decided is whether the activities 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. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following: • Assets can be categorised as either trading/revenue assets or capital/ 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. • Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. However, paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. MT 2006/1 explains that 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. Paragraph 264 of MT 2006/1 discusses two court cases [ Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty)] involving subdivision and development of properties that were originally held as capital/investments assets, where the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets. From the Stratham 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. These factors 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; and • buildings have been erected on the land. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of this 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. Application to the Taxpayers' circumstances • The taxpayers purchased the block of land and constructed their family home on the land. The purpose for which the land has been held will remain unchanged as one of the subdivided blocks of land will still be the taxpayers' principal place of residence after the subdivision is made. • The taxpayers and the neighbouring land owners pooled their funds to complete the subdivision plans and had studies carried out rather than each doing their own individual studies and plans. The land owners considered this would increase their chances of the Council approving their submission and would be cost effective. However, each land owner will be responsible for their own outgoings of the development separately, including the building of the road, so that each of the land owners can commence their own development at different stages and at different times depending on their cashflows. • The taxpayers have a coherent plan for the subdivision in that they have lodged the development application and completed all the requirements to obtain the subdivision approval. However, the level of development on the land consists only of that necessary to obtain Council approval for the subdivision and the taxpayers do not intend to build anything on the land or perform any works beyond the minimum amount necessary for Council approval. The taxpayers will try to sell the vacant blocks of land, however concede they may have to engage a real estate agent to assist them in selling the vacant blocks of land. • The taxpayers may need a short term loan to commence the development and will try to presell some of the vacant blocks of land to pay back the loan and then sell future blocks slowly to help fund their retirement. The taxpayers have had discussions with a potential financier, and the financier has indicated that, as a condition of lending the funding, they may require the taxpayers to engage a management company to do the major parts of the subdivision such as the road and drainage works and services. • The taxpayers do not intend to claim the interest on the subdivision funding as a business expense, rather any interest would be capitalised against the development costs and would form part of the cost base for capital gains tax purposes. We consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the subdivision does not amount to an enterprise and is a mere realisation of a capital asset. Accordingly, the taxpayers will not be selling the vacant blocks of land in the course of an enterprise that they are carrying on under paragraph 9-5(b) of the GST Act.