Private ruling: CGT - trusts .
Date of advice: 6 November 2024
Published: 16 December 2024
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Did the disposal of a 75% interest in Lot X under the Partitioning result in the Trust deriving ordinary income, either as the disposal of trading stock or as an isolated profit-making transaction? | A1: Yes, but the Trust will be entitled to an offsetting deduction for the same amount. | Q2: Did the disposal of a 25% interest in Lots X to X under the Partitioning result in Persons A and B deriving ordinary income, either as the disposal of trading stock or as an isolated profit-making transaction? | A2: No. | Q3: If the answer to Question 1 is 'no', can the Trust disregard the capital gain arising from the Partitioning under section 118-42 and section 124-190? | A3: Not applicable because the Trust's capital gain from the Partitioning will be reduced to nil under the anti-overlap rule in section 118-20. | Q4: If the answer to Question 2 is 'no', can Persons A and B disregard any capital gain from the Partitioning under section 118-42 and section 124-190? | A4: No. | Q5: Did Persons A and B make a taxable supply (for GST purposes) when they disposed of their interests in Lots X to X under the Partitioning? | A5: No.

Relevant facts and circumstances: 1. The Property was originally under a single title of land, owned as tenants in common in the following proportions: • the Trust as to 75% • Persons A and B as to 25% (holding their 25% together as joint tenants). 2. The Trust held its interest in the Property with the intention of developing units for sale as part of a property development business. 3. Persons A and B held their interest in the Property with the intention of constructing a dwelling to be their home. 4. The landowners entered an agreement to the following effect. • The Property would be divided into separate lots under a 'Community Title' arrangement. This would allow the individual lots to be registered as separate legal property, able to be dealt with independently from the other parts of the Land (albeit, subject to the terms of the Community Title arrangement). • Lot X is the common property for the Community Title. • Persons A and B would have exclusive occupation and entitlement to a specific lot (Lot X). • The Trust would have exclusive occupation and entitlement to X specific lots (Lots X to X). 5. The Property was divided into lots under Community Title law on date X (during the 20XX income year). Immediately following the division, each of the lots continued to be owned in the following proportions: • the Trust as to 75% of all lots • Persons A and B as joint tenants as to 25% of all lots. 6. The parties executed documents to change ownership of the divided lots on date Y (during the 20YY income year). (We'll call this the Partitioning.) The effect of this Partitioning was that: • Persons A and B became the sole owner of Lot X (as joint tenants), and • the Trust became the sole owner of Lots X to X. 7. Immediately following the division, and at the Partitioning, Lots X to X were of equal size and value. 8. At the time of the transfer of title (to give effect to the Partitioning), buildings hadn't been constructed on the Property. The Property remained vacant land. 9. The parties propose to construct X dwellings on the Property (one on each lot) after the Partitioning. Persons A and B will retain Lot X to occupy as their main residence. The Trust will dispose of Lots X to X. Lot X will remain as common property under the Community Title arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 70-5 | Income Tax Assessment Act 1997 section 70-15 | Income Tax Assessment Act 1997 section 70-20 | Income Tax Assessment Act 1997 section 70-25 | Income Tax Assessment Act 1997 section 70-90 | Income Tax Assessment Act 1997 section 70-110 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 112-25 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 118-42 | Income Tax Assessment Act 1997 section 124-190 | 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

Reasons for decision: Summary: 10. Where you sell land (held as trading stock) as part of carrying on a property development business, the proceeds will be assessable as ordinary income under section 6-5. 11. We characterise the Trust's transfer of its 75% interest in Lot X as a sale in the course of its property development business because it allows it to deal separately with Lots X, X, and X. 12. Therefore, the Trust will be assessed on the market value of the 25% interests in Lots X, X, and X (that it received from Persons A and B) under section 6-5. 13. However, this won't have practical consequences because the Trust will have an offsetting deduction under section 8-1 for the market value of the 75% interest in Lot X that it gave to Persons A and B. | Detailed Reasoning - Explanation: The transfers will be treated as having been made for consideration equal to the market value of the part interests in the relevant lots. 14. Section 21 says where consideration is paid or given otherwise in cash, the money value of that consideration shall be deemed to have been paid or given for the purposes of 'this Act'. 15. Subsection 6(1) says 'this Act' includes the Income Tax Assessment Act 1997. 16. The Trust's consideration for transferring its 75% interest in Lot X was 25% interests in Lots X, X, and X, and vice versa for Persons A and B. 17. Since the transfers were of property, not money, section 21 will treat the consideration for: • The Trust as being the money value of the 25% interests in Lots X, X, and X given by Persons A and B • Persons A and B as being the money value of the 75% interest in Lot X given by the Trust. 18. In this context, we think the 'money value' of those interests would be their market value at the relevant time. Land sales may result in ordinary income if they are either sales of trading stock or are part of an isolated profit-making undertaking. 19. Section 6-5 includes ordinary income in your assessable income. 20. For a taxpayer in the business of dealing in land for resale, land is treated as trading stock: see TD 92/124. [1] 21. Section 70-10 says trading stock includes anything produced, manufactured, or acquired that's held for purposes of manufacture, sale, or exchange in the ordinary course of a business. 22. For a business taxpayer, gross earnings from the sale of trading stock are usually assessable as ordinary income under section 6-5: see section 70-5. 23. There's ATO guidance about determining whether activity amounts to a business. TR 97/11 [2] at paragraphs 11 to 18 says relevant indicators of a business include whether the activity is a significant commercial activity, purpose and intention to make a profit, whether the activity is profitable, repetition and regularity, whether the activity is conducted in a businesslike manner, size and scale, and the taxpayer's knowledge and skill. Each case turns on its facts, no single indicator is decisive, and the indicators need to be considered in combination and as a whole, with the weighting varying. 24. TR 92/3 [3] gives the ATO view on whether profits on isolated transactions are ordinary income. TR 92/3 at paragraph [6] says profits from isolated transactions are generally income when two elements are present. • First, the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain. • Second, the transaction was entered into and the profit made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. You include amounts in your assessable income if you dispose of trading stock outside the ordinary course of business or stop holding something as trading stock but continue to own it. 25. Section 70-90 says if you dispose of an item of your trading stock outside the ordinary course of a business (that you are carrying on) your assessable income includes the market value of the item on the day of the disposal. 26. Section 70-110 says if you stop holding an item as trading stock, but still own it, you are treated as having sold it to someone else in the ordinary course of business for cost, and then immediately bought it back for the same amount. You may claim deductions for the cost of acquiring trading stock. 27. Section 8-1 allows deductions for losses or outgoings that meet either of two positive limbs and aren't disallowed under any of four negative limbs. The positive limbs are that the loss or outgoing is incurred in gaining or producing assessable income, or in carrying on a business for that purpose. The negative limbs deny deductions for losses or outgoings that are capital, private or domestic, incurred in producing exempt or non-assessable non-exempt income, or are denied by a specific provision. 28. Section 70-15 is about the timing of section 8-1 deductions for acquiring trading stock. Where the item becomes part of your trading stock before or during the income year in which you incur the outgoing, you deduct it in that income year. Otherwise, you deduct the outgoing in the first income year that the item becomes part of your trading stock, or for which an amount is included in your assessable income for disposing of the item. 29. Section 70-20 is a market value substitution rule that applies when you acquire trading stock through a non-arm's length transaction for more than market value. 30. Section 70-25 says outgoings incurred for acquiring trading stock aren't capital. The Trust will be assessed under section 6-5 when it transfers the 75% interest in Lot X to Persons A and B. 31. Since the Trust is in a property development business, proceeds from selling property in the ordinary course of its business would be assessable income. 32. Did the Trust transfer its 75% interest in Lot X to Persons A and B in the course of that business? 33. We think the answer to this question is 'yes'. We characterise the scheme this way. • The Trust acquired the 75% interest in the Property to develop and sell X lots in a property development business, so the interest in the Property qualifies as trading stock under section 70-5. • After the subdivision, the Trust continued to hold its 75% interests in Lots X, X, X, and X for the same purpose of sale, so they continued to qualify as trading stock. • The Partitioning happened as part of an agreement to restructure the Property's ownership to allow the parties to deal separately with their respective interests. • In effect, the Trust gave up some trading stock to acquire other trading stock. On subdivision, its 75% interest in the Property was replaced with a 75% interest in Lots X, X, X, and X. Those interests were trading stock before and after the subdivision. It then swapped its 75% interest in Lot X for extra 25% interests in Lots X, X, and X. Its trading stock decreased and increased to the same extent. • From the Trust's perspective, its disposal of the 75% interest in Lot X is best seen as a preparatory step to allow it to hold X lots outright as trading stock. • Therefore, from the Trust's perspective, the transfer of its 75% interest in Lot X was a disposal of trading stock in the ordinary course of its business. 34. It follows that the Trust will be assessed on the market value of the 25% interests in Lots X, X, and X that it received from Persons A and B, being the sale proceeds for the Lot X transfer. 35. The Trust would also be able to claim a corresponding deduction in the same income year. • It incurred an outgoing when it transferred its 75% interest in Lot X to Persons A and B, and that outgoing will be taken to be the market value of a 75% interest in Lot X at that time. • It incurred that outgoing in acquiring the 25% interests in Lots X, X, and X as trading stock for the Trust's property development business. • It follows that the outgoing was incurred in carrying on a business for the purpose of earning assessable income, meeting the positive limbs of section 8-1. • None of the negative limbs apply: the transaction isn't private or domestic from the Trust's perspective, and section 70-25 says outgoings to incur trading stock aren't capital. • Since the outgoing happened at the same time those lots became trading stock, the deduction is allowable in the income year of the outgoing under section 70-15. 36. The Trust won't have any tax liability because the ordinary income and deduction will be equal. Each lot is of equal size and value. The Trust's consideration received from Persons A and B (ordinary income amount under section 6-5) is the market value of 25% of Lots X, X, and X. The Trust's outgoing paid to Persons A and B (deduction under section 8-1) is the market value of 75% of Lot X. Since the size and value of Lots X-X are equal, the market value of 25% of Lots X, X, and X will be equal to the market value of 75% of Lot X. The income and deduction will offset. 37. Section 70-20 won't apply because the market value of the trading stock the Trust receives (25% interests in Lots X, X, and X) is equal to the market value of the consideration it paid (a 75% interest in Lot X). If we're wrong about this conclusion, the Trust would be assessed under the trading stock provisions instead. 38. We see three other approaches to our interpretation that the Trust's transfer of its 75% interest in Lot X is a sale of trading stock. • First, the Trust didn't dispose of its 75% interest in Lot X in the ordinary course of business. It wasn't a sale on the open market with the intention of making a profit. Rather, it was a transfer to Persons A and B to allow them to use Lot X as their home. • Second, the Trust never held its 75% interest in Lot X as trading stock. • Third, the Trust should be characterised as having stopped holding the 75% interest in Lot X as trading stock on subdivision. 39. We disagree with the first approach. The Trust entered the arrangement to acquire 25% interests in Lot X, X, and X to allow it to deal with those Lots as trading stock. From the Trust's perspective, it was a business transaction to dispose of and replace trading stock. 40. We don't think the second approach is open on these facts. • Before subdivision, the Trust held its 75% interest in the Property with the intention of developing units for sale as part of a property development business, i.e., as trading stock. • The Trust continued to hold a 75% interest in the Property, through 75% interests in Lots X, X, X, and X, from date X to date Y. • Subdivision doesn't destroy property or create new property: it simply splits it into smaller parcels (for CGT purposes, see section 112-25). • If the Trust's 75% interest in the Property was trading stock before subdivision, subdividing the property can't have created a new asset (Lot X) which wasn't trading stock. • Therefore, the Trust's 75% interests in each Lot, including Lot X, must have been trading stock on subdivision. 41. We also reject the third approach for similar reasons. The Trust's 75% interest in Lot X would have retained its character as trading stock after subdivision because the Trust intended to hold Lot X to transfer to Persons A and B in exchange for 25% interests in Lots X, X, and X. Therefore, the Trust would have continued to hold its 75% interest in Lot X as trading stock from subdivision (date X) to the Partitioning (date Y). 42. Even if (under the first approach) the Trust disposed of its 75% interest in Lot X outside the ordinary course of business, then section 70-90 would assess the Trust on the market value of that interest. 43. If the third approach was correct, then the consequences in section 70-110 would apply. If on or after subdivision, the Trust stopped holding its 75% interest in Lot X as trading stock, then the Trust would be treated as having sold the interest as trading stock for the interest's cost and having bought it back for the same amount. The Trust would include the amount in its assessable income under section 6-5. 44. Whether the transaction is assessed under section 70-90, or deemed to have made a sale of trading stock under section 70-110, the Trust would still be entitled to a deduction for the cost of acquiring the 25% interest in Lots X, X, and X. 45. However, in the latter case, the Trust's deduction would be in the income year of the Partition (the 20YY income year) and the assessable amount under section 70-110 would be in the income year of the subdivision (the 20XX income year). Conclusion on Question 1: the Trust will be assessed under section 6-5 but will have an offsetting deduction under section 8-1. 46. Since the Trust sold its interest in Lot X as trading stock as part of its business, the Trust will be assessed under section 6-5 for the market value of the 25% interests in Lots X, X, and X that it received from Persons A and B. 47. However, it will have a corresponding deduction under section 8-1 for the market value of the 75% interest in Lot X which it gave to Persons A and B. 48. The market values of the income and deduction are equal so they will offset, leading to no taxable income for the Trust. 49. Because of our conclusion, we don't need to consider whether the transaction could be characterised as an isolated profit-making scheme from the Trust's perspective. | Detailed Reasoning - Question 2: Did the disposal of a 25% interest in Lots X to X under the Partitioning result in Persons A and B deriving ordinary income, either as the disposal of trading stock or as an isolated profit-making transaction? | Detailed Reasoning - Answer: No. | Detailed Reasoning - Explanation: 50. We explained the circumstances in which transfers of land may result in amounts being assessed as ordinary income in our explanation for Question 1. Relevantly, taxpayers may be assessed if they sell land either: • in the course of a property development business, or • with a profit-making intention in the course of carrying out an isolated business or commercial transaction. 51. Persons A and B aren't carrying on a property development business. Few if any of the indicators from TR 97/11 are present here. They have no intention to make a profit because their intention was to hold their interest in the Property so it could become their home, rather than sell to make a profit. We characterise their interest as being small-scale, and they conducted the transaction in a non-commercial manner with a related party. Considered in combination, the indicators point strongly against Persons A and B carrying on a business. 52. The transaction can't be characterised as an isolated profit-making transaction. Persons A and B didn't intend to profit because they just completed the transfer to acquire a 100% interest in a unit to use for their private residence. Neither limb of paragraph 6 in TR 92/3 is met. 53. Since Persons A and B didn't transfer the land in the course of a property development business or with a profit-making intent, the transaction won't be assessed under section 6-5. | Detailed Reasoning - Answer: Not applicable because the Trust's capital gain from the Partitioning will be reduced to nil under the anti-overlap rule in section 118-20. | Detailed Reasoning - Question 4: If the answer to Question 2 is 'no', can Persons A and B disregard any capital gain from the Partitioning under section 118-42 and section 124-190? | Detailed Reasoning - Answer: No. | Detailed Reasoning - Summary for Questions 3 and 4: 54. Sections 118-42 and 124-190 give rollover relief for capital gains or losses arising from transfers involving stratum units meeting certain conditions. • One condition in section 118-42 is that the transferring party owns land on which there is a building. • Section 124-190 imposes conditions that the transferee has a right to occupy a building and that the building's owner subdivides the building into stratum units. 55. The conditions in sections 118-42 and 124-190 can't be met because there's no building: the Property was vacant land when the parties subdivided the Property and transferred their interests in lots. 56. Since the relevant conditions aren't met, the Trust, Person B, and Person C can't disregard any capital gain under either provision. 57. Since the Trust has already been assessed under section 6-5, the anti-overlap rule in section 118-20 will apply to reduce the Trust's capital gain to nil. | Detailed Reasoning - Explanation for Questions 3 and 4: CGT event A1 will happen when the parties transfer the relevant part interest in each lot to each other: their part interest is a CGT asset and they dispose of it to another entity. 58. Broadly, the CGT provisions calculate gains and losses from CGT events and include any net capital gain in assessable income. 59. One CGT event is CGT event A1. Subsections 104-10(1) and (2) say CGT event A1 happens if you dispose of a CGT asset, and you dispose of a CGT asset if a change of ownership occurs from you to another entity. 60. Section 108-5 says: • a CGT asset is any kind of property, or a legal or equitable right that isn't property • a CGT asset includes an interest in something else that's a CGT asset • land and buildings are examples of CGT assets. 61. CGT event A1 will happen for the Lot X transfer. Lot X is a CGT asset because it's property, and the Trust's 75% interest in Lot X is also a CGT asset. The Trust disposed of its interest in Lot X to Persons A and B when it transferred it to them. 62. CGT event A1 will also happen to Persons A and B for the transfer of Lots X, X, and X. Their 25% interests in those lots are also CGT assets, and they disposed of their interests to the Trust. The parties will have a capital gain if the market value of the relevant interests is more than their cost base. 63. Subsection 104-10(4) says you make a capital gain (from CGT event A1) if the capital proceeds from the disposal are more than the asset's cost base. 64. Section 116-20 says the capital proceeds from a CGT event are the money and market value of property you received (or are entitled to receive) in respect of the event happening, worked out at the time of the event. 65. Section 110-25 says cost base of a CGT asset (at first element) includes the money you paid and market value of property you gave (or are required to pay or give) in respect of acquiring it. 66. The parties will include the market value of the interests they received under the Partitioning in their capital proceeds. For the Trust, this will be the 25% interests in Lots X,X, and X. For Persons A and B, this will be the 75% interest in Lot X. 67. The parties will have a capital gain if the market value of those interests exceeds what they paid to acquire them. The rollover for stratum units in sections 118-42 and 124-190 only applies where the relevant land has a building. It isn't available here because the Property was vacant land when the Partitioning and transfers happened. 68. Rollover treatment is available for certain transfers relating to stratum units. Section 118-42 disregards capital gains or losses where you own land with a building, subdivide the building into stratum units, and transfer each unit to the occupants. Section 124-190 disregards capital gains or losses for a recipient who loses a pre-existing right to occupy a unit in a building. 69. This rollover (in section 118-42) applies where the transferer meets all of three conditions. • You own land on which there is a building: paragraph (a). • You subdivide the building into stratum units: paragraph (b). • You transfer each unit to the entity who had the right to occupy it just before the subdivision: paragraph (c). 70. Subsection 124-190(3) says a 'stratum unit' is a lot or unit (however described in a law relating to strata title or similar title) and any accompanying common property. 71. The conditions in section 118-42 aren't met on these facts. • Paragraph (a) isn't met because there was no building on the land when the parties completed the relevant transfers. • Paragraph (b) isn't met. The parties have subdivided the Property into units. It's possible the units would qualify as 'stratum units' because a Community Title arrangement is similar to strata title. However, there's no building on the land which has been subdivided. • It's not clear that paragraph (c) is met. The parties have transferred interests in each lot to each other. But here the parties merely had fractional interests in first the Property, and then each lot after the subdivision, as tenants in common (with Persons A and B holding their interest jointly). While the parties had agreed to subdivide and complete the transfers under the Partitioning, the facts don't suggest that any agreement created rights to occupy, and exclude the other from, specific portions of the property at any time before the transfers took place. 72. Since at least two of the three conditions haven't been met, section 118-42 won't apply to disregard any capital gain from the Partitioning. The Trust can't disregard any capital gain from transferring its 75% interest in Lot X to Persons A and B. Persons A and B can't disregard any capital gain from transferring their 25% interest in Lots X, X, and X to the Trust. 73. Section 124-190 allows rollover relief if a building owner transfers a stratum unit to you if you meet conditions. Subsection 124-190(1) sets three conditions for the rollover. • You own property that gives you a right to occupy a unit in a building: paragraph (a). • The building's owner subdivides it into stratum units: paragraph (b). • The owner transfers to you the stratum unit that corresponds to the unit you had the right to occupy just before the subdivision: paragraph (c). 74. If those conditions are met, then section 124-10 applies to: • disregard any capital gain or loss from the loss of your ownership of the original asset, and • transfer your cost base for the original asset to the new asset. 75. The conditions in section 124-190 aren't met for similar reasons to section 118-42. • Paragraph (a) isn't met because the Property was vacant at the Partitioning. While the parties owned interests in the Property, there was no building. Therefore, no party had a right to occupy a unit in a building at that time. • Paragraph (b) isn't met. None of the parties could be described as 'the building's owner' at the transfer because the Property was vacant at that stage. • It isn't clear that paragraph (c) is met either. The parties merely had fractional interests in first the Property, and then each lot after the subdivision, as tenants in common (with Persons A and B holding their interest jointly). While the parties had agreed to subdivide and complete the transfers under the Partitioning, the facts don't suggest that any agreement created rights to occupy, and exclude the other from, specific portions of the property at any time before the transfers took place. 76. Since at least two of the three conditions haven't been met, section 124-190 won't apply to disregard any capital gain from the Partitioning. The applicant has suggested that we should interpret the rollover flexibly without requiring that a building is on the land. 77. The applicant has submitted that the rollover in sections 118-42 and 124-190 should be interpreted flexibly so not to require that a building be on the land. 78. The applicant supported their submission this way. • Section 118-42 replaced former section 160ZZPG, and section 1-3 says provisions shouldn't be taken to have a different meaning to predecessor provisions in the Income Tax Assessment Act 1936 just because a different form of words is used. • The EM [4] to former subsection 160ZZPG said 'strata title law' is defined broadly to include a range of laws which relate to the ownership of land by strata title, group title, cluster title, unit title, or other similar title, and 'stratum unit' means an lot or unit in relation to such a law. • Given this broad interpretation sections 118-42 and 124-190 are intended to apply to arrangements that have the same effect as a strata title arrangement. • Community title arrangements are similar to strata title arrangements, the only difference being that community title arrangements are defined by lot boundaries and surveyed measurements as well as reference to parts of a building, and strata title boundaries are defined by parts of a building only, not land. • The technical difference in defining subject property shouldn't prevent sections 118-42 and 124-190 from applying to community title arrangements. • Sections 118-42 and 124-190 should be interpreted in a sufficiently broad manner to allow it to apply to arrangements that don't result in the subdivision of a building itself, but involve the subdivision of property that's administered in a similar manner to a strata title arrangement. • Since the purpose of both sections is to allow for subdivision for strata title like arrangements, and the transfers are consistent with this purpose, the requirement for subdividing property with a building should be met. 79. While we've considered the applicant's submissions, we don't agree. Both provisions have requirements about a building, and we don't see anything in the context that suggests we can ignore those requirements. We also see nothing in former section 160ZZPG, the explanatory memorandum which introduced it, and ATO guidance in TR 97/4 [5] to suggest the rollover was intended to be available for vacant land. Rather, all those materials are consistent with the rollover in former section 160ZZPG applying only to land with a building. Section 118-20 is an anti-overlap provision which reduces capital gains for amounts already assessed under other provisions. 80. An anti-overlap provision in section 118-20 allows a taxpayer to reduce any capital gain by amounts that have been assessed under other provisions. Subsection 118-20(1) says a capital gain you make from a CGT event is reduced, if, because of the event, another provision includes an amount in your assessable income. 81. We explained in Question 1 that the Trust will be assessed under section 6-5 on the market value of the 25% interests in Lots X, X, and X that it received from Persons A and B. 82. If the Trust made a capital gain on the Partitioning, section 118-20 would apply to reduce the capital gain to nil. We concluded at paragraph 66 that the Trust's capital proceeds are equal to the market value of 25% of Lots X, X, and X at that time. The same amount will be assessed under section 6-5. Since the amounts are equal, no capital gain will remain. Conclusion on Questions 2 and 3: the rollover isn't available. 83. The conditions in sections 118-42 and 124-190 haven't been met, so neither provision applies to disregard any capital gain from the Partitioning. | Detailed Reasoning - Answer: No. | Summary: 84. One of the requirements for a taxable supply is that you made the supply in the course or furtherance of an enterprise that you carry on. 85. For GST purposes, an enterprise excludes activities done by an individual without a reasonable expectation of profit or gain. 86. We don't think Persons A and B had a reasonable expectation of profit or gain because their intention was to acquire a unit to use as their dwelling. 87. It follows that Persons A and B didn't transfer their interests in Lots X to X in the course or furtherance of an enterprise, so the transfer won't be a taxable supply. | Detailed Reasoning - Explanation: 88. Section 9-5 of the GSTA says you make a taxable supply if: • you make the supply for consideration • the supply is made in the course or furtherance of an enterprise that you carry on • the supply is connected with the indirect tax zone • you are registered, or required to be registered. However, the supply isn't a taxable supply to the extent that it's GST-free or input taxed. 89. Subsection 9-20(1) of the GSTA says an enterprise is an activity, or series of activities, done: • in the form of a business • in the form of an adventure or concern in the nature of trade • on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property. 90. Subsection 9-20(2) of the GSTA says enterprise doesn't include an activity or series of activities done by an individual without a reasonable expectation of profit or gain. 91. MT 2006/1 [6] at paragraphs 177 to 179 says the principles in TR 97/11 apply to determining whether you are carrying on a business for GST enterprise purposes. 92. MT 2006/1 at paragraph 234 says an 'adventure or concern in the nature of trade' may be an isolated or one-off transaction which doesn't amount to a business but has the characteristics of a business deal. 93. GSTR 2009/2 [7] is about the GST consequences of partitioning real property for co-owners. It says under partition by agreement: • each transfer is a supply [48] • will be a supply in the course or furtherance of an enterprise if the land is applied or intended to be applied in an enterprise carried on by a co-owner [57, 64] • may be instances where jointly owned land is applied in an enterprise by one co-owner but not the other [78-85, including Example 6] • partition by agreements are for consideration (non-monetary), because each co-owner gives up their interests in parts of the land in return for getting interests in other parts of the land from the other co-owners [86]. 94. Following GSTR 2009/2, Persons A and B have made a supply for consideration because they transferred interests in property (a 25% interest in Lots X, X, and X) in exchange for another interest in property (a 75% interest in Lot X). 95. But Persons A and B aren't carrying on an enterprise. • Persons A and B aren't in business on their own account because they didn't intend to make a profit. • They aren't carrying out an adventure or concern in the nature of trade for the same reason. • We don't think transferring a 25% interest in X lots in a single transaction amounts to doing anything on a regular or continuous basis (in the form of a lease, licence or other grant of an interest in property). • In any case, Persons A and B are individuals and don't have a reasonable expectation of profit or gain: they are merely transferring a 25% interest in X lots in return for a 75% interest in a single lot, as part of an arrangement to acquire a unit in which to live. 96. Since Persons A and B aren't carrying on an enterprise, they didn't make the supply in the course or furtherance of an enterprise. 97. Since one of the conditions for a taxable supply isn't present, any supply Persons A and B may have made in transferring their interests in Lots X, X, and X to the Trust isn't a taxable supply for GST purposes. [1] Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? [2] Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? [3] Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income. [4] Explanatory Memorandum to the Taxation Laws Amendment Bill 1990 (House of Representatives), notes on clauses at clause 33. [5] Taxation Ruling TR 97/4 Income tax: capital gains: roll-over relief for buildings subdivided under strata title law into stratum units and common property. [6] 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. [7] Goods and Services Tax Ruling GSTR 2009/2 Goods and services tax: partitioning of land.

• all hyphenated provisions (e.g., section 6-5) are in the Income Tax Assessment Act 1997 except for those in the A New Tax System (Goods and Services Tax) Act | • all unhyphenated provisions (e.g., section 21) are in the Income Tax Assessment Act 1936 | • GSTA means the A New Tax System (Goods and Services Tax) Act 1999 | • 'the Partitioning' means the transaction on date Y which resulted in a change of ownership of the lots on the Property under this ruling scheme.