Private ruling: CGT & GST - land subdivision
Date of advice: 3 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Will your gains from the disposal of subdivided land be treated as a mere realisation of a capital asset under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and be taxable under section 102-5 and section 6-10 of the ITAA 1997 (rather than taxable as ordinary income under section 6-5 of the ITAA 1997)? | A1: Yes. | Q2: Will your subdivision not constitute carrying out an enterprise for the purposes of section 9-5 and 9-20 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A2: Yes.

Relevant facts and circumstances: You are a discretionary trust established after 20 September 1985. You were formerly registered for GST in respect to a commercial rental property. You have owned X properties for many years and you and your director have never owned any other properties or undertaken any other activities. The non-rental property was purchased as vacant land after 20 September 1985 where soon after a family dwelling was constructed on a portion of the land and used until the current time for that residential purpose. With the progressive rezoning and development of the local area, the land remains undeveloped and council rates have steadily increased. After a number of failed attempts to sell the surplus (non-residential) land to property developers, you recently entered into a contract with an engineering company that will pay for the subdivision of the surplus land subject to a deposit (which you borrowed from a major bank) and the pre-sale of a number of blocks (which was successfully done). A planning services company was employed to lodge a development application, which was approved, the subdivision has commenced, you will retain your residential lots and the other lots will be sold through a real estate agent. The development has been delayed due to issues between the contractor and council and titles are still to be issued.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 104-10 | 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: Detailed Reasoning - Income tax treatment: Profits from a land sub-division can be treated in at least three ways for taxation purposes: 1. As ordinary income under section 6-5 of the ITAA 1997, as a result of carrying on a business of property development, involving the sale of land as trading stock. 2. As ordinary income under section 6-5 of the ITAA 1997, as a result of an isolated commercial transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business. 3. As capital gains under Part 3-1 and Part 3-3 of the ITAA 1997, from the mere realisation of a capital asset. The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. Whereas an isolated (one-off) commercial transaction does not amount to a business but has the characteristics of a 'business deal'. Taxation Ruling TR 92/3 explains, for an isolated commercial transaction to occur, it is usually necessary the taxpayer has the purpose of profit-making at the time of acquiring the property and that the property has no use other than as the subject of trade. The mere realisation of a capital asset was described in Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001 as "liquidating or realising the old assets". In The Alabama Coal, Iron, Land and Colonization Co Ltd v Mylam (1926) 11 TC 232, a commercial transaction was distinguished from a mere realisation as "there must be something in the nature of buying at any rate, and not merely selling, which is mere turning your property into money''. In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams 72 ATC 4188; (1972) 127 CLR 226, at ATC 4194-4195; CLR 249, Gibbs J explained mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price… In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J described a salient characteristic of the mere realisation of land as follows: …[to not] undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. In distinguishing mere realisation from a commercial transaction, Justice Ryan further said: Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. In your case, your gains from the disposal of subdivided land will be treated as a mere realisation of a capital asset because: (i) the land was not originally purchased for the purpose of subdivision; (ii) the land had another purpose other than the subject of trade, namely, long term residential; (iii) you are merely realising or selling an old asset; (iv) you will not undertake any works on the land apart from what is necessary by the municipal authorities; and (v) you will not engage in a business of selling land since real estate agents will sell the land. | Detailed Reasoning - GST tax treatment: Section 9-20 of the GST Act defines the term 'enterprise' to include: • an activity, or series of activities, done in the form of a business; • an adventure or concern in the nature of trade; or • provision of a lease, licence or other grant of an interest in property on a regular or continuous basis. Subsection 9-20(2) of the GST Act provides certain additional tests in relation to carrying on an enterprise. In particular, the activity or activities must not be a private recreational pursuit or hobby and there must be a reasonable expectation of profit or gain. Miscellaneous Taxation Ruling MT 2006/1 provides the Australian Taxation Office (ATO) view on whether or not an activity or series of activities constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 . Further to this, Goods and Services Tax Determination GSTD 2006/6 provides that the ATO view provided by MT 2006/1 can be applied equally to the term enterprise as used in the GST Act. Paragraph 234 of MT 2006/1 states an adventure or concern in the nature of trade may be an isolated or one-off transaction. Paragraph 263 of MT 2006/1 states 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 In your case, as your subdivision of land will result in the mere realisation of a capital asset, it will not constitute carrying out an enterprise for the purposes of section 9-5 and 9-20 of the GST Act.