Private ruling: Capital Gains Tax
Date of advice: 21 October 2015
Published: October 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you carrying on a business of land development? | A1: No | Q2: Are the proceeds from the sale from the subdivided lots be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: Will the gain made from the sale of the subdivided lots, created from the subdivision of your land be subject to capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997? | A3: Yes | Q4: Will there be GST on your sale of the subdivided lots? | A4: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. You purchased a house and land "the property" in XXXX with the intention that the property would be your main residence. You purchased the property as joint tenants. You did not have any intention to subdivide the property at the time of purchase. You have resided in the house since settlement and continue to reside there. You have never claimed any tax deductions for expenses relating to the property. You are not registered for Goods and Services Tax (GST). You have never claimed any input tax credits for expenses relating to the property. In about XXXX you decided that the land was no longer suitable for your current or future needs. You wanted to continuing living in the house but with less land attached to the property. Soon after XXXX you commenced taking steps to subdivide the property. A "Proposed Reconfiguration of a Lot" was lodged with the Council. You intend for the property to be subdivided into X separate blocks; X vacant land blocks and X block with the existing house. The existing house block will remain your main residence and the two vacant land blocks will be sold. It is not necessary to apply for any change of use or re-zoning as part of the subdivision. You will not build any dwellings on the subdivided lots before selling them. On XXXX you received a Negotiated Decision Notice from the Council, granting a development permit for reconfiguring a lot. On XXXX the Council received a Survey Plan for the proposed subdivision. You have engaged the following consultants and undertaken the following activities in order to facilitate your application for subdivision: (a) Survey consultants: to undertake survey work and draft supporting plans in conjunction with engineers. (b) Engineering consultants: to undertake all negotiations with local Council and prepare and submit all necessary applications. (c) Lawyers: to draft documentation required for easement applications. You have funded all costs in relation to the sub-division of the property from your personal savings. You intend to continue to fund the subdivision costs from personal savings and do not intend to seek any external finance. You will undertake the minimum amount of work necessary to allow you to sell the two vacant lots and retain the lot with the existing house as your main residence. At all times you will continue to work in your usual trade or employment. All of the work for completing the subdivision will be done by persons who you hire, as you do not have any experience or knowledge in undertaking subdivisions. You have not previously undertaken any property development or land subdivision in your own right or through any entities that you control. You do not intend to undertake further subdivisions in future.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Reasons for decision: Detailed Reasoning - Question 1: Are you carrying on a business of land development?: The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, which uses the following indicators to determine whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character; • whether there is repetition and regularity of the activity; • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. In your situation, the Commissioner is satisfied you are not carrying on a business of land development. Although you are undertaking a small subdivision of a block acquired as your main residence, you are doing the minimum possible to dispose of land that is excess to your needs and you do not propose to undertake any other developments in the future. It is therefore considered that there is no repetition, regularity and permanency of the activity. Also, the scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business. | Detailed Reasoning - Profits on isolated transactions: Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Although you are not carrying on a business of property or land development, the profits from sale of the land may still be assessable as ordinary income if those proceeds are considered to be from an isolated business transaction or part of a specific profit-making scheme. The Commissioner's view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3. The term 'isolated transactions' refers to transactions outside the ordinary course of business of a taxpayer carrying on a business and to those entered into by non-business taxpayers. Paragraphs 6 of TR 92/3 emphasises that a profit made by a taxpayer who is not carrying on a business is generally income when the intention of the taxpayer in entering into the transaction is to make a profit or gain and the activity carried out is business or commercial in character. | Detailed Reasoning - Taxpayer's intention or purpose: Paragraph 36 of TR 92/3 confirms that: The courts have often said 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme. The decisions in Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 demonstrate that if a taxpayer did not intend to make a profit when he or she acquired land then the likelihood that any profit made on the eventual sale of land is ordinary income is greatly diminished. Paragraph 9 of TR 92/3 explains that where a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. However the High Court decisions in White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355 demonstrate, that is not always the case (see Paragraphs 41 and 42 of TR 92/3). Therefore if a taxpayer acquires an asset with the intention of using it for a certain purpose he or she can later decide to use the asset for a different purpose. If he or she uses the asset in a business operation or commercial transaction, the profit from the activity can be income even though the taxpayer did not have that purpose in mind at the time of acquiring the asset. | Detailed Reasoning - Commercial transaction: If a taxpayer enters into a transaction in the course of carrying on a business, it is not necessary to consider whether it is a business operation or commercial transaction. However, it is necessary to consider this issue if the taxpayer is not carrying on a business or if the transaction or operation is not in the course of the taxpayer's business. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (see FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 379). This depends very much on the circumstances of the case. Some of the factors to consider when looking at whether an isolated transaction amounts to a commercial transaction are shown in paragraph 13 of TR 92/3: • the nature of the entity undertaking the operation or transaction; • the nature and scale of other activities undertaken by the taxpayer; • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; • the nature, scale and complexity of the operation or transaction; • the manner in which the operation or transaction was entered into or carried out; • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; • if the transaction involves the acquisition and disposal of property, the nature of that property; and • the timing of the transaction or the various steps in the transaction. | Detailed Reasoning - Application to your circumstances: You purchased the property a number of years ago as your main residence and you have lived in the property since it was acquired. You did not have any business or commercial purpose when you acquired the land. After living in the property for a number of years you have decided that you do not want to have all of the land the house is currently on so you have decided to subdivide and sell the excess land. You will undertake the minimum amount of work required, to complete this; and you will sell the excess land as vacant lots. You will continue to live in the existing house on the remaining land as your main residence after the subdivision has been completed. You will fund the subdivision costs from your personal savings and will not borrow any funds to finance the activities. Your own involvement in the activity will be minimal as you will engage the services of survey consultants, engineer consultants and lawyers to complete the work necessary to subdivide the land. The subdivision is basic when compared to other land developments; it is relatively small, uncomplicated and inexpensive and will comprise only what is necessary to secure council approval. You will not be erecting any buildings on the land. You will continue in your usual occupation whist the subdivision takes place and you have no history of property development and are not currently undertaking any other similar activities. It is not possible to sell the excess land without first undertaking the subdivision. It is therefore necessary, in order for you to retain your main residence but to reduce the amount of land which you must maintain to undertake the subdivision and sell part of the land. The activities that you are undertaking are not being done in a business-like manner and do not amount to an isolated profit making transaction. The profit from the sale of the subdivided lots will not be assessable under 6-5 of the ITAA 1997. Question 3: Will the gain made from the sale of lots, created from the subdivision of your land be subject to capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997? Section 102-5 of the ITAA 1997 includes in your assessable income an amount that is a net capital gain. Under section 102-20 of the ITAA 1997, a person makes a capital gain if a CGT event happens. CGT event A1 happens when a person disposes of a CGT asset to someone else and there is a change in ownership from you to another entity (section 104-10 of the ITAA 1997). The gain or loss is made when you enter into the contract for disposal. When you acquired the land you acquired a capital asset. Section 112-25 of the ITAA 1997 states that when a CGT asset (the original asset) is split into two or more assets (the new assets), and you are the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event. Therefore the subdivision of land itself does not constitute a CGT event and where an asset is subdivided, the new assets are treated as though they were always separate assets. However, when you dispose of any of the subdivided lots you will be taken to have disposed to a capital asset which will cause CGT Event A1 to occur. Therefore the gain made from the sale of lots, created from the subdivision of your land, will be subject to capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Question 4: Will there be GST on your sale of the subdivided lots?: GST is payable on any taxable supply that you make. The requirements of a taxable supply under section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) include that the supply is in the course or furtherance of an enterprise that you carry on and you are registered or required to be registered for GST. Your activity of subdividing the Land does not amount to the carrying on of an enterprise of property development as it is not: • trade engaged in on a regular basis; nor • an adventure or concern in the nature of trade (which includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal) As you are not carrying on an enterprise in relation to this activity, you are also not required to be registered for GST. Your supplies will therefore not be taxable supplies pursuant to section 9-5 of the GST Act and there will be no GST applicable to the sale of the subdivided lots