Private ruling: GST and the subdivision and sale of land
Date of advice: 23 April 2018
Published: July 2018
Ruling period: Year ended 30 June 2018. | Year ended 30 June 2019.
Date scheme commenced: 1 July 2017.

Ruling: Q1: Will the profit from the sale of the subdivided block of land (Balance Lot) be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the profit from the sale of the Balance Lot be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A2: Yes. | Q3: Will the supply of the Balance Lot by Entity A and Entity B (You) to Entity C (Purchaser) be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 and subject to GST? | A3: No.

Relevant facts and circumstances: Entity A and Entity B (You) do not have an ABN and are not registered for GST either individually or jointly. On DDMMYYYY you purchased the Property from Entity D for $X. Prior to purchasing the Property you viewed various properties in the area to live in and wanted to purchase at least a X size block and spend around $X. While on a drive through the area you saw the for-sale sign for the Property and contacted the agent. You met the agent on site and found out the details about the Property. The Property was advertised as a development opportunity with development approval for a X lot subdivision. You were not initially aware of the subdivision approval and were informed by the agent. You were not interested in subdividing the block at that stage. You talked to the neighbours and were told the owners of the Property had been trying to sell the land to Developers but no-one wanted to buy it because of the cost of putting in a new roundabout and road surfacing costs as a council requirement for the subdivision. You believe this is the reason why you were able to obtain the Property for a lower price than the $X wanted by the owners. You obtained a residential loan from a Bank to purchase the Property. The Property was over your budget and larger in size (around X) but you were attracted to the portion of the land that had a creek line and house site on it. The Property was also close to your child’s school. You purchased the property for the purpose of building a house on it and living in it, and you did build and live in it. You built your house squarely within the area of one of the proposed subdivision blocks – Lot X. The Property has not been re-zoned since your purchase. You have never offered the Property for sale. You have not used the remainder of the property for any purpose since purchase. You have slashed the grass and at one point cultivated an area of the soil with the intention of planting trees, but this has not happened. In MMYYYY you were approached by a property developer who wished to acquire a portion of your property through an entity called Entity C (the Purchaser). You entered into negotiations with the Purchaser who will bear the costs of subdividing the Property into X lots with you retaining X lots and the remaining large lot being sold to the developer (Balance Lot). You have provided an image of proposed sub-division of the Property. You have provided a copy of the draft purchase contract. Some of the terms are being renegotiated, such as an increase in the deposit price. But generally, the Purchaser will be responsible for any costs relating to the development. You were not provided any other documentation by the Purchaser. Under the draft purchase contract you agree to: ● allow the Purchaser and their officers or contractors on to the Property to conduct any surveys or inspections and carry out minor earthworks ● sign the consent form for the development application. ● Under the draft purchase contract the Purchaser is responsible for: ● lodging the development application and/or the operational works application, and paying the costs of these applications ● preparing the subdivision plan ● paying the $X deposit ● paying the $X deposit upon satisfactory completion of due diligence ● completing a fence at their cost between the proposed Lot X and proposed Lot X (Balance Lot) ● paying the balance amount of $X on settlement. The contract is conditional on the sealing of the road and the building of the roundabout by a third party to the satisfaction of the buyer, and to the registration of the X lots. The Purchaser will take all necessary steps to liaise with the relevant local authority to arrange the subdivision. All actions necessary for the sub-division of the Property will be undertaken by the Purchaser. After you were approached by the Purchaser, you had a local real estate valuation done for your home and land as it is (one title) and were advised the market value was $X. The sale price for the Balance Lot is $X. You do not have access to the development application or the development approval. You are not providing the land as security for the developers finance. You propose to build a house for your parents on Lot X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Section 995-1 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

Reasons for decision: Summary: The proceeds of the sale of the Balance Lot will not be ordinary income and not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The proceeds represent a mere realisation of capital assets which will fall for consideration under the capital gains tax provisions in Parts 3 1 and 3-3 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As a general principle, profits from property sales will either be assessable as ordinary income under section 6-5 of the ITAA 1997 or statutory income under the capital gains tax provisions of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or as a result of a taxpayer entering into an isolated business transaction, the profit will be assessable as ordinary income. However, where the profit is a mere realisation of a capital asset, the profit will be assessable under the capital gains tax provisions of the ITAA 1997. There have been several cases in which the courts have addressed the question of whether the proceeds received for the sale of an asset are revenue or capital in nature. The decision in each case depended on its own facts, and very often will be a matter of degree. The extent of the personal involvement of the taxpayer in much of the planning, organisation and management of the activities has been held to be significant factors in the determination of whether or not a business was being carried out. For example: ● In Stevenson v FC of T (1991) 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the degree of the taxpayer’s involvement was seen as an indicator of a business being conducted. ● The lack of personal taxpayer involvement was seen as a relevant to the finding that a business was not being conducted in the cases of Stratham v FCT 89 ATC 4070, McCorkell v FCT 98 ATC 2199 (McCorkell) and Casimaty v FCT 97 ATC 5 (Casimaty). From the cases involving the subdivision of land and from Taxation Ruling TR 92/3, it would appear that the following are the most important factors to consider when determining whether profits made as a result of an isolated business transaction are assessable income: a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and b) 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. In determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant: a) the nature of the entity undertaking the operation or transaction 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 f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction g) if the transaction involves the acquisition and disposal of property, the nature of that property, and h) the timing of the transaction or the various steps in the transaction. 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. Application to your situation You purchased the property in YYYY to build a house to live in, and you did build the house and live in it. You have not used the surrounding land for any purpose other than private use. At the time of purchase you were aware of the possibility for a future subdivision and sale of the surplus land on your property, however, the prospect of future gains was not a significant reason for the purchase. The requirement to undertake expensive road building rendered any future subdivision unprofitable at that point. This was reflected in the price that you purchased the land for. When a third party developer committed to upgrading the road and building the roundabout, that situation changed. At this point you effectively had a windfall gain and your land became more valuable for the purpose of subdivision. You did not actively seek to sell the land. You were approached by a developer who made you an offer. You will only sell the land. You will not be actively involved with the subdivision, and will not receive any of the rewards or bear any of the risks of the venture. You will have no control over the timing or any other aspect of the subdivision. While you will make a significant gain on the sale of the land, on balance the Commissioner accepts you are not engaged in a profit making undertaking, instead merely disposing of a capital asset. The profit that arises on the sale will be accounted for under the capital gains provisions in Part 3-1 and Part 3-3 of the ITAA 1997. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Part 3-1 and Part 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. When a CGT asset (the original asset) is split into two or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event, according to subsection 112-25(2). Instead you will be taken to have acquired three CGT assets at the time you purchased the Property, with the cost base apportioned between the three subdivided blocks on a reasonable basis. As you have held the Property for more than 12 months you will be eligible for the 50% general CGT discount. | Detailed Reasoning - Other relevant comments: You have stated that you intend to build a house on Lot X for your parents to live in. If you do build a house and your parents treat it as their main residence, it will also be considered capital. However, if that intent changes, and you later build a house to sell, it is likely that this would be considered a profit making undertaking and be taxed as ordinary income. | Detailed Reasoning - Question 3: In this reasoning, please note: ● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all reference materials referred to are available on the Australian Taxation Office (ATO) website ato.gov.au ● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act You are not registered for GST. Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with the indirect tax zone (Australia), and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. For the supply of your subdivided land (the Balance Lot) to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In your case, you will be selling the Balance Lot in Australia for consideration. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Further, the supply of the Balance Land in your situation will neither be GST-free or input taxed. Accordingly, we must determine whether: (a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and (b) if so, whether you are required to be registered for GST. | Detailed Reasoning - Enterprise: Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the 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 provides guidance on what activities will amount to an enterprise. 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’. In particular: ● A business encompasses trade engaged in on a regular or continuous basis. ● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. We do not consider your activities are in the form of a business and will consider whether they are done in the form of an adventure or concern in the nature of trade. Paragraphs 178, 252 and 265 of MT 2006/1 set out a number of factors that can be looked at to determine whether a particular set of activities amounts to an enterprise. We have reviewed your factual circumstances and have taken into consideration the following factors: ● In YYYY you purchased the Property for the purpose of building a house to live in, which you have done and you have used the surrounding land for private purposes. ● Whilst aware of the possibility for a future subdivision and sale of the surplus land, your purchase was motivated by your intended private use of the land rather than profit making. You did not proceed with the approved X lot subdivision. ● You did not actively seek to sell the land and were approached by a property developer who made you an offer. ● You will not be actively involved with the subdivision, and will not receive any of the rewards or bear any of the risks of the venture. You will have no control over the subdivision. You will only sell the land. After considering all the facts and circumstances we consider that your activities amount to a ‘mere realisation’ of a capital asset, and do not constitute the carrying on of an enterprise. As we consider that the sale is not in the course of an enterprise you are not required to be registered for GST in relation to that activity. As you do not meet the criteria for 9-5 your supply will not be a taxable supply and you will not be liable for GST on the sale of the property in this factual scenario.