Private ruling: Land subdivision
Date of advice: 26 August 2024
Published: 8 October 2024
Ruling period: 1 July 20ZZ to 30 June 20AA | 1 July 20AA to 30 June 20BB | 1 July 20ZZ to 30 June 20BB
Date scheme commenced: XX Month1 20XX

Ruling: Q1: Will any part of the proceeds or profit made on the sale of the lots from subdivided land constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the sale of the lots from subdivided land constitute assessable income as profit arising from the carrying on of a profit-making undertaking under section 15-15 of the ITAA 1997? | A2: No. | Q3: Will the gain from the sale of the lots be treated as a mere realisation of a capital asset and subject to capital gains tax (CGT) as a CGT event A1 under section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997? | A3: No. | Q4: Will any part of the proceeds made on the sale of the lots be a taxable supply under section 9-5 of the A New Tax Systems (Goods and Services Tax) Act 1999 ? | A4: Yes.

Relevant facts and circumstances: You are an individual. You are a contractor. You are also a partner in a partnership who carries on a construction-related business activity. You are not registered for GST. On XX Month1 20XX you settled and purchased vacant land at the Property for an amount excluding GST. This Property was vacant land consisting of X hectares. The Property is zoned residential. You funded the purchase of the Property from using the loan redraw facility for your home loan and a personal loan from a family member. You purchased the Property because it was more affordable compared to land that is located near to where you reside. On XY Month1 20XX you attended the chambers of the local Council and held preliminary discussions regarding the property's subdivision potential. At this time you became aware of a financial incentive offered by the Council. Under the incentive, if the subdivision of the land is fully completed within a time period specified by the Council, the Council will forego charging certain fees and charges. On XZ Month1 20XX you decided to subdivide and sell, part of the Property as smaller lots (the Lots). You did not seek any professional or other third party advice about undertaking the subdivision activity. You lodged a development application (DA) with the Council on XX Month2 20XX. You received council approval (with conditions) for the subdivision activity on XX Month3 20XX. You have not prepared a business plan for the subdivision activity. You are financing the costs of the subdivision work from personal loans from family member(s) and using your home loan redraw facility. You are managing the activity from a distance of approximately XX kilometres. You are communicating with relevant third parties via email and travelling to the Property to manage the activity onsite. You have not engaged a contractor to manage the land subdivision activity. The project is proposed to be undertaken in at least two stages. Stage 1 will involve X lots of X square metres each being created while stage 2 will also create Y lots of Y square metres each. Stage 1 work commenced in Month5 20YY. During Stage 1 you personally carried out the following work: supervision of works, clearing and grubbing, administration work, prepared and submitted applications and liaised with the Council. Stage 1 required no earthworks to separate the first X lots. However, you have incurred the following expenses: • Council fees • Costs for property and vegetation maintenance. You engaged third parties to carry out the following: • Tunnel boring services, to provide water connections. This work initially commenced in Month5 20YY. • Contractor engaged to carry out the surveying work. You lodged an application with an electricity provider in Month4 20XX for the supply and connection of electricity to the lots. The electricity provider issued a letter of offer to you on XX Month6 20ZZ. They completed the works in Month9 20ZZ. The cost for the supply and connection of electricity to the lots was approximately $X across Stages 1 and 2. Roads had already been constructed surrounding the Property prior to you purchasing the Property. On XX Month7 20ZZ, the Council endorsed the survey plan allowing for the titles to be registered. You have within six months in which to register the titles for each lot of land. In Month8 20ZZ, you commenced approaching real estate agents in the area to determine who would be suitable to engage to sell the lots of land. You have engaged a real estate agent to list the first X lots for sale. You do not have an exclusive listing agreement with the real estate agent. The asking price per lot is $X. Stage 1 was completed one year after commencement. Work on Stage 2 commenced during 20ZZ. Work required for Stage 2 includes constructing the kerb along the front of the Stage 2 lots. You intend to engage a civil contractor and an engineer to carry on this work. Stage 2 is anticipated to be completed by Month10 20AA. You are working towards completing the subdivision activity by Month10 20AA to ensure you meet the conditions set out by the Council that will entitle you to take advantage of the financial incentive. During Stage 2 you will personally carry out such work as site works, possibly some clearing and supervision. You will also need to engage third parties in either or both stages for channel and other road works, traffic control, earthmoving contractors for site works and other professional services. The "balance lot" will be retained as a future home site. You still intend to construct a dwelling on the 'balance' land in the next few years subject to finances becoming available to you from the sale of the lots. However, you have not ruled out further subdividing the "balance lot" in the future. You are undecided if the sales and expenses will be transacted through a separate bank account. You will be maintaining the records for the subdivision activity. You will keep transaction records, accounts and email correspondence. Documentation will be maintained either electronically or in paper format. Besides the current subdivision of the Property, XX years ago, due to financial hardship, you subdivided property you previously owned into two lots. You did not build any structure on that part of land before selling them shortly after the subdivision. You currently own a property. When you purchased it twenty years ago, it consisted of vacant land on which you have since constructed a dwelling. This property has been used as your residential premises and as a rental property.

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 15-15 | 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 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Section 188-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 188-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

Reasons for decision: Summary: Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) your assessable income includes income according to ordinary concepts (known as ordinary income) you derived directly or indirectly from all sources, during a relevant income year. There are two ways the proceeds or profit from the sale of land can be treated for taxation purposes as ordinary income under section 6-5 of the ITAA 1997: • as income from carrying on a business; • as income from an isolated business or commercial transaction with a view to a profit. Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each particular case. 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. Each of these circumstances are discussed as follows: | Detailed Reasoning - Carrying on a business of land subdivision: The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including land subdivision. Paragraph 13 of TR 97/11 states that some of the following indicators are relevant in determining whether a taxpayer is carrying on a business: • whether the activity has a significant commercial purpose or character; • whether the taxpayer has more than just an intention to engage in business; • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; • 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. Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Isolated commercial transaction: Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Commonwealth of Taxation v Myer Emporium Ltd (1987) 163 CLR 199and provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Paragraph 1 of TR 92/3 provides 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. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Also, it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction or operation is generally income when both of the following elements are present: • the intention or purpose of a taxpayer 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 operation or commercial transaction. Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction: • 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. In Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 335 the taxpayer, in 1954, acquired 1,584 acres of land to secure for its original shareholders access to beach shacks which they occupied on the adjacent beachfront. The acquisition was not for a purpose of profit-making by sale or for any business purpose. In 1967 all the shares in the taxpayer were acquired by three companies for $1.6 million. The three companies had not been shareholders of this taxpayer previously. A new set of Articles of Association were adopted at the time of the acquisition. The three companies acquired the shares to gain control of the land with the intention of the taxpayer to develop, subdivide and sell the land for a profit. In 1969, the land was rezoned. It was expected after the development and sale of the subdivided land the taxpayer would make a profit of $7 million. Subdividing the land commenced in 1970 and the first sale of lots of land was made in 1971 with final lot sales made in 1975. The High Court held the subdivision of 1,584 acres of land was a business transaction. The taxpayer's activities were so extensive that it amounted to a business of land development. The profits were held to be assessable as ordinary income. | Detailed Reasoning - Application to your situation: We will now consider your facts and circumstances and apply them to each of the two ways proceeds from the sale of the subdivision of property would be treated as ordinary income for taxation purposes: | Detailed Reasoning - Carrying on a business activity: Each of the indicators outlined in TR 97/11 for a taxpayer to be carrying on a business activity will be applied to your facts and circumstances: • whether the activity has a significant commercial purpose or character o the purchase of the Property and the land subdivision works are being financed from your home loan redraw facility and personal loan from family member. The sale of the lots of land will repay these borrowings and contribute towards building a dwelling on one lot of land in the next few years. o you have previously subdivided property you owned into two lots. You sold both lots X years ago. o you are managing the entire subdivision activity. o you have been involved in carrying out the work to subdivide the Property. o you have engaged a real estate agent to market and sell the lots. o you have not prepared a business plan. • whether the taxpayer has more than just an intention to engage in business o you are a contractor and a partner in a partnership who carries on a construction-related business activity. o you purchased the Property because it was more affordable compared to land located near where you reside. You initially intended to just hold the Property, then build a house on the Property over the next few years when you are more financially secure, and relocate there to reside. o when you found the Property you made enquiries about the possibilities of subdividing the Property because you recognised the subdivision potential. o you are carrying out subdivision works in two stages. During the first stage you intend to sell X lots of land. During the second stage, you intend to sell Y lots of land. You anticipate to complete stage 2 subdivision works by Month10 20AA. You are uncertain whether you will subdivide any further land you hold at the Property. o The scale of the activity is relatively small. • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity o you recognised the potential to subdivide the Property. You studied the town plan and zoning data for the Property and discovered other adjoining subdivided parcels of land. o a week after settlement of the Property, you held discussions with the Council. You were also made aware of the Council's financial incentive. You would be entitled to the incentive if you satisfied certain terms and conditions. • whether there is repetition and regularity of the activity o you have previously subdivided a property you owned into two lots. You sold both X years ago. o over two stages, you are planning to create Z lots of land from subdividing the Property. Once these lots are created, marketed and sold the activity will cease. You are uncertain whether you will subdivide any of the remainder of the land held on the Property. • 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 o the activity of self-managing a land subdivision activity does occur in the ordinary trade of business. o you had experience in subdividing a property you previously owned into two lots and selling both lots X years ago. o you are actively involved in this current subdivision process. You are the decision maker during this current subdivision activity. o the scale of the subdivision activity is small. You currently plan to create Z lots of land over two stages. o the subdivided land will be marketed to the public. • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit o you are managing the land subdivision activity. You conducted research into the feasibility to subdivide the land. You made enquiries to initiate and progress the subdivision activity. You are ensuring you are complying with the Council requirements. o you will keep and maintain records for tax and other purposes. o you have not opened a separate bank account for the activity. • the size, scale and permanency of the activity o you propose to create Z lots of land from a portion of your X hectares of the Property. Generally, the size of a land subdivision can vary. Land subdivision activities can be larger than the development you propose to undertake and they can be smaller. No statistics or any other information has been identified to understand how your subdivision activity compares to others. Objectively, creating Z lots from your land is a small number of lots to create. o once the land has been subdivided, marketed and the lots are sold, the activity may cease. You will hold the remainder portion of the land. You are uncertain if you will further subdivide any of the remainder portion of the Property. You intend to hold a portion of the Property for your personal use. There is no permanency about your activity. • whether the activity is better described as a hobby, a form of recreation or a sporting activity o the purchase of the Property was not connected to a particular interest or hobby you have. o you initially acquired the Property to hold the land and in a few years, when you are more financially secure, you intend to build a house on that land and relocate to reside there. o X years ago, you subdivided property you previously owned into two lots and subsequently sold both lots. | Detailed Reasoning - Conclusion: On the balance of the facts and circumstances applied to the above indicators, the Commissioner is satisfied that you would not be carrying on the subdivision activity as a business. When you acquired the Property, conducted research and made enquiries, you recognised there was potential to subdividing the land and making a profit. Your actions demonstrate the motive to undertake the activity is to make a profit from the land subdivision activity rather than an intention to carry on a business. It is likely that you will make a profit from the activity that will be contributed towards constructing a dwelling on your portion of the remaining land in the future. The scale of the land subdivision activity is relatively small. Despite the opportunity to further subdivide the Property, you have no firm plans to further subdivide the remaining land you hold. You are likely to proceed with building a dwelling on a portion of the land once you assess your financial situation following the sale of the Z lots. The activity is more akin to ensuring you are compliant with the Council and other regulations and ad hoc planning to ensure you meet terms and conditions to take advantage of the Council's financial incentive. You are maintaining records but not in a systematic way. You state you do not have the knowledge or experience of land subdivision. However, you are a contractor and a partner of a partnership that carries on a construction-related business activity. You have previously experienced subdividing property you previously owned into two lots and subsequently selling them. These attributes and experiences would enhance your ability to engage with the Council and engage contractors and other services to manage the land subdivision activity. | Detailed Reasoning - Isolated commercial transaction: An isolated commercial transaction is considered to be a transaction made outside the ordinary course of business of a taxpayer carrying on a business, as well as a transaction entered into by a non-business taxpayer. When a taxpayer enters into a transaction with the intention or purpose of making a profit, the profit or gain will constitute assessable income. In considering whether the profits on the sale of the subdivided lots are income from an isolated commercial transaction each of the indicators outlined in TR 92/3 will be applied to your facts and circumstances: • the nature of the entity undertaking the operation or transaction o you are an individual who is managing the land subdivision activity and its sole decision maker. o you are a contractor. You are a partner in a partnership who carries on a construction business activity. o you have previously owned property that you subdivided into two lots. You subsequently sold these lots X years ago. • the nature and scale of other activities undertaken by the taxpayer o Z lots of land is being subdivided from a portion of X hectares of the Property. The subdivision activity will be undertaken in two stages. o you intend to retain a portion of the land to construct a dwelling. You have no firm plans if you intend to further subdivide any of the remaining portion of the land. • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained o you purchased the land for $X in Month1 20XX o based on the broad cost amounts provided, the land subdivision works will cost $X at a minimum. o each lot of land is expected to be listed for sale between $XX to $XX. You could expect gross proceeds of between $XX and $XX in land lot sales. The current asking price on the market is $XX. • the nature, scale and complexity of the operation or transaction o you are managing the land subdivision activity. You are engaging with contractors, service providers and other third parties to progress the activity. o you currently reside X kilometres away from the Property. You are communicating with relevant third parties via email and travelling to the Property to manage the activity onsite. • the manner in which the operation or transaction was entered into or carried out o you were looking for land to purchase and hold for a few years. You intend to construct a dwelling on the property and reside. o you recognised the potential to subdivide the land. You studied the town plan and zoning data for the property and discovered other adjoining subdivided parcels of land. o a week after settlement of the Property, you held discussions with the Council. You were also made aware of the Council's financial incentive that encourages land subdivision activity in the area. You would be entitled to the incentive if you satisfied certain terms and conditions. o in just under three weeks of acquiring the land you lodged a DA application with the Council. • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction o you are the manager and decision maker for the land subdivision activity. o no other party has been identified as connected to the activity. o you are dealing at arm's length with third parties you have engaged with to carry on the land subdivision activity. • if the transaction involves the acquisition and disposal of property, the nature of that property o the Property is vacant land. A portion of the vacant land is being subdivided into Z lots for sale. • the timing of the transaction or the various steps in the transaction. o within three weeks of settling the purchase of the Property, you had lodged a DA application with the Council. o nine months after settlement you commenced Stage 1 of the land subdivision activity in Month5 20YY. o Stage 1 was completed one year after commencement of the subdivision activity. o During 20ZZ Stage 2 commenced and is anticipated to be completed by Month10 20AA. You need to ensure you complete the land subdivision activity by a certain date to meet the Council's eligibility conditions for the financial incentive. o Land lot sales will occur during and after the land is subdivided and titles become available. | Detailed Reasoning - Conclusion: In your case, objectively, your actions demonstrate you have the intention or purpose of making a profit from acquiring and subsequently subdividing a portion of the Property. You recognised the potential to subdivide the Property and you conducted research and engaged with the Council. Within three weeks of settling the purchase of the Property you had lodged the DA application. You have the commercial knowledge and experience to manage the land subdivision activity yourself. You have at least once subdivided land that you have previously owned. That was X years ago when you subdivided land into two lots and subsequently sold them. You are anticipating to complete the subdivision by the Council's due date to take advantage and profit from the Council's financial incentive. The profit you make from the land subdivision will be attributed to the construction of a dwelling on a portion of the Property. Your intention to subdivide the Property and subsequently sell the subdivided lots was for a profit-making purpose. The first condition of paragraph 6 of TR 92/3 has been satisfied. Your land subdivision and the proposed sale of the lots demonstrate the characteristics of a commercial transaction. The second condition was also met because the transaction was entered into for a profit to be made in the course of carrying on a commercial transaction. Therefore, the profits that are made from the sale of the lots will be made from an isolated commercial transaction and will be assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2: Will the sale of the lots from subdivided land constitute assessable income as profit arising from the carrying on of a profit-making undertaking under section 15-15 of the ITAA 1997? | Summary: No because profit arising from land acquired on or after 20 September 1985 is specifically excluded from being assessable income under section 15-15 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 15-15(1) of ITAA 1997 states: Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, subsection 15-15(2) provides that such a profit will not be assessable under the section if it: a) is assessable as ordinary income under section 6-5; or b) arises in respect of the sale of property acquired on or after 20 September 1985. You acquired the Property after 20 September 1985. Accordingly, as paragraph 15-15(2)(b) of ITAA 1997 is satisfied, section 15-15 of ITAA 1997 does not apply. | Detailed Reasoning - Question 3: Will the gain from the sale of the lots be treated as a mere realisation of a capital asset and subject to capital gains tax (CGT) as a CGT event A1 under section 104-10 of the ITAA 1997 and assessable as statutory income under section 102-5 of the ITAA 1997? | Summary: No, the sale of the lots of land will not be treated as a mere realisation of a capital asset. Detailed reasoning Proceeds from the sale of property more often represent the mere realisation of capital assets, with gains subject to the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997. Paragraph 36 of TR 92/3 states: 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. In Stratham & Anor v Federal Commissioner of Taxation 20 ATR 228, which was an appeal by the taxpayers against the previous decision Case V65 [1] , the issue of the matter involved the Commissioner sought to assess the profits from the realisation of the land sold during the 1981-82 income tax year as assessable income. The taxpayers were the trustees of the estate of the deceased. In 1970 the deceased acquired the family farm of approx 240 acres (approximately 97 hectares). The deceased did not acquire the property with the purpose of subdividing and selling of the lots of land. In 1976 some of the land was sold and a half interest in most of the reminder of the land was sold to a company (Bickerton Holdings) that was controlled by relatives of the deceased. The company acquired the interest in the land without any dominant intention to resell the land by subdivision. In 1976, the deceased and the company formed a partnership to raise beef cattle on the property. Unfortunately the activity was unsuccessful because of the decease's decline in health and the work commitments of the company's controllers. In middle to later 1979 the deceased and the company decided to sell the whole or part of the land. The owners sought approval for a staged plan of subdivision from the local council. The process the owners undertook with the local council involved lodging an application to subdivide the property and the provision of a bond by way of a bank guarantee. After the local council approved the subdivision application, the local council undertook all necessary subdivisional work. The owners obtained some professional advice but did not engage any contractors. The deceased died in October 1980. The owners sold the subdivided land simply by listing it with the local real estate agents. The owner did not participate in the marketing of the subdivided land. Between 1 July 1980 and 30 June 1986 105 lots were sold through four stages of subdivision. The facts presented to the court demonstrated the way in which the subdivision and sale progressed was simple. Significant characteristics of the activity included at 229: • the owners were satisfied to sell the land as one parcel but were unable to do so; • no moneys were borrowed by them, although a bank guarantee was provided to the local council; • only very limited clearing and earthworks were involved; • the owners relied upon the local council to carry out roadworks, kerbing, electricity and sewerage works; • the owners did not erect buildings on land including a site office; • the owners had no business organisation, no manager, no office, no secretary, no letterhead; • the owners did not advertise the land for sale; • the owners did not engage any contractors, although they did obtain some professional advice; • books were kept in relation to land sales and • the land was sold simply by listing it with the local real estate agent. The Full Court of the Federal Court of Australia decided the applicant's subdivision of the land was merely to the advantageous and enterprising realisation of the capital asset rather than to a business of land development carried on by the owners or to an undertaking or scheme for the purpose of profit-making. The court said at 233: 'It is well established... that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant manner to be taken into account in determining the nature of the realisation, ie in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme.' In Casimaty v Commissioner of Taxation (1997) 37 ATR 358 the taxpayer, Casimaty, carried on a primary production business on a property comprising of 988 acres (400 hectares approx) of land acquired from his father in 1955. The taxpayer experienced severe financial hardship and deteriorating health. In 1972 or 1973, Casimaty attempted to sell the land as a whole without success. Left with no alternative, the taxpayer decided to sell of parts of his land. Between 1975 and 1995 the taxpayer arranged for creating eight subdivisions equivalent to two-thirds of his property. Casimaty arranged for works to be carried out to the extent of preparing the land for sale such as farm fencing on boundaries, extension of water main, making water connections, construction of road entrances, construction of road access and satisfying conditions set out by the Council. The taxpayer also slash and cleared scrub, filled in some creeks and waterholes and stabilised creek's levy banks. Casimaty did not provide any public facilities. The taxpayer was not involved in the sale and marketing of the subdivided lots of land nor did he acquire land for subdivision or resale. The Federal Court of Australia, Ryan J presiding, held the taxpayer's activities were no more than mere realisation. The court's decision was based on: • Casimaty had acquired and continued to hold the land to carry on the primary production business and it was the location of his family's residence; • he undertook only necessary activities to obtain local Council approval for the subdivision of the parts of the land. If Casimaty had constructed houses, provided internal fencing or other improvements these may indicate the taxpayer had intention of carrying on a business of land development and improvements; • there is nothing to suggest a change in the purpose or object with which the land was held; • he did not acquire additional land to added to the original 'stock' of land. If additional land was acquired it may have indicated an intention to carry on a business of land development; • the taxpayer did not claim as a business expense the interest on moneys borrowed to finance the subdivisional costs; • Casimaty outsourced the sales and advertising of the land lots; In McCorkell v Federal Commissioner of Taxation (1998) 39 ATR 1112 the taxpayer's family had carried on an orchard farm since 1917. McCorkell had inherited the property and orchard. During the early 1980's, the land was rezoned as future residential zone. McCorkell had been approached by property developers but the price they quoted was too low for McCorkell. In 1982 McCorkell had approach surveyors and engineers about subdividing the property but they advised McCorkell he would experience difficulties to sewer the property and did not take the matter further. In 1984. McCorkell obtained Council approval for part of four hectares of land to be subdivided into 40 lots. During this time, McCorkell had been contemplating retirement. He had no family to continue the orchard and residential development was now surrounding his land. McCorkell had been experiencing complaints from nearby residents about the effects of spraying his orchard on the neighbours. In 1987, the taxpayer met with a consulting engineer and surveyor who advised the sewer could be resolved and the land could be subdivided. A draft subdivision plan was prepared. In 1988 McCorkell was introduced to a consultant who made applications, on McCorkell's behalf, to council to obtain approval for the subdivision. The council approved the subdivision of the balance of the four hectares of land to subdivide into 17 lots. In 1989, McCorkell engaged joint real estate agents to sell the lots of land. The subdivision of the land was carried out in two stages. McCorkell obtained a short-term bank loan to supplement his funds to pay for the first stage of the subdivision. Sales from the land during the first stage repaid the loan. Based on the facts of the case, the tribunal decided McCorkell had no direct involvement in planning and contracting work for the subdivision or in selling the lots of land. Therefore, the tribunal held McCorkell was not carrying on a business of subdividing and selling land. The proceeds from the sale of land was capital in nature and was not assessable income. In comparison, Stevenson v Federal Commissioner of Taxation (1991) 22 ATR 56 the taxpayer's family had carried on a farm activity on 476 acres of land since 1904. Stevenson inherited the property in 1953. From the 1960's, Stevenson decided to sell most of the land and engaged a third party to find a buyer. Around this time, the local Water Authority acquired 26 acres from to taxpayer and used the land to form a lake. Stevenson decided to take advantage of the lake views and determined the value of the land had increased. In the 1970's, Stevenson decided to sell 360 acres to a plantation company but retained 35 acres bordering the lake. In 1975, a third party on behalf of Stevenson submitted an application to Council to rezone the 35 acres of land. The Water Authority objected to the application and imposed stringent conditions relating to water supply and sewerage. As a result of these conditions, Stevenson found he could not engage a developer willing to pay his price without a rezoning approval. Consequently, from 1977, Stevenson developed the land himself by subdividing the land into residential lots in stages. Stevenson organised finance and marketing of the subdivision. The subdivided lots were sold from 1980 to 1986. The Federal Court held the extent of the activities and the how Stevenson went about to realise the land amounted to a business. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Parts 3-1 and 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 under section 104-10 of the ITAA 1997 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. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sale. | Detailed Reasoning - Application to your circumstances: The expression 'mere realisation' is used to contrast the activity with a business operation or a commercial transaction carrying out a profit-making scheme. We have already addressed the latter two above. In considering if profit will be the result of mere realisation, we would consider relevant court cases. | Detailed Reasoning - Conclusion: In comparing your facts and circumstances with the court cases of Stratham , Casimaty and McCorkell , you do not share similar characteristics. Characteristics described in each court report state: • the three parties inherited or was gifted their properties and carried on their respective business activity to varying degrees. None had intentions when inheriting the land to carry out a land subdivision activity to gain a profit. • each had their own reason for ceasing the business activity and making the decision to subdivide the properties. • each party did not have the knowledge and experience of land subdivision. • each engaged different parties to carry out the land subdivision without the taxpayer being involved. • each party had different ways of financing the activity. • each party was not involved in the marketing and sales of the lots. Compared with Stratham , Casimaty and McCorkell, you have not held the Property for a long period time nor had been conducting a different activity on the Property to generate an income during that time. You recognised the subdivision potential in the land and conducted research. You are managing the subdivision activity and you are its decision maker. You acted quiet quickly after settlement of the Property to initiate the subdivision activity. You are taking advantage of the Council's financial incentive to profit from it, ensuring you meet the terms and conditions. Therefore, the Commissioner is satisfied the future sale of the Z lots from the Property is not a mere realisation of your capital asset. | Detailed Reasoning - Capital gains tax: CGT event A1 will occur on the disposal of your ownership interests in each of the subdivided lots. The capital gain for the event is worked out by comparing the cost base of your ownership interests in the asset with the capital proceeds for its disposal. As the Commissioner's view is that future sale of the subdivided lots is not a mere realisation of capital assets, but an isolated commercial transaction, any profit on the sale will be assessable under section 6-5 of the ITAA 1997 Therefore, any capital gain made on the sale of the subdivided lots will be reduced to the extent that the profit from the sale is included in your assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 4: Will any part of the proceeds made on the sale of the lots be a taxable supply under section 9-5 of the A New Tax Systems (Goods and Services Tax) Act 1999 ? | Summary: Yes, the supply of the vacant lots subdivided from the Property will be taxable supplies under section 9-5 of the GST Act. | Detailed Reasoning - Detailed reasoning: In this ruling, unless otherwise stated, • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act • all reference materials published by the Australian Taxation Office (ATO) that are referred to are available on the ATO website www.ato.gov.au. Section 9-5 provides that 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 to the indirect tax zone (Australia); and (d) you are registered or required to be registered for GST. However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed. The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively. In your case, there are no provisions in the GST Act under which your sale of the subdivided vacant lots would be a GST-free or input taxed supply. In this case, the sale of the Lots will be made for consideration and the supplies are connected with the indirect tax zone as the Lots are located in Australia. As such we will consider whether the sale of the Property is made in the course or furtherance of an enterprise that you carry on and if so, as you are not registered for GST, whether you are required to be registered. | Detailed Reasoning - Enterprise: The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done: 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 (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). Goods and Services Tax Determination GSTD 2006/6 provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. | Detailed Reasoning - In the form of a business: Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business which include those indicators contained in TR97/11 discussed above at question 1. For the same reasons set out previously we consider that the activities undertaken in the subdivision of the Property and the subsequent sale of the subdivided lots, do not display the salient indicators of a business which, amongst other things, include transactions entered into a continuous and repetitive basis. The indicators set out in paragraph 178 of MT2006/1 (which are identical to those factors included in paragraph 13 of TR 97/11) are not present to a sufficient degree to warrant the conclusion that you are carrying on an enterprise in the form of a business. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade: Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes, or held as an investment asset or for personal enjoyment. 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 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues stating that the issue to be decided is whether the activities being conducted 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. Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: Paragraphs 252, 253, 266 and 270 of MT 2006/1 provide the following commentary: 252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade. 253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties. 266 In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular 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. In relation to land bought with the intention of resale paragraph 270 of MT 2006/1 specifically provides: Land bought with the intention of resale 270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. Example 28 and 29 at paragraphs 271 to 276 of MT 2006/1 provides an example which we consider to be on foot with yours. | Detailed Reasoning - Examples of subdivisions of land that are enterprises: Example 28 271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit. 272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner. Example 29 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise. 276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units We consider that it is relevant that when you purchased the Property you were already aware of its subdivision potential and within a short period of acquiring the Property, you conducted research, made formal enquiries with the Council, and lodged a development application for its subdivision. Whilst you purchased the Property with the intention to hold it as a long-term investment asset or for personal enjoyment, that intention changed within days of acquiring the Property, at least in relation to a portion of the land, to that of subdivision and resale. You expect to make a profit from the sale of the lots and intend to use the profits to construct a dwelling on the balance lot. Notably you have not ruled out further subdividing the balance lot. Overall, this indicates that the activities undertaken by you to subdivide and sell the lots are activities in the conduct of a profit-making undertaking or scheme and are therefore in the form of an adventure or concern in the nature of trade. Therefore, in weighing up all of the facts of this case, and in line with the reasons set out above for concluding that the profits a made on the sale of the lots will be assessable as ordinary income, we consider that your activities amount to an enterprise. As you are not registered for GST, we now consider whether you are required to be registered for GST. | Detailed Reasoning - GST registration: Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold, currently $75,000. As discussed above your activities in subdividing and selling the lots constitute the carrying on of an enterprise in the form of an adventure or concern in the nature of trade. The next step is to determine whether your turnover meets the GST registration threshold. | Detailed Reasoning - Turnover: The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or b) your projected GST turnover is at or above $75,000. Your 'current GST turnover' is the sum of the values of all your supplies made in the current month and the previous 11 months. However, supplies that are input taxed, not for consideration or not made in connection with an enterprise that you carry on are not included when calculating your current GST turnover. Your 'projected GST turnover' is the sum of the values of all your supplies made for the current month and the next 11 months. Likewise, supplies that are input taxed, not for consideration or not made in connection with an enterprise that you carry on are not included when calculating your projected GST turnover. Section 188-25 provides that in working out your projected GST turnover you should disregard certain transactions. We don't consider that the exclusions in section 188-25 apply to your circumstances. In your case the proceeds from the sale of the lots will be included in the calculation of your projected GST turnover. Based on the expected selling price for each lot, the sum of the value of your supplies will exceed $75,000, consequently your projected turnover will exceed the registration turnover threshold and you will be required to be registered for GST. | Detailed Reasoning - Conclusion: As you are required to be registered for GST and you meet the other requirements of section 9-5 your supply of the Z lots will be a taxable supply. [1] Case V65 was reported at 88 ATC 498.

in the form of a business (paragraph 9-20(1)(a)) or | in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)). | 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.