Private ruling: CGT and GST - subdivision and sale of land
Date of advice: 2 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the proceeds from the sale of the subdivided land be assessed under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the proceeds from the sale of the subdivided land be assessable as a capital gain? | A2: Yes. Issue 2 | Q3: Will your supplies of the subdivided lots be taxable supplies pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A3: No.

Relevant facts and circumstances: You and your X relatives acquired a property (the property) as beneficiaries of a deceased estate. The property is recorded on one title with all X relatives named as tenants in common. You and your X relatives are not registered for GST One of your relatives had resided on the property for a long period of time and will continue to reside at the property after any development activity. The property contains a residence and other structures. It is X acres in size. It was rezoned some years ago by the council to 'Residential 1'. This means that it can no longer be used for its prior purpose, nor can any purchaser of the property use it in this manner. You and your siblings had originally planned on selling the property as a single lot and dividing the proceeds between yourselves. The council issued a heritage ruling in relation to the property, which requires several buildings on the property to be retained due to historical significance. You have sought advice from a real estate agent about how to 'realise the asset'. The real estate agent advised that you may be able to subdivide around the historical buildings and sell the subdivided lots. The proposed XX lot subdivision will include one lot on which the original house is located to be given to the relative that has resided there. The remaining lots will be either sold or distributed between the relatives. You and your relatives do not have any experience in subdivision or property development. You and your relatives plan on engaging a consultant to manage the subdivision.

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 s ection 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 9-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision: Detailed Reasoning - Issue 1: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts. Typical examples of ordinary income include salary and wages, proceeds from carrying on a business, rent, interest and dividends. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income under the capital gains provisions. Section 15-15 ITAA 1997 provides that your assessable income also includes profit arising from the carrying on, or carrying out, of a profit-making undertaking or plan. Subsection 15-15(2) goes on to say that this section does not apply to a profit that is assessable as ordinary income under section 6-5 or arises in respect of the sale of property acquired on or after 20 September 1985. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) deals with determining whether profits on isolated transactions are income. According to TR 92/3, a profit from an isolated transaction is generally income if the intention or purpose of the 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 or in carrying out a business operation or commercial transaction. In your case, you acquired the property as a beneficiary of a deceased estate. Prior to the heritage ruling, you and your relatives had intended to sell the property and divide the proceeds among you. The heritage ruling requires several buildings on the property to be retained due to historical significance. One of your relatives has expressed a wish to continue living in the dwelling on the property and you have sought advice on how to achieve this. You propose to subdivide the property into XX lots, which will allow your relative to continue to live in the dwelling and the remaining land to be sold or retained by you and your other relatives. Accordingly, the proceeds from the sale of the subdivided lots will not be included in your ordinary income. Rather, the disposal is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Issue 2: In this part of the reasoning, unless otherwise stated, • 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 www.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 must pay the GST payable on any taxable supply 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 Australia; and (d) you are registered, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. You, and your relatives propose to work together to subdivide the property and sell off the resulting lots. The transactions will be made for consideration and the property is located in Australia therefore the transactions will meet paragraphs 9-5(a) and 9-5(c) and the supply of the vacant lots in your factual situation will neither be GST-free nor input taxed. However, we must also determine: 1 In what capacity the activities are being undertaken 2 Whether the supply is in the course or furtherance of an enterprise being carried on, and 3 Whether there is a requirement for GST registration. In what capacity are the activities being undertaken? In certain circumstances where individuals work together and receive income it is considered that they are a partnership. A partnership is defined in section 195-1 of the GST Act with reference to section 995 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 of the ITAA 1997 provides that a partnership means an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly. Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSTR 2004/6) provides the following explanations of the particular type of partnership known as a tax law partnership. 10. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. We refer to this type of partnership as a tax law partnership. 30. We consider that, for GST purposes, an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. We refer to this as the 'time of association' approach. We do not consider that your activities amount to carrying on a business which is the first limb of the definition in section 995 of the ITAA 1997 however the consideration you and your relatives will receive from the sale of the lots will be statutory income. Therefore as you and your relatives are an association of persons who are in receipt of statutory income you will meet the definition of a partnership as defined in section 995 of the ITAA 1997 and described in GSTR 2004/6. We consider that you and your relatives will become a tax law partnership from the time you commence your activities. Therefore we will be ruling to the tax law partnership created when the subdivision activities commence. We will refer to this tax law partnership as you in this ruling. | Detailed Reasoning - Are you conducting an enterprise?: The term 'carrying on an enterprise' is defined in the GST Act and includes doing anything in the course of the commencement or termination of the enterprise. Section 9-20 relevantly defines enterprise as 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 ATO view on the meaning of the term 'enterprise' is explained in detail in 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). 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. • A business encompasses trade engaged in on a regular basis. • An adventure or concern in the nature of trade includes an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. Your activity does not amount to a business engaged in a regular basis. Therefore we will consider whether you are carrying on an enterprise as a one-off or isolated real property transaction which has the characteristics of a business deal. Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets. They provide the following: • Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes. • Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade. Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time. The property in question was received as an inheritance. It was not used in any enterprise activity by you and your relatives. Therefore the relevant issue in your circumstances is whether the nature of the asset has changed from a private asset to trading assets as a consequence of you engaging the developer to subdivide and sell the lots. MT 2006/1 sets out a number of indicators that provide guidance as to whether an activity is undertaken in a businesslike manner. 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. Paragraph 264 of MT 2006/1 discusses two court cases [ Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty)] involving subdivision and development of properties that were originally held as capital/investments assets. In these cases, the court decided that the sale of the post-subdivision lots was the mere realisation of capital/investment assets. You originally intended to sell the property as a single supply and share the proceeds however this was not feasible. You now intend to engage a property developer to subdivide the property and sell off the subdivided lots. You do not intend to do anything to the property while you are preparing for subdivision and intend that the only changes to the property will be council requirements. This indicates that your subdivision and sale of the lots in the proposed manner does not constitute carrying on an enterprise of property development. | Detailed Reasoning - Registration: As provided in section 23-5, you are required to be registered if: • you are carrying on an enterprise, and • your GST turnover meets the registration turnover threshold (currently $75,000). As you are not carrying on an enterprise in relation to this activity you are not required to be registered for GST. | Detailed Reasoning - Conclusion: As you, the tax law partnership made up of you and your X relatives are not carrying on an enterprise nor required to be registered for GST, your supplies of the lots will not be taxable supplies pursuant to section 9-5.