Private ruling: CGT & GST - disposal of vacant land
Date of advice: 17 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will your share of the proceeds received from the disposal of the subdivided blocks constitute a mere realisation of a capital asset and be taxed under the capital gains tax provisions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Issue 2 - GST | Q2: Was your supply of your interest in Proposed Lots A, B and C, a taxable supply? | A2: No.

Relevant facts and circumstances: You and other parties purchased a residential property. You and the other owners are not registered for GST. You and the other parties purchased the property with the intention of holding it as an investment property. The property was available for rent from the date of purchase and was tenanted for several years. Due to serious damage caused by the tenant, the original property was vacant for a period of time. The original property was later destroyed by fire, with no compensation from insurance. As it was very difficult to then sell the vacant land, you and the other parties engaged a firm to subdivide the land into a number of blocks. There were no improvements to the land apart from what was required by council. Some of the blocks were sold - to the same purchaser. Another block was acquired by the local council for public use.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | A New Tax System (Goods and Services Tax) Act 199 Subsection 9-30(4)

Reasons for decision: Detailed Reasoning - Issue 1: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Additionally, section 15-15 of the ITAA 1997 specifies that your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997 or which arises in respect of the sale of property acquired on or after 20 September 1985. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transaction are income, considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to paragraph 1 of TR 92/3, 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. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose 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 contrast, paragraph 36 of TR 92/3 notes 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. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In your case, you do not carry on a business of buying, selling or developing land. You have had minimal involvement in the subdivision of the land and have only changed the land to the extent that you were required for council purposes. It was not your intention at the time of acquisition to demolish the house and subdivide the block. Accordingly, the proceeds from the disposal of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and your share of the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Issue 2: Subsection 9-30(4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states: A supply is taken to be a supply that is *input taxed if it is a supply of anything (other than *new residential premises) that you have used solely in connection with your supplies that are input taxed but are not *financial supplies. Your enterprise involves the activity of making supplies of residential property by way of lease. Up to the time when the house was fire damaged, you had used the property solely in connection with your leasing activity. The fire damaged house was demolished and removed merely to prepare the land for sale. In these circumstances where the fire made the house uninhabitable, the demolition should not be regarded as a separate and distinct use of the land, but rather as a consequential step between the end of the leasing activities and the sale of the land. Your only use of the land, from which the vacant subdivided lots were created, has been in connection with making input taxed supplies by way of lease of residential premises. Therefore, your sale of the vacant subdivided lots is taken to be an input taxed supply under subsection 9-30(4) of the GST Act and consequently will not be subject to GST.