Private ruling: Revenue or capital
Date of advice: 24 May 2019
Published: July 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2018

Ruling: Q1: Are the proceeds from the sale of a few blocks of land assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the proceeds from the sale of a few blocks of land be capital proceeds for the purposes of the capital gain tax (CGT) provisions? | A2: Yes. | Q3: Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) when you sell a few subdivided blocks of land? | A3: No.

Relevant facts and circumstances: You and your spouse (you) purchased a property. You funded the purchase of the property with a housing loan and your own personal funds. The property was zoned residential. Your intention at the time of purchasing the property was to use the property as your principal place of residence. The property has a house, and other structures erected on it. You moved into the property after it was purchased and vacated the property just before the house on the property was demolished. You spent a significant amount renovating the house after you moved in. Due to ongoing debt issues of repaying the housing loan and a reduction in your income you decided to sell the property. You engaged the services of a real estate agent to sell the property at auction. At the time of the auction no reasonable bids were made to purchase the property. After discussion with your real estate agent a decision was made to withdraw the property from sale and seek to sub-divide the property into a number of small blocks as you believed this was a better way to realise the value of the property. You had undertaken research into sub-dividing the property. You initially considered subdividing land into X number of lots. However due to the additional capital costs to include roadways and accesses to the development which increased the overall level of complexity of the development you decided to only subdivide into a few lots. The individual lots are slightly larger than the minimum local council requirements. You do not have a business plan. Prior to the starting of the sub-division you engaged a demolition company to demolish the house to the clear the land. You engaged a firm to undertaken the following activities: ● draw up the plans for the sub-division ● lodge the plans for the sub-division ● complete the entire sub-division. A conveyancing entity was engaged to prepare and lodged the required forms to organise the new titles with the Lands Title Office. The cost of completing the sub-division was as follows: ● the demolition of the house (including clearing the block) was $XX,XXX ● the sub-division was $XX,XXX. You borrowed funds from family members to undertake the sub-division. No dwellings, roads or guttering have been constructed as part of the sub-division. The sub-division was completed in a few months. You are seeking to sell a few lots through an agent with the aim of achieving an amount similar to that paid for the property when it was purchased. The sub-division is a one-off arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | 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

Reasons for decision: Detailed Reasoning - Income or capital: 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. 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 - GST: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) 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 (which includes 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 residential property to be a taxable supply, all of the requirements in section 9-5 must be satisfied and it must not be GST-free or input taxed. From the information you have provided, in your case you have a few subdivided land blocks of your residential property for consideration and the property is connected with the indirect tax zone as it is located in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) of the GST Act are satisfied. In addition the sale of the Property is neither GST-free or input taxed. Accordingly, we must determine whether the sale of your residential property is in the course or furtherance of an enterprise that you carry on under paragraph 9-5(b) and whether you are required to be registered for GST purposes under paragraph 9-5(d). Subsection 9-20(1) in part defines enterprise as follows: | Detailed Reasoning - 9-20 Enterprises: (1) An enterprise is an activity, or series of activities, done: (a) in the form of a *business; or (b) in the form of an adventure or concern in the nature of trade; or (c) … Section 195-1 of the GST Act stated: carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise. Paragraph 234 of Miscellaneous Taxation Ruling: 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 (MT 2006/1) states: Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, 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. MT 2006/1 discusses the meaning of ‘entity carrying on an enterprise’ for the purposes of entitlement to an Australian Business Number and relevantly provides: | Detailed Reasoning - Isolated transactions and sales of real property: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. The issue to be decided is whether the activities 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. (In an income tax context a number of public rulings have issued outlining relevant factors and principles from judicial decisions. See, for example, TR 92/3, TD 92/124, TD 92/125, TD 92/126, TD 92/127 and TD 92/128.) Based on the facts as presented it is our view that you always intended to build and live in the Property as your principal place of residence. This intention is confirmed by the fact that you lived in the Property since you purchased it and incurred considerable expense in making improvements to it. Your activities in relation to the sale of the subdivided blocks are a small ‘one off’ undertaking for which you did not have a commercial purpose in mind. Based on the facts presented, in this instance, it is our view that this undertaking is a mere realisation of an asset. In accordance with MT 2006/1 (see paragraph 263) your activities in this situation are not an enterprise in that they are not of a revenue nature in the form of a business or in the form of an adventure or concern in the nature of trade. Therefore you do not meet all of the elements of section 9-5. As the supplies of the blocks are not taxable supplies, and you are not required to be registered for GST purposes for this case since we consider that you are not carrying on an enterprise of property development.