Private ruling: Tax treatment of the sale and development of property
Date of advice: 20 March 2019
Published: May 2019
Ruling period: 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Was there an assessable capital gain or capital loss realised by each of Owner 1, Owner 2 and Owner 3 when they entered into a Put and Call Option Agreement with Developer A in relation to the property? | A1: No. | Q2: Are each of Owner 1, Owner 2 and Owner 3 required to include any amount in assessable income when they entered into a Loan Agreement with Developer A? | A2: No. | Q3: If Owner 1, Owner 2 and Owner 3 continue to use the property in the farming business currently conducted under the share farming arrangement with Couple B until Company C exercises the option originally granted to Developer A: a. Will Owner 1, Owner 2 and Owner 3 be entitled to treat any gain realised on a sale of part of the property to Company C as a discount capital gain under Division 115 of the Income Tax Assessment Act 1997 (the ITAA 1997)? b. Will Owner 1, Owner 2 and Owner 3 be entitled to claim the small business 50% exemption in Subdivision 152-C of the ITAA 1997 if they sell part of the property to Company C following the exercise of the option originally granted to Developer A? c. Will each of Owner 1, Owner 2 and Owner 3 be entitled to claim the small business retirement concession in Subdivision 152-D of the ITAA 1997 if they sell part of the property to Company C following the exercise of the option originally granted to Developer A? | A3: a. Yes b. Decline to rule. c. Decline to rule. | Q4: If: a. the conditions precedent in clause A of the Development Agreement are satisfied or the parties otherwise agree to proceed with the development of the balance of the property; and b. Developer D undertakes the development of the balance of the property in accordance with the terms of the Development Agreement, will Owner 1, Owner 2 and Owner 3 be treated as carrying on a business of developing land for the purpose of deriving a profit from sale of the subdivided lots? | A4: Yes. | Q5: If the answer to question (4) is ‘yes’ – will that part of the property that forms the subject matter of the development agreement with Developer D be treated as trading stock of Owner 1, Owner 2 and Owner 3? | A5: Yes. | Q6: If the answer to question (5) is ‘yes’ – will Owner 1, Owner 2 and Owner 3 be treated as having commenced the business and to have commenced holding that part of the property that forms the subject matter of the development agreement with Developer D as trading stock on the date they executed the Development Agreement? | A6: Yes. | Q7: If the answer to question (5) is ‘yes’ but the answer to question (6) is ‘no’ – will Owner 1, Owner 2 and Owner 3 be treated as having commenced the business and to have commenced holding that part of the property that forms the subject matter of the development agreement with Developer D as trading stock when the conditions precedent in clause A of the Development Agreement are satisfied or the parties otherwise agree to proceed with the development of the balance of the Property? | A7: Not applicable. | Q8: If the answer to question (5) is ‘yes’ and if Owner 1, Owner 2 and Owner 3 elect under section 70-30(1)(a) of the ITAA 1997 to have sold that part of the Property that forms the subject matter of the development agreement with Developer D for its cost at the time it became trading stock – will the cost of that part of the property be an amount equal to the market value of that part of the property at the date that Owner 1, Owner 2 and Owner acquired the Property? | A8: Yes. | Q9: If the answer to question (5) is ‘yes’ and if Owner 1, Owner 2 and Owner 3 elect under section 70-30(1)(a) of the ITAA 1997 to have sold that part of the property that forms the subject matter of the development agreement with Developer D for its market value at the time it became trading stock – will there be a CGT event K4 under section 104-220 of the ITAA 1997 at that date? | A9: Yes. | Q10: If the answer to question (9) is ‘yes’: a. Will Owner 1, Owner 2 and Owner 3 be entitled to treat any capital gain realised at the time of the CGT event as a discount capital gain under Division 115 of the ITAA 1997? b. Will Owner 1, Owner 2 and Owner 3 be entitled to claim the small business 50% exemption in Subdivision 152-C of the ITAA 1997 in respect of the capital gain? c. Will Owner 1, Owner 2 and Owner 3 be entitled to claim the small business retirement concession in Subdivision 152-D of the ITAA 1997 in respect of the capital gain? | A10: a. Yes b. Yes. c. Yes. | Q11: If the answer to question (9) is ‘yes’ – will Owner 1, Owner 2 and Owner 3 be required to include the assessable amount of any capital gain arising from the CGT event in their assessable income at the time they commenced the business of developing land? | A11: Yes. | Q12: If the answer to question (11) is ‘yes’ – is there any scope for Owner 1, Owner 2 and Owner 3 to defer payment of tax in respect of that capital gain until they sell the developed lots? | A12: No. | Q13: If the answer to question (11) is ‘yes’ – will the date that Owner 1, Owner 2 and Owner 3 acquired the property be: a. the date of death of the previous owner b. the date that Owner 1 (as executor of the estate of the previous owner) transferred the property to Owner 1, Owner 2 and Owner 3 as tenants in common in equal shares c. some other date? | A14: Yes. | Q14: If Owner 1, Owner 2 and Owner 3 are carrying on an enterprise and required to be registered for GST, will the partnership be able to apply the margin scheme under Division 75 of the GST Act in relation to the sale of each of the subdivided lots? | A15: Yes. | Q15: If the partnership is able to apply the margin scheme will the partnership be able to rely on section 75-11(3) of the GST Act to determine the margin on each of the supplies? | A16: Yes. | Q16: If the partnership is able to rely on section 75-11(3) of the GST Act will the date on which Owner 1, Owner 2 and Owner 3 inherited the property be the date of death of the previous owner? | A17: Yes. | Q17: If the partnership is able to rely on section 75-11(3) of the GST Act, will the first day on which the partnership is required to be registered for GST be: (a) the date on which the partnership executed the Development Agreement (b) the date on which the conditions precedent in clause A of the Development Agreement are satisfied or the parties otherwise agree to proceed with the development of the balance of the property (c) some other date? | A18: The partnership is required to register for GST in a particular month when their projected GST turnover exceeds the GST registration threshold of $75,000.

Relevant facts and circumstances: 1. The previous owner acquired the property before 20 September 1985. 2. The property was used by the previous owner to operate a farm business in partnership with the previous owner’s spouse. 3. The previous owner, Couple B (as share farmers), and Company E as trustee for the Trust F also reached agreement about operating the farm business under a share farming arrangement. 4. Under the share farming arrangement: a. Trust F and Couple B agreed to share the proceeds of sale of the produce generated from the business b. Trust F and Couple B agreed to share expenses in specified proportions. 5. The previous owner’s children were involved in the activities of the Trust F. Owner 1 managed the administrative affairs of the Trust F, Owner 3 was involved in the management of the farm and Owner 2 was involved in physically working on the farm with Couple B. 6. The previous owner, Trust F and Couple B entered into a formal written agreement documenting the terms of the share farming arrangement in 20XX. 7. The previous owner died on X 20XX. 8. The previous owner’s spouse, Owner 1, Owner 2 and Owner 3 were named as the executors in the will. Owner 1 was appointed executor of the father’s estate. 9. The spouse of the previous owner died on X 20XX. 10. Under the terms of the previous owner’s will, there was a specific bequest of $X to the spouse. The previous owner’s will then provided that the residue of the estate was to be held by the trustees in the following proportions: (a) one third for Trust G of which Owner 1 would be the primary beneficiary (b) one third for Trust H of which Owner 2 would be the primary beneficiary (c) one third for Trust I of which Owner 3 would be the primary beneficiary. 11. The terms of the will further provided that the trustee of the estate had power ‘to determine [each of the Trusts] at any time and to distribute the whole of the income and capital then remaining to [the relevant primary beneficiary]’. 21. Owner 1 transferred the property to Owner 1, Owner 2 and Owner 3 as tenants in common in equal shares as beneficiaries of the previous owner’s estate. 22. Owner 1, as executor of the estate, continued to make the property available to the Trust F to continue the share farming arrangements, from the time of the previous owner’s death until the time the property was transferred to Owner 1, Owner 2 and Owner 3. 23. Since the previous owner’s death, Trust F made a loss in some years and derived a small amount of net income in another, which was all distributed to Owner 1. 24. After the property was transferred to Owner 1, Owner 2 and Owner 3 as tenants in common in equal shares, Owner 1, Owner 2 and Owner 3 agreed to conduct the farming business in partnership with each other and in accordance with the terms of a share farming agreement with Couple B. 48. The annual turnover for the share farming business is less than $2 million per annum. 49. Owner 1, Owner 2 and Owner 3 and Couple B are continuing to conduct the share farming business on the property. Owner 1, Owner 2 and Owner 3 are not registered for GST as their current GST turnover and projected GST turnover, being their share of the income from the share farming business, is less than the registration turnover threshold. Owner 1, Owner 2 and Owner 3 understand that Couple B are registered for GST as their current GST turnover and projected GST turnover, being their share of the income from the share farming business, is greater than the registration turnover threshold. 50. Owner 1, Owner 2 and Owner 3 are not individually registered for GST. 51. The property is in an area where there is major property development occurring. Since the previous owner’s death, Owner 1, Owner 2 and Owner 3 have been approached by a number of property developers wishing to develop the property. Generally, these approaches were made on the basis that Owner 1, Owner 2 and Owner 3 will receive payment some years in the future (any sale that involved the developer acquiring the property up-front was offered at a significantly lower price). 52. Historically, the property has qualified for exemption from land tax. However, under the relevant legislation the exemption from land tax can change as the urban boundary and the zoning of the property change. There has recently been uncertainty and disputes with the relevant State authority about the property’s liability for Land Tax. 53. Owner 1, Owner 2 and Owner 3 were concerned about the possible liability to land tax. They also anticipate that the local council will shortly finalise the Precinct Structure Plan affecting the property. When the Precinct Structure Plan is approved, they anticipate that the value of the property will increase significantly. Therefore, Owner 1, Owner 2 and Owner 3 were keen to obtain some funds to pay the anticipated increase in council rates and likely land tax liability. 54. In addition, the anticipated increase in council rates and the possible imposition of land tax meant that the existing farming business may cease to be a viable economic proposition. 55. Because of these concerns, Owner 1, Owner 2 and Owner 3 decided that they needed to take steps to dispose of the property. 56. If Owner 1, Owner 2 and Owner 3 sold any part of the property or took any steps to subdivide the property, the entire property would attract a liability to pay a State imposed levy. 57. One developer who had approached Owner 1, Owner 2 and Owner 3 about disposing of the property was Developer A. Developer A owned a number of adjoining properties. Developer A wanted to acquire part of the property comprising a percentage of the property owned by Owner 1, Owner 2 and Owner 3, as this would assist Developer A’s plans for development of the adjoining properties in Developer A’s ownership. 58. However, the part of the property that Developer A wanted to acquire is in the ‘X precinct’ area and the precinct structure plan for that area has not been finalised. Therefore, that part of the property currently cannot be developed. Developer A did not want to immediately acquire that part of the property until it could be developed. 59. Therefore, Owner 1, Owner 2 and Owner 3 entered into a Put and Call Option Agreement and a Loan Agreement with Developer A. Under these arrangements: (a) The Loan Agreement operated so that: (1) Developer A lent Owner 1, Owner 2 and Owner 3 an initial advance and then a number of separate advances over subsequent years (2) the loan was interest-free (3) the loan was repayable when either of the options under the Put and Call Option Agreement is exercised or when the Put and Call Option Agreement otherwise comes to an end. (b) The Put and Call Option Agreement provides: (1) Owner 1, Owner 2 and Owner 3 granted to Developer A an option (the call option) allowing Developer A to call for a transfer of part of the property. (2) Developer A agreed to pay Owner 1, Owner 2 and Owner 3 a nominal Option Fee for the grant of the call option. (3) In consideration of the grant of the call option, Developer A also granted to Owner 1, Owner 2 and Owner 3 an option (the put option) by which Owner 1, Owner 2 and Owner 3 can require Developer A to purchase part of the property. (4) The options are exercisable on registration of the relevant plan of subdivision in relation to the property that provides for a separate title to that part of the property that Developer A wishes to acquire. (5) Under both the call option and the put option, the price payable for that part of the Property is $X. (6) When the call option or put option is exercised, Developer A can apply any amount that Owner 1, Owner 2 and Owner 3 owe to Developer A under the terms of the Loan Agreement as part payment of the purchase price for that part of the property. 60. The Loan Agreement provided Owner 1, Owner 2 and Owner 3 with funds to pay the anticipated increase in council rates and land tax liability. The arrangements did not trigger a State imposed levy liability for Owner 1, Owner 2 and Owner 3. Owner 1, Owner 2 and Owner 3 retained rights to sell the remainder of the property. 61. Then Owner 1, Owner 2 and Owner 3 entered into an agreement with Company J, an unrelated party. Under this agreement, Company J agreed to provide services to assist Owner 1, Owner 2 and Owner 3 with various stages of the subdivision and sale of the property other than the part of the property the subject of the Put and Call Option Agreement. These services included (as per the Service Agreement with Company J): Initial sale ● Assisting the Owner with any initial partial sale of the Land including assistance with management of agreements, purchasing party and key stakeholder meetings and negotiations during and post transaction. ● Expression of Interest and tender process ● Selection of the tender in the EOI process for the development of the Land. ● Evaluating all proposals and provide key recommendations to the Owner to the most suitable developer to enter into an agreement with. ● Management of the EOI process and subsequent negotiation, agreement and implementation of a Development Agreement over the land. ● Ongoing Development Representation ● Ongoing support to the Owner to ensure the development conditions are being met. ● Running project control groups, evaluating developer business plans, coordinating land management and transfers, assessing financial plans and reporting and managing the correct distribution of revenues and development obligations. ● Liaising with key government agencies, consultancies and adjacent landholders. ● Providing advice in relation to any upfront cost with the sales agent. 62. Company J helped Owner 1, Owner 2 and Owner 3 with the process of evaluating various offers for dealing with the property. 63. Company J recommended to Owner 1, Owner 2 and Owner 3 that they enter into an agreement with Developer D. Owner 1, Owner 2 and Owner 3 reached in principle agreement with Developer D relating to the proposed development of the property. Under the terms of this agreement: (c) Owner 1, Owner 2 and Owner 3 will engage an entity controlled by Developer D to act as development manager in respect of the development of the property. (d) Owner 1, Owner 2 and Owner 3 will make the property available for Developer D entity to perform its role. (e) Developer D will undertake all work associated with development of the property, including: (1) setting the vision for the development (2) obtaining all approvals for the works (3) sales pricing (4) procuring and funding all works for the development (5) funding all costs of the development including rezoning, State imposed levies, marketing and sales (6) determining how to undertake the development. (f) From the sales of the developed property, Owner 1, Owner 2 and Owner 3 must pay any GST that may be payable in respect of the sale of any developed lots. Owner 1, Owner 2 and Owner 3 will be entitled to retain a percentage from the proceeds of sale of the first number of lots and a percentage of the balance of the proceeds and must pay the remainder to Developer D as a Development Fee. 64. On X 20XX, Owner 1, Owner 2 and Owner 3 signed a Development Agreement with Developer D. 65. A copy of the Development Agreement between Owner 1, Owner 2 and Owner 3 and Developer D is enclosed with this application. 66. Owner 1, Owner 2 and Owner 3 propose to continue operating the farm business on the property while that activity remains viable. Farming is likely to become unviable as development approaches the boundaries of the property. When farming on the property is no longer viable, Owner 1, Owner 2 and Owner 3 propose to use the property for some other primary production activity until the property is developed and sold.

Relevant legislative provisions: Income Tax: | Paragraph 357-110(1)(a) of the Taxation Administration Act 1953 Section 6-5 of the Income Tax Assessment Act 1997 | Section 70-10 of the Income Tax Assessment Act 1997 | Subsection 70-30(1) of the Income Tax Assessment Act 1997 | Paragraph 70-30(1)(a) of the Income Tax Assessment Act 1997 Subsection 70-30(4) of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Subsection 104-220(1) of the Income Tax Assessment Act 1997 | Subsection 104-220(2) of the Income Tax Assessment Act 1997 | Subdivision 115-A of the Income Tax Assessment Act 1997 Subsection 115-30(6) of the Income Tax Assessment Act 1997 | Subsection 128-15(2) of the Income Tax Assessment Act 1997 | Subdivision 152-C of the Income Tax Assessment Act 1997 | Subdivision 152-D of the Income Tax Assessment Act 1997 Section 152-10 of the Income Tax Assessment Act 1997 | Subsection 152-35(1) of the Income Tax Assessment Act 1997 | Subparagraph 152-40(1)(a)(i) of the Income Tax Assessment Act 1997 | Subparagraph 152-40(1)(a)(iii) of the Income Tax Assessment Act 1997 Section 152-78 of the Income Tax Assessment Act 1997 | Subsection 328-125(4) of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | GST: | 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 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 75-5 | A New Tax System (Goods and Services Tax) Act 1999 subsection 75-5(3) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(ca) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(d) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 75-11(e) | A New Tax System (Goods and Services Tax) Act 1999 section 188-10 | A New Tax System (Goods and Services Tax) Act 1999 section 188-25 | A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision: Summary: There was no assessable capital gain or capital loss realised because there was no CGT event D2 at the time of entering into the contract as the put and call options are not yet exercisable. | Detailed Reasoning - Detailed reasoning: Section 104-40 of the ITAA 1997 provides that CGT event D2 (granting an option) happens if you grant an option to an entity, or renew or extend an option you had granted and the time of the event is when you grant, renew or extend the option. In addition, ATO Interpretative Decision ATO ID 2003/1190 Capital Gains Tax: business succession agreement – put and call options – CGT event D2 further clarifies that CGT event D2 does not occur at the time the agreement is entered into, but when the condition precedent to the grant occurs. According to the Option Agreement, the call and put options can only be exercised during the Option Period which is the period commencing on the date by which the Condition Precedent is satisfied and ending on the earlier to occur of a number of days after satisfaction of the Condition Precedent and the date on which a party gives a notice. The Option Agreement also states that the Condition Precedent is deemed to be satisfied on the date that the Plan of Subdivision is registered. Given that the date when the option may be exercised is dependent on when the relevant Plan of Subdivision is registered, and at the date of this ruling it is not known when the Plan of Subdivision will be registered or lodged at the responsible authority; there is no CGT event D2 at the time of entering into the contract. CGT event D2 will arise as soon as the Plan of Subdivision is registered and put and call options become exercisable. | Summary: Monies received from loans are not considered assessable income under section 6-5 of the ITAA 1997, therefore Owner 1, Owner 2 and Owner 3 are not required to include the advances received in their assessable income. | Detailed Reasoning - Detailed reasoning: Under the terms of the Loan Agreement, the Owner 1, Owner 2 and Owner 3 have received an initial advance and a promise for further advances for subsequent years. The loan is not interest bearing and is repayable any time before the expiry date. The Loan Agreement also states that the loan repayment may also be applied towards the amount payable to Owner 1, Owner 2 and Owner 3 by Developer A if the options are exercised. Monies received from loans are not considered assessable income under section 6-5 of the ITAA 1997 therefore the Owner 1, Owner 2 and Owner 3 are not required to include the advances received in their assessable income. | Summary: a. Owner 1, Owner 2 and Owner 3 are entitled to treat any gain realised on a sale of that part of the property to Company C as a discount capital gain provided the capital gain will be calculated without any reference to indexation of the cost base at the time of sale. b. The Commissioner is declining to rule on this matter because the correctness of the private ruling depends on an assumption about a future event or some other matter and it is considered inappropriate to make a private ruling on the basis of that assumption. c. The Commissioner is declining to rule on this matter because the correctness of the private ruling depends on an assumption about a future event or some other matter and it is considered inappropriate to make a private ruling on the basis of that assumption. | Detailed Reasoning - Detailed reasoning: a. The sale is considered a mere realisation and will be on capital account. Therefore discount capital gains under Subdivision 115-A of the ITAA 1997 applies. CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of the property. There is a capital gain if the capital proceeds from the disposal are more than the cost base. A capital loss occurs if the capital proceeds are less than the reduced cost. You will be eligible for the discount capital gain under Subdivision 115-A where you meet all of the following criteria: ● you are an individual − the property is owned by Owner 1, Owner 2 and Owner 3 as tenants in common ● the CGT event happened after 21 September 1999 − this will be satisfied ● the capital gain must be calculated without any reference to indexation of the cost base − to be done once the sale happens ● the CGT asset was acquired more than 12 months before the CGT event. − under section 115-30(6) of the ITAA 1997, the Owners are treated as having acquired the Property when the previous owner died, therefore they would have owned the property for more than 12 months when the eventual sale happens. The discount percentage is 50%. b. In line with Practice Statement Law Administration PSLA 2008/3 Provision of advice and guidance by the ATO (PS LA 2008/3) and paragraph 357-110(1)(a) of the Taxation Administration Act 1953 (TAA 1953), the Commissioner can decline to rule if the correctness of a private ruling depends on an assumption about a future event or some other matter and it is considered inappropriate to make a private ruling on the basis of that assumption. The Commissioner can only make a determination if the Owner 1, Owner 2 and Owner 3 satisfy the basic conditions of small business CGT relief at the time when that part of the property is sold. Given that the sale is in the future, the date of sale is still unknown at the time of this ruling and the taxpayers’ circumstances might be different at that point in time. Accordingly, the Commissioner is declining to rule on this matter. c. In line with PSLA 2008/3 and paragraph 357-110(1)(a) of the TAA 1953, the Commissioner can decline to rule if the correctness of a private ruling depends on an assumption about a future event or some other matter and it is considered inappropriate to make a private ruling on the basis of that assumption. The Commissioner can only make a determination if the Owner 1, Owner 2 and Owner 3 satisfy the basic conditions of small business CGT relief at the time when that part of the property is sold. Given that the sale is in the future, the date of sale is still unknown at the time of this ruling and the taxpayers’ circumstances might be different at that point in time. Accordingly, the Commissioner is declining to rule on this matter. | Summary: The Owner 1, Owner 2 and Owner 3 are treated as carrying on a business of developing land as the planned subdivision is on a massive scale. The development involves: ● laying out and constructing roads ● building on the property ● the large-scale establishment of services, amenities and other improvements. These activities amount to a level of development and improvement of the land to such a marked degree that is it impossible to say that it is a mere realisation of an asset. Therefore proceeds are assessable under section 6-5 of the ITAA 1997 as income from carrying on a business of property development. | Detailed Reasoning - Detailed reasoning: The sale of the subdivided lots after Developer D has undertaken the subdivision work will be on revenue account therefore a discount capital gain does not apply. The sale will be on revenue account for the following reasons: ● Owner 1, Owner 2 and Owner 3 are carrying on a business under Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? ● The agreement between Owner 1, Owner 2 and Owner 3 and Developer D is considered a joint venture based on Goods and Services Tax Ruling GSTR 2004/2 Good and services tax: What is a joint venture for GST purposes? ● Developer D is considered an agent of the Owner 1, Owner 2 and Owner 3 based on the decision in Abeles & Anor v. FC of T 91 ATC 4756 ● Owner 1, Owner 2 and Owner 3 and Developer D are both carrying on a business. | Detailed Reasoning - Taxation treatment of property sales: Section 6-5 of the ITAA 1997 includes in your assessable income, where you are an Australian resident, all ordinary income that you derive during an income year. Ordinary income is defined as income according to ordinary concepts. Income according to ordinary concepts generally includes income that arises in the ordinary course of a taxpayer’s business. In certain circumstances proceeds not within the ordinary course of the taxpayer’s business may form part of their ordinary income. Therefore the following needs to be considered in order to determine whether the proceeds to be received from the sale of the Property are either: ● assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development − assessable ordinary income under section 6-5 of the ITAA 1997 as income from a profit-making undertaking or scheme. In circumstances where it is neither assessable income from carrying on a business of property development nor income from a profit-making undertaking or scheme, then the amount might be assessable as statutory income under the capital gains tax legislation as a result of the sale of a capital asset. | Detailed Reasoning - Mere Realisation vs disposal in the course of business or profit making undertaking: Generally, when you enter into an arrangement to develop and sell your land, the key question to be determined is whether the ultimate sale is a ‘mere realisation’, or whether it is a disposal either in the course of business or as part of a profit-making undertaking or scheme. Where the sale is a ‘mere realisation’ the sale is on capital account to which the capital gains tax (CGT) rules will generally apply. 1 These proceeds are not ordinary income. A sale that is more than a ‘mere realisation’ will be on revenue account and proceeds will generally be assessable as either income from the carrying on of a business or income from a profit making undertaking or scheme. The doctrine of ‘mere realisation’ was developed in the Full High Court case of Scottish Australian Mining Co Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188 ( Scottish Australian Mining ), and has been relied upon by numerous cases since. The Full High Court in Scottish Australian Mining found that based on the facts of that case, the subdivision of the land was considered no more than a mere realisation of a capital asset, and its subdivision was merely an enterprising way to realise an asset to its best advantage. For many years it was felt that the doctrine of ‘mere realisation’ was applied so broadly that it was thought that only in exceptional circumstances would an isolated transaction fall within the ordinary concepts of income. However this all changed in 1982 when the landmark Full High Court case of FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 ( Whitfords Beach ) was decided. In this case, Justice Mason said: 37. However, apart altogether from this factor, the facts previously mentioned show that there was involved more than mere realization of an asset. Deane J. was right in pointing to the circumstance that the asset was divided and improved in the course of a business of dividing and improving the asset. In this respect I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. 38. Like Wilson J., I have difficulty with the decision of Williams J. in Scottish Australian Mining Co. Ltd. v. Federal Commissioner of Taxation (1950) 81 CLR 188. The taxpayer there, after giving up its mining business in 1924, devoted itself to the subdivision of its land. This entailed the construction of roads, the building of a railway station, the granting of land to public institutions such as schools and churches and the setting aside of land for parks. I should have been inclined to the view that the taxpayer had ceased to carry out its mining business and that it had commenced to carry on the business of land development. … 40. From what I have said it will be seen that it is my opinion that what the respondent did amounted to more than realization of an asset and constituted the carrying on of the business of land development. Accordingly, the gross income is assessable under s. 25(1). 2 Therefore the decision in Whitfords Beach has severely narrowed the scope of the ‘mere realisation’ doctrine developed by Scottish Australian Mining, which so many of the preceding cases relied upon. The case highlights that while ‘mere realisation’ may still be possible where blocks are merely subdivided to several blocks with minimal activity, where the size and scale of the activity reaches such a level (such as constructing roads, the provision of parklands, services and other activities), this all amounts to a development and improvement of the land to such a marked degree that it is no longer possible to say it is a mere realisation of an asset. The decision in Whitfords Beach also highlights that the requirements of modern day residential subdivision, which involve much more development and improvement of land than was formerly the case, make it far more difficult for contemporary residential subdivisions to satisfy the ‘mere realisation’ doctrine. | Detailed Reasoning - Carrying on a business of property development: The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators that are applied to determine the matter on the facts. Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. This definition simply states what activities may be included in a business; it does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. Profits made on the sale of land can be considered ordinary income under section 6-5 of the ITAA 1997 if the activities become a separate business operation. Paragraph 11 of Taxation Ruling TR 92/3 Income Tax: Whether profits on isolated transactions are income states: The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer’s business. Paragraph 13 of TR 97/11 states that the following indicators are relevant as to whether or not a person 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 regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. 3 Paragraph 16 of TR 97/11 provides that no one indicator is decisive. The indicators must be considered in combination and as a whole, and whether a business is carried on depends on the large or general impression. | Detailed Reasoning - Part of the Property covered by the Option agreement: We agree that the eventual sale of the part of the property to Company C is a mere realisation of an asset and its disposal will fall under CGT event A1. | Detailed Reasoning - Part of the Land covered by the Development Agreement with Developer D: The factors in TR 97/11 will now be applied to the Owner’s circumstances. Significant commercial purpose or character. The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of the activity, the repetition and regularity of the activity and the profit indicators. Paragraph 29 of TR 97/11 provides that a way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative. The Owners have engaged Developer D for the development of the property. Developer D is part of a large property development group. Developer D’s activities cover the development of residential land, housing and apartments, commercial, retail and industrial properties, investment property ownership and management, and property management. Under the terms of the development agreement: ● The Owners will engage an entity controlled by Developer D to act as development manager. ● The Owners will make the property available for Developer D entity to perform its role. ● Developer D will undertake all work associated with the development of the property. ● The Developer must give the Owners a copy of each Application for a Planning Approval prior to lodging or submitting that Application with an Authority, for approval by the owner. ● The Developer must submit the first Business Plan to the Owners for approval. ● From the sales of the developed property, the Owners must pay any GST that may be payable in respect of the sale of any developed lots. The Owners will be entitled to retain an amount from the proceeds of sale of the first number of lots and then a percentage of the balance of the proceeds and must pay the remainder to Developer D as a development fee. The Commissioner considers the Owners’ activities to engage a reputable and multi-national development manager to develop the property, to be involved in the business plan approval process and to have the first allocation of the development proceeds, capped at a percentage of the total proceeds, to have a significant commercial purpose and character. Intention to engage in business In Inglis v. FC of T (1979) 80 ATC 4001; 10 ATR 493 , Brennan J stated: The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree. The Owners have stated that the entry into the Development Agreement with Developer D was prompted by the Owners’ concern that the farming activity on the property is no longer a viable economic use of the property given the rezoning, land costs and rates, and increased proximity of property development. However, paragraph 42 of TR 92/3 indicates a taxpayer’s intention may change to profit-making after the time of acquisition. This is supported by the decision of the Federal Court in Stevenson v Commissioner of Taxation (1991) FCR 282 ( Stevenson ) where doubt was raised in relation to the position that a landowner may only form a profit-making intention in respect of any asset at the time of acquisition. Although the landowner in Stevenson did not acquire land with an intention to resell it many years later, the landowner subdivided his land into 180 lots and the scale of the borrowings used to finance the subdivision and sale of the land resulted in the commitment of the use of the land to a profit-making undertaking scheme or business activity. The Commissioner considers that the Owners committed the property to subdivision from the moment of entering into the Development Agreement with Developer D. The date when the Owners executed the Development Agreement is when they committed themselves to the development. The date the Development Agreement was executed was also the date at which the Early Access Licence and Construction Licence was granted to Developer D. This allows Developer D from the date of the Development Agreement a non-exclusive license to access the property at any time for the purposes of the development, demonstrating the Owners’ change of intention from that point forward. In addition, the Development Agreement has a condition that a favourable private binding ruling is to be sought. This condition happened after the Owners’ intention changed. According to the Development Agreement, if this condition is not met the parties will negotiate to vary the allocation of the proceeds. If the parties fail to agree on the variation, the parties must discuss any other matters to resolve the tax treatment to ‘allow the development to proceed substantially as contemplated’ under the Development Agreement, therefore showing the Owners’ clear intention of engaging in property development. The Commissioner considers this to be a positive indicator of carrying on a business of land development. Is there an intention to make a profit or a genuine belief that a profit will be made? Strong evidence of an intention to make a profit occurs when the Owners have conducted research into the proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. The Owners engaged Company J to provide services to assist them with various stages of the subdivision and sale of the property. Company J helped them with the process of evaluating various offers for dealing with the property and provided the recommendation to enter into a development agreement with Developer D as the preferred option to realise the asset. Regarding the development profitability, the market value of the property is approximately $X according to the a previous valuation. The Owner’s expected share in the development proceeds, based on the distribution of the whole project proceeds under the Development Agreement, will be significantly higher. This indicates that the market value of the property, if sold to developers as a development site, is $X as opposed to the estimated share in the development proceeds in selling the lots after subdivision. Therefore, the Owners agreed to Company J’s recommendation to develop the property with Developer D to maximise profits. The Commissioner considers that the Owners have an intention to make profit from the property development, or a genuine belief that a profit will be made, well in excess of the property’s true value. The Owners have conducted research into their proposed activity, consulted experts and received advice on the running of the activity and the profitability of it before starting the business. These are all positive indicators of carrying on a business of property development. Is there repetition and regularity in the activity? There will be repetition and regularity of the activities given that there will be the marketing and sale of X lots in various stages, while the subdivision is a ‘one-off’ venture. Is the activity of the same kind and carried on in a similar way to that of the ordinary trade? An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. In considering this, it is noted that the Owners’ estimated total development fee to be paid to Developer D is many times the property value. The Owners stated they will not be undertaking an active role in the subdivision. Rather, they have engaged Developer D to assist with every aspect of the subdivision including planning, surveying, engineering, dealing with council, engaging and managing contractors and marketing and selling the subdivided lots. Although this may be the case, in engaging with Developer D and executing the Development Agreement, the Owners are carrying on a development activity with Developer D in a similar manner to that which is common in the industry, particularly with farmland subdivision and development. The Commissioner considers that these are positive indicators of carrying on a business of land development. Is the activity organised in a businesslike manner? A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. The Owners have engaged Developer D to undertake the planning approval stage, to manage and undertake the subdivision activities and to market and sell the lots. The Owners stated that they have a minimal involvement in the subdivision. However, as the Owners of the property, you will be signing documentation and all things as required for the continued development and sale of the property. The Owners will also act on advice provided by Company J, who the Owners have engaged to liaise with Developer D and advise on the development. It is also noted that a key condition of the Development Agreement is that the Owners grant Developer D a Power of Attorney. The Owners also enter into an Agency Agreement with Developer D to market and sell the subdivided lots. In this sense, the Owners have appointed Developer D as their agent. O’Loughlin J in Abeles and Anor v. Federal Commissioner of Taxation (1991) 91 ATC 4756 ( Abeles ) stated: In the application of these principles to the facts of this case, I have concluded that the taxpayers exceeded the bounds of the mere realisation of their land in an enterprising way. No doubt they were aided by Mr. Markham in making their decisions; perhaps, arguably, he induced them, first to agree to subdivide and then to participate in the larger plan that involved the six blocks and the four groups of owners. But, in these particular circumstances, they cannot hide behind Mr. Markham. He was their agent and his conduct was their conduct. Through Mr. Markham, the brothers went beyond a mere simple subdivision and sale of their 10 acres; they entered into an arrangement that was in the nature of a joint venture, sharing costs and expenses rateably; they even participated in variations to the boundaries of their land in order to present, and participate in, the best plan of subdivision. Their financing commitment was heavy; their established line of credit was $90,000 more than they paid for the land five years earlier; they allowed for the subdivision being a lengthy project and arranged with the finance company to accrue interest on the borrowed moneys. Although the size of a project is not a conclusive factor, it is one of numerous matters that are to be weighed in the balance. In this case, the readiness of the brothers to involve themselves with the other owners was more consistent with a business enterprise than a private realisation. The taxpayers, through their agent, Mr. Markham, chose to embark upon a business-like and efficient program of subdivision. Therefore in your case, it is considered that Developer D is your agent, so ultimately Developer D’s conduct is the Owners’ conduct, and, through Developer D, the Owners have chosen to embark upon a businesslike program of property development and subdivision. The Abeles case mentioned above that the parties entered into an arrangement that was in the nature of a joint venture. The term joint venture is not defined in the tax legislation; however, paragraph 11 of GSTR 2004/2 provides that a joint venture is an arrangement between two or more parties characterised by the following features: ● sharing of product or output, rather than sale proceeds or profits ● a contractual agreement between the participants ● joint control ● a specific economic project ● cost sharing. For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture. Further, paragraphs 22 and 23 of GSTR 2004/2 provide that the term ‘joint venture’ is limited to arrangements where the participants are to share product or output rather than profits or sale proceeds. Thus, a feature of joint ventures is the sharing of the costs of the venture by the participants, commonly by way of individual participants contributing money, property or expertise. In light of our view in GSTR 2004/2, it is considered that the Owners are engaged in a joint venture as: ● The Owners have entered into a contractual agreement where the common undertaking is to develop farmland into residential units then proportionately share in the value of the developed land when sold. ● The Owners and Developer D have entered into a contractual agreement for a specific economic project; that is, the development of the land. ● The Development Agreement establishes a Project Control Group (PCG) which will be comprised of representatives appointed by both the Owners and Developer D, demonstrating joint control and oversight of the development. ● The Development Agreement stipulates that the Owners will contribute the Property and Developer D will cover the development costs, which demonstrates the costs borne by each party to the agreement. In this sense, as the Owners have entered into a joint venture relationship with Developer D, the Owners are carrying on the development activity as part of this venture in a businesslike manner. The Commissioner considers that this is a positive indicator of carrying on a business of property development. What is the size and scale of the activity? The size or scale of the activity is not a determinative test, and a person may carry on a business in a small way. However, if the scale of the activities result in more than is required for your own domestic needs combined with an intention to profit from the activities, or a reasonable expectation of doing so, a business may be carried on despite the scale. In Whitfords Beach , Mason J made the following comments: I do not agree with the proposition which appears to be founded on remarks in some of the judgments that sale of land which has been subdivided is necessarily no more than the realization of an asset merely because it is an enterprising way of realizing the asset to the best advantage. That may be so in the case where an area of land is merely divided into several allotments. But it is not so in a case such as the present where the planned subdivision takes place on a massive scale, involving the laying out and construction of roads, the provision of parklands, services and other improvements. All this amounts to development and improvement of the land to such a marked degree that it is impossible to say that it is mere realization of an asset. We need to bear in mind that the subdivision of broad acres into marketable residential allotments involves much more in the way of planning, development and improvement than was formerly the case. The Owners stated that they have decided to subdivide the property as they believe it is the most enterprising way to realise it. The Owners will subdivide the property into X blocks in various stages. The total cost of the subdivision will be borne by Developer D, and the Owners’ will receive a share of significant development proceeds. The Commissioner contends that the scale of the activities and the improvements to the property go beyond merely realising the asset in the most enterprising way. Therefore the Commissioner contends there was a change of purpose in relation to the use of the property and the size and scale of the development is a positive indicator of carrying on a business of land development. Is the activity better described as a hobby, a form of recreation or a sporting activity? The Owners have not provided any argument to support a contention that the activity is better described as a hobby, a form of recreation or a sporting activity. The Commissioner considers that your activities are not a hobby or a form of recreation and this indicator is not applicable in the present case. Conclusion Having considered all of the above factors, Owner 1, Owner 2 and Owner 3 will be treated as carrying on a business of developing land for the purpose of deriving a profit from sale of the subdivided lots. The income will be assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development. | Detailed Reasoning - Quoted cases in the ruling applications: It is noted that the Owners relied on a number of court cases to support their contention that the sale of the subdivided lots is a mere realisation of a capital asset. For completeness, our view of the application of those cases will now be addressed. | Detailed Reasoning - Casimaty case: The Owners have noted the Full Federal Court case Casimaty v. FC of T (1997) 97 ATC 5135; 37 ATR 358 ( Casimaty ) where the Court ruled that sales from subdivision occurred as part of the mere realisation of a capital asset. In Casimaty , the owner subdivided the land into 8 separate subdivisions over a period of 18 years (1975 to 1993) and the lots were sold as low density farming rural lots as opposed to the Owners’ development plan for several years and subdivision into higher density residential lots. It is also noted that in Casimaty , the taxpayer’s developmental activities never extended to the proposal or creation of public facilities nor did the taxpayer undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities and enhance the presentation of individual allotments for sale as vacant blocks. Ryan J considered the following factors in reaching this conclusion: a. As the taxpayer acquired and continued to hold the property for use as a residence and the conduct of a business of primary production, there is nothing to suggest a change in the purpose or object with which the property was held (distinguishing Whitfords Beach ). b. The taxpayer did not acquire other land to be added to the original land. c. The taxpayer had previously carried on farming and fencing business in partnership with his wife and son respectively, but did not attempt to bring the property to account as a partnership asset and did not seek to claim as a business expense the interest on moneys borrowed for the subdivision. d. The subdivision was undertaken piecemeal in response to the exigencies of increasing debt and deteriorating health, and no coherent plan was conceived at the outset for the development, even in stages, to maximise the return from the aggregate of each lots. e. The taxpayer did not undertake any development or works beyond that necessary to secure the council approval for the subdivisions and enhance the presentation of the various lots and his developmental activities never extended to the proposal or creation of public facilities. f. The taxpayer did not set up his own sales organisation or advertised or conducted sales himself. The Commissioner considers there are major differences between your case and the case of Casimaty that do not allow you to rely on it to support the conclusion that the sale of the subdivided lots is a mere realisation of a capital asset. Casimaty can be distinguished from your situation for the following reasons: ● The development is carried on in a businesslike manner. The Owners have entered into a Development Agreement with Developer D to develop the entire property (excluding the portion referred to in the Option Agreement you entered into with Developer A) into residential units. ● In Casimaty there were 8 entirely separate subdivisions, each with a separate planning process, done in a piecemeal manner. No coherent plan for subdivision existed. In the present case, there is a coherent plan of subdivision for the entire development. ● In Casimaty a total of 81 large lots (sizes ranged up to 5 hectares) were sold over the 8 stages. In the present case, the development encompasses many residential lots in various stages and requires significantly more activities as opposed to the level of activity conducted in subdividing land in Casimaty. ● In Casimaty, only minimal works were conducted, such as providing fencing, minimal road works and mains water, which one would associate with large rural/farmland style lots. This contrasts to the present case, which in addition to road works, connection of mains water and fencing, also includes works such as stabilisation and installation of drainage, construction of buildings and improvements, installation of services and roads (including trunk infrastructure) and landscaping and installation of amenities, described as ‘Works’ in the Development Agreement, that would ordinarily be associated with higher density residential subdivision. The scale of the development activities in the present case is more akin to the development activities in Whitfords Beach than the minimal works undertaken in Casimaty . Due to the reasons highlighted above, we believe that Casimaty can be distinguished from the present case. | Detailed Reasoning - Statham case: The second case the Owners have noted was the Full Federal Court case Statham & Anor v. FC of T (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070 ( Statham ) where the Court ruled that the mere realisation of an asset at a profit did not necessarily render the profit taxable. In Statham, the deceased had acquired the subject land from his father in 1970. The land was acquired by the deceased so that he might raise his family in a rural environment and conduct some farming activity. In 1976 he sold off a 36 hectare portion of the property and some urban blocks. He also sold a further half share of 30 hectares, being most of the balance of the farming property to his sister’s company. Part of the property was retained by the deceased so that he might subdivide and sell it. In 1976 the deceased and his sister’s company entered into a partnership to raise beef cattle on the property. However, this was not achieved for a variety of reasons, including that the deceased’s health deteriorated. A decision was made during 1979 to subdivide and sell the whole or part of the land. There were four stages of subdivision involving 105 lots that were sold in total. The subdivision involved a relatively simple approval process. After the approval was obtained, the local council undertook all necessary work including road, earthworks, and sewerage work. The lots were sold through listing the properties with local agents. The Full Federal Court noted that the mere magnitude of the realisation does not convert the activity into a business undertaking or scheme, although it is a relevant matter to take into account. The Court considered that the proceeds of sale were not income according to ordinary concepts nor did a profit arise from the carrying out of a profit making undertaking or scheme. The Court determined that what occurred was: …the mere realisation, by the most advantageous means, of the asset which the owners had on their hands when they abandoned the intention of farming the subject property. The Court considered the following factors were significant: (a) The owners were at first content to sell the land as one parcel, but were unable to do so. (b) The owners did not borrow money, although a guarantee was provided to Kingaroy Shire Council by way of bank guarantee. (c) Only very limited clearing and earthworks were involved. (d) The owners relied upon the Kingaroy Shire Council itself to carry out road works, kerbing, electricity and sewerage works which were required to be done. (e) The owners did not erect buildings on the land; not even, for example, a site office. (f) They had no business organisation, no manager, no office, no secretary, and no letterhead. (g) The owner maintained working in his main occupation. (h) The owners did not advertise the land for sale. (i) Apart from the Kingaroy Shire Council's activities, the owners did not engage any contractors, although they did obtain some professional advice. (j) The owner kept his own books in relation to the sales of the land. (k) The land was sold simply by listing it with the local real estate agents. The Commissioner contrasts this to the present case: ● Statham involved the development of low density rural/residential-type lots (average size above 2000 m2) as opposed to the proposed higher density development of many lots in the present case. ● Statham had limited clearing and earthworks that you’d associate with such low density allotments. In contrast, the development in the present case will require extensive earthworks, to develop drainage, construct buildings and improvements, installation of services and road, landscaping and installation of amenities that would ordinarily be associated with higher density developments. ● In Statham’s case the taxpayer left the development work to the Council to undertake, while in the present case, the Owners have engaged Developer D, a large developer to carry out the development that includes setting the vision for the development, obtaining all approvals for the works, sales pricing, procuring and funding all works for the development, funding all of the costs (including rezoning, marketing and sales) and preparation of the business plan. Notably, leaving the construction activity to the Council is vastly different to entering into a joint venture and agency relationship with Developer D, as one could not say the Council is conducting that activity as an agent of the landholder. The Council will continue to operate in the interest of its constituents and is not bound by a development agreement to act as agent of the landholder, as is the case where a landowner hires the services of a developer, to undertake the development on their behalf. Having considered the Statham and Casimaty cases, it is for the above reasons that the Commissioner considers that they can be distinguished from the present case and have no application to the Owners’ circumstances. | Summary: The part of the property that forms the subject matter of the development agreement with Developer D is treated as trading stock of the Owners because they are considered carrying on a business of property development. | Detailed Reasoning - Detailed reasoning: The meaning of trading stock is given in section 70-10 of the ITAA 1997, and includes anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. Thus a thing can only be trading stock where it is capable of sale or exchange in the ordinary course of a business. The decision of the High Court in Federal Commission of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 clearly established the principle that land can come within the definition of 'trading stock'. In that case, the High Court determined that land acquired for the purpose of development, subdivision and sale by a taxpayer carrying on a business of property development is trading stock. The Commissioner’s view is set out in Taxation Determination TD 92/124 Income tax: property development: in what circumstances is land treated as 'trading stock'? . Paragraph 1 of TD 92/124 states that the land is treated as trading stock for income tax purposes: ● it is held for the purpose of resale; and ● a business activity which involves dealing in land has commenced. Paragraphs 2 and 3 of TD 92/124 further explain: Both the required purpose and the business activity must be present before land is treated as trading stock. The business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operations designed to lead to the sale of the land. It is not necessary that the acquisition of land be repetitive. A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose would lead to the land being treated as trading stock. Under subsection 70-30(1) of the ITAA 1997 if you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if: ● just before it became trading stock, you had sold the item to someone else at arm’s length and you elected to value it at either: (a) its cost (b) its market value just before it became trading stock. ● you had immediately bought it back for the same amount. Given that the Owners are considered carrying on a business of property development as discussed above, and are holding the property for the purposes of resale, the property that forms the subject matter of the Development Agreement with Developer D is trading stock of the Owners. | Summary: The Owners have commenced the business and to have commenced holding that part of the property that forms part of the subject matter of the Development Agreement with Developer D as trading stock on the date they executed that Development Agreement. | Detailed Reasoning - Detailed reasoning: The date that the Owners and Developer D executed that Development Agreement is the point in time when their intentions changed and they have committed themselves, and the relevant part of the Property, to be part of the property development business. TD 92/124 states that land is treated as trading stock for income tax purposes if: ● it is held for the purpose of resale; and ● a business activity which involves dealing in land has commenced. The date when the Owners and Developer D executed the Development Agreement is when they committed themselves to the development and when they embarked on a definite operation designed to lead to the sale of the property. The start of the continuous cycle of operations and business activities is evidenced by the Early Access Licence and Construction Licence granted to Developer D in the Development Agreement. This allows Developer D from the date of the Development Agreement a non-exclusive license to access the Property at any time for the purposes of the following: ● conducting any survey, inspection, test, study or other investigation of the land ● erecting and maintaining any fencing to secure the land as detailed with the business plan ● erecting any sign of public notice that is require to obtain a planning approval for the development ● erecting marketing signage on those areas approved by the Owners. ● The Development Agreement also established the PCG that meets quarterly from the date of the Development Agreement to oversee its progress and evinces a joint intention to begin the development with Developer D. The Owners have also executed a Power of Attorney on the date of the Development Agreement, appointing various subsidiaries of Developer D, jointly and severally as the true and lawful attorney of the Owners and in the name and on behalf of the Owners to do all those things described in the Power of Attorney including signing, sealing, delivering or otherwise executing documents related to the development of the property. These activities and commitments demonstrate that the Owners have entered into a definite and continuous cycle of operations designed to lead to the sale of the land from the date of execution of the Development Agreement. | Summary: This question is not applicable because answers to both questions 5 and 6 are yes. | Summary: The cost of that part of the property that forms the subject matter of the Development Agreement with Developer D is its market value when the Owners last acquired it. This is the market value of the property at the time of the previous owner’s death. | Detailed Reasoning - Detailed reasoning: If the Owners elect under paragraph 70-30(1)(a) of the ITAA 1997 to have sold that part of the Property that forms the subject matter of the Development Agreement with Developer D for its cost at the time it became trading stock, CGT event K4 does not apply and any capital gain or capital loss is disregarded. It must now be determined what the cost of the property is. Law Administration Practice Statement PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust provides that the ATO’s practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will. So, the cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased’s legal personal representative. PS LA 2003/12 provides that if the deceased acquired the asset before 20 September 1985, the acquisition cost will be equal to the market value at the date of the deceased’s death. This is relevant in the Owners’ case as the property was passed to them via a testamentary trust, established as part of the previous owner’s estate. The property then passed to the Owners as tenants-in-common. The ATO does not recognise a taxing point at this time. So, the cost of that part of the property will be its market value on the date of the previous owner’s death. | Summary: There is a CGT event K4 when the Owners elect to have sold that part of the property that forms the subject matter of the Development Agreement with Developer D for its market value at the time it became trading stock. | Detailed Reasoning - Detailed reasoning: Subsection 104-220(1) of the ITAA 1997 provides that CGT event K4 occurs if you start holding as trading stock a CGT asset you already own, but did not hold as trading stock, and you elect to be treated as having sold the asset for its market value. Subsection 104-220(2) of the ITAA 1997 provides that the time of the event is when you start holding the asset as trading stock. Therefore CGT event K4 occurs when the Owners started holding that part of the Property as trading stock. As discussed above, the Owners began a definite and continuous cycle of operations designed to lead to the sale of the land from the date of execution of the Development Agreement. The Owners’ intention changed, from one of holding the land for the purposes of farming, to holding the land for the purposes of resale. So, the time of CGT event K4 is the date when the Development Agreement with Developer D was executed. The Owners make a capital gain from CGT event K4 if the market value of the asset just before it became trading stock is more than its cost base. If the market value of the asset is less than its reduced cost base, a capital loss is made. | Summary: a. The Owners are entitled to treat any capital gain from CGT event K4 as a discount capital gain provided the capital gain will be calculated without any reference to indexation of the cost base. b. The Owners are entitled to claim the small business 50% exemption in Subdivision 152-C of the ITAA 1997. c. The Owners are entitled to claim the small business retirement concession in Subdivision 152-D of the ITAA 1997 provided they comply with the CGT retirement exemption limit reduced by the CGT exempt amounts of CGT assets specified in choices previously made. | Detailed Reasoning - Detailed reasoning: You will be eligible for the discount capital gain under Subdivision 115-A of the ITAA 1997 where: ● you are an individual − The property to which CGT event K4 happened is owned by Owner 1, Owner 2 and Owner 3 as tenants in common. ● the CGT event happened after 21 September 1999 − CGT event K4 happened when the Development Agreement with Developer D was signed, meeting this requirement. ● the capital gain must be calculated without any reference to indexation of the cost base − The calculation is yet to be done. ● the CGT asset was acquired more than 12 months the CGT event. − Under Item 6 in the table in subsection 115-30(1) of the ITAA 1997, the Owners are treated as having acquired the property when the previous owner died, therefore they would have owned the property for more than 12 months as the date when CGT event K4 happened. The discount percentage is 50%. | Detailed Reasoning - Small business CGT concessions: The basic eligibility conditions for the small business CGT concessions are contained in Subdivision 152-A of the ITAA 1997. The Owners’ suitability against the basic conditions will now be considered. The Owners’ have met the basic conditions for small business CGT relief having considered the following factors: ● CGT event K4 happened when the Development Agreement was entered into. ● The CGT event would result in a capital gain. ● The property is used in a business operated in accordance with the terms of the share farming agreement between the Owners and Couple B. ● The Owners participate in the farming business conducted in accordance with the share farming arrangement through a partnership in which they each have an interest. ● The partnership is a small business entity. ● The Property is an active asset of the Owners. The partnership is a small business entity as the date when the Owners start holding the property as trading stock because: ● The partnership has a turnover of less than $2 million per annum. There are no affiliates nor connected entities as an assumption for this ruling. ● The partnership anticipates that it will continue to operate the business until the level of development permits and will have a turnover of less than $2 million in each year until the development reaches a stage where the business is not viable. The property satisfies the active asset test under subsection 152-35(1) of the ITAA 1997 if the Owners have owned the asset for 15 years or less and the asset was an active asset of theirs for a total of at least half of the period between when they acquired the asset to when CGT event K4 happened. Subsection 128-15(2) of the ITAA 1997 treats the Owners as having acquired the asset when the previous owner died. The property is an active asset of a person provided it is used in a business carried on, whether alone or in partnership, by the person or an entity connected with the person. For a total of XX days, the Trust F used the property in a business the Trust F conducted in accordance with the terms of the share farming agreement with Couple B. Also, Owner 1 transferred the property to Owner 1, Owner 2 and Owner 3 as tenants in common in equal shares. Owner 1, Owner 2 and Owner 3 each should be treated as controlling the Trust F during that period. In general, a person is treated as controlling the Trust F if the person received more than 40% of the income or capital of the trust in a year (subsection 328-125(4) of the ITAA 1997). Section 152-78 of the ITAA 1997 provides that for years in which a discretionary trust does not make any distributions of income or capital, the trustee may nominate up to four individuals as controllers of the trust for that year. The Trust F made a loss for some years and did not make any distributions in those years. Company E as trustee for Trust F intends to nominate Owner 1, Owner 2 and Owner 3 as controllers of the Trust F for each of those years. Therefore, each of Owner 1, Owner 2 and Owner 3 should be treated as controlling the Trust F for the relevant period. Owner 1 received all of the income of the Trust F for a specific year. Therefore, Owner 1 should be treated as controlling the Trust F for that year, which is a total of 365 days. Owner 1, Owner 2 and Owner 3 each should be treated as controlling the Trust F for more than 50% of the relevant period. On that basis, the Trust F should be treated as a connected entity of each of Owner 1, Owner 2 and Owner 3 for more than half of that period. The property was used in a business carried on by Trust F, in accordance with the terms of the share farming agreement with Couple B, during that period. Therefore, the property should be treated as an active asset of each of Owner 1, Owner 2 and Owner 3 for more than 50% of that period under subparagraph 152-40(1)(a)(iii) of the ITAA 1997. Owner 1, Owner 2 and Owner 3 have used the property in a business they each have been carrying on in partnership with each other and in accordance with the terms of the share farming agreement with Couple B. Therefore, the property has been an active asset under subparagraph 152-40(1)(a)(i) of the ITAA 1997. Therefore, the property should be treated as an active asset of each of Owner 1, Owner 2 and Owner 3 for more than 50% of the period they have owned the property. On this basis the property satisfies the active asset test in section 152-35 of the ITAA 1997. Therefore, the property satisfies the basic conditions for the small business relief. On the basis that the Owners satisfy the basic conditions for the small business CGT relief and the retirement concessions under Subdivision 152-D of the ITAA 1997, they will be eligible for the retirement concession. If the Owners are 55 years old or older when they make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying super fund or retirement savings account, even though they may have been under 55 years old when they received the capital proceeds. The contribution is made at the later of when you made the choice and when you received the proceeds. An individuals’ CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual. | Summary: The Owners are required to include the assessable amount of any capital gain from CGT event K4 in their assessable income by the time they lodge their income tax returns for the relevant income year because they started to hold the property as trading stock on the date of the Development Agreement. | Detailed Reasoning - Detailed reasoning: Subsection 70-30(2) of the ITAA 1997 provides that an election to treat trading stock as having been sold at its market value must be made by the time the taxpayer lodges their income tax return for the income year in which they start holding the item as trading stock. Subsection 104-220(2) provides that the time of CGT event K4 is the time at which you start holding the item as trading stock. Therefore the Owners are required to include the assessable amount of any capital gain from CGT event K4 in their assessable income by the time they lodge their income tax returns for the relevant income year because they started to hold the property as trading stock on the date of the Development Agreement. | Summary: There is no specific legislative scope that allows for the deferral of payment. | Detailed Reasoning - Detailed reasoning: There is no specific legislative scope that allows for the deferral of payment. It is important to lodge on time, even if the Owners may be unable to pay the required amount of tax by the due date. If the Owners experience difficulty paying their tax obligations on time, phone us on 13 11 42 . If contact is made with us early, we can help address the problem before it gets harder to manage. In some circumstances, we may be able to offer assistance by arranging: ● more time to pay tax debts without interest charge ● tailored payment plans ● remission of general interest charges. In addressing the Owners’ submission, it is noted that Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? does not apply as TD 94/89 is about land disposal under CGT event A1 and not CGT event K4. | Summary: The Owners acquired the property on the date of the previous owner’s death. | Detailed Reasoning - Detailed reasoning: Under Item 6 in the table in subsection 115-30(1) of the ITAA 1997 a CGT asset is considered to have been acquired by someone at the time of a person’s death if the asset was both: ● passed to the acquirer as the beneficiary of a deceased individual’s estate ● a pre-CGT asset of the deceased immediately before his or her death. Under subsection 128-15(2) of ITAA 1997, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died. The previous owner acquired the property pre-CGT and the property has passed to Owner 1, Owner 2 and Owner 3 as the beneficiary of the previous owner’s estate therefore they are treated as having acquired the property at the time of the previous owner’s death. | Summary: The Owners are required to register for GST as a partnership in relation to the property development undertaken at the property. | Detailed Reasoning - Detailed reasoning: The sale of part of the property by the Owners under the Put and Call Option will be considered as disposal of capital assets by the partnership. However, if the partnership is required to be registered for GST or registered for GST at the time of exercising the Put and Call Option, then the disposal of part of this property will be subject to GST. Disposal of capital assets used in the share farming enterprise will be taxable supply provided the partnership is registered or required to be registered for GST. The property development activities undertaken by the Owners in relation to the remaining part of the property are considered as an enterprise of property development by the partnership. The GST turnover from the sale of subdivided lots of land by the partnership will require the partnership to register for GST. Please refer to the detailed reasoning section under question 17 for detailed rationale. | Summary: Yes. Please refer to the detailed reasoning section under question 17 for detailed rationale. | Detailed Reasoning - Detailed reasoning: Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make. Section 9-5 of the 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; 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. The Owners intend to subdivide their property into a number of lots of residential land for sale. For the supply of the subdivided land to be taxable, all of the requirements in section 9-5 of the GST Act must be satisfied. The Owners will be selling the subdivided vacant land for consideration and the supply is connected with the indirect tax zone. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Furthermore, the supply of the subdivided lots will neither be GST-free nor input taxed. Accordingly, it should be determined whether: a) the sale of the subdivided lots are in the course or furtherance of an enterprise that the Owners will be carrying on b) if so, whether the Owners are required to be registered for GST. | Detailed Reasoning - 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 of the GST Act relevantly defines enterprise to include an activity, or series of activities, done: ● in the form of a business ● in the form of an adventure or concern in the nature of trade ● on a regular or continuous basis, in the form of a lease, license or other grant of interest in property. 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 at paragraph 154 provides: 154. For an entity that has to carry on an enterprise to be entitled to an ABN, it is necessary to identify one activity or a series of activities that amount to an enterprise. If an entity carries on a number of activities, only one of those activities need constitute an enterprise in order for the entity to be entitled to an ABN. However, not every activity or series of activities that an entity carries on would by themselves amount to an enterprise or be activities carried on by them in an enterprise. Some activities will be specifically excluded while others may not fall within the definition of enterprise. The Owners are individually not registered for GST as their turnover from the share farming activities is less than $75, 000. However, after the property was transferred to the Owners as tenants in common they continue to engage in the share farming business in partnership with each other and in terms of the agreement with Couple B. This is the enterprise the Owners have been carrying on in partnership for GST purposes. The partnership is not registered for GST as their turnover from the share farming activity has not exceeded the GST turnover threshold of $75,000. The Owners have entered into two separate transactions to dispose of their property. The sale of part of the Property consisting of X hectares (approximately) to Company C under the Put and Call Option including the Loan Agreement. The second transaction will be the agreements entered into with Company J and Developer D to subdivide the remaining part of the property for sale. It is necessary to consider whether the agreements entered into by the Owners to dispose of the remaining part of the property would constitute carrying on of an enterprise by the Owners. It is relevant to consider whether these agreements are made in the form of an adventure or concern in the nature of trade, carried out in a business-like and commercial manner. Paragraph 234 of MT 2006/1 provides that ordinarily the term business would encompass trade engaged in, on a regular or continuous basis. An isolated or one off transaction may fall into the category of an adventure or concern in the nature of trade’ where the activities being undertaken do not amount to a business but are commercial in nature and have the characteristics of a business deal. Paragraph 237 of MT 2006/1 provides that the term ‘profit making undertaking or scheme’ like the term ‘an adventure or concern in the nature of trade’ concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a ‘business deal’. | Detailed Reasoning - Indicators of carrying on a business: Paragraph 178 of MT 2006/1 outlines the main indicators of carrying on a business and they are: ● a significant commercial activity ● a purpose and intention of the taxpayer to engage in commercial activity ● an intention to make a profit from the activity ● the activity is or will be profitable ● the recurrent or regular nature of the activity ● the activity is carried on in a similar manner to that of other businesses in the same or similar trade ● activity is systematic, organised and carried on in a businesslike manner and records are kept ● the activities are of a reasonable size and scale ● a business plan exists ● commercial sales of product ● the entity has relevant knowledge or skill. ● In addition it is relevant to consider: ● the length of time the property had been held and to what purpose it had been put to in that time; ● the personal involvement in the development activity. 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. Application of the indicators to the activities undertaken by the Owners ● The Owners have been engaged in commercial activities in partnership with each other in relation to the share farming business. They will be undertaking additional commercial activities in relation to the proposed property development by entering into a number of agreements to develop the remaining part of the property for sale. These are significant commercial activities engaged by the Owners. ● The value of the property has risen in value due to the changes made to the City urban boundary and the zoning of the property by the State Government. Although the Owners entered into the loan agreement to pay off the land tax due to re-zoning of the property, the decision taken to develop the remaining part of the property for sale indicates that there is a clear intention of making profit by engaging in business deals. ● The scale of activities carried out by the Owners in relation to the property development indicates stronger evidence that the Owners will be making profit. ● The Owners will be carrying on the property development in a similar manner to that of other businesses in the same or similar trade. The Owners have taken systematic steps in planning the subdivision by engaging Company J as project manager or service provider, Developer D to develop the property on behalf of the Owners and a Project Control Group. These are the types of activities routinely undertaken by owners or their service providers engaged in property development. ● Although the size or scale of the activity is not the only determinative factor the other facts and commitments combined with the intention of profit making need consideration. In this case, it is our view that the subdivision of land into a number of lots for sale by the Owners is in a businessman-like manner. Further factors we have taken into consideration include: ● The Owners have made a decision to dispose part of the property to Company C in its entirety. The Owners will have no involvement in the development of this part of the property based on the terms and condition of the Put and Call Option agreement. However, the Owners will be engaged in the development of the remaining property as they have entered in to agreements with a property developer and a service provider to manage the property development. This indicates that the intention of the Owners is not just to dispose of the property in its entirety but rather to engage in a similar manner an entity would carry on an enterprise of property development. ● The financial risk in relation to the project rests with the Owners as they will be borrowing heavily to fund other costs in relation to the property. Although the property developer will be funding the development costs, Owners are required to pay the property developer the development fees when it is due. ● We acknowledge that the Owners may not have relevant knowledge or skill in property development activities. Because they do not have the necessary expertise in carrying on such a large scale property development, they have engaged relevant professionals to ensure the whole project is undertaken in a businesslike manner. Considering the activities undertaken by the Owners in relation to the subdivision of the remaining part of the property for sale, it is our view that the Owners are carrying on an enterprise. Commencement of an enterprise The term ‘carrying on’ an enterprise includes doing anything in the course of the commencement or termination of the enterprise. Paragraphs 122 to 126 of MT 2006/1 explain the meaning of ‘commencement of an enterprise’. Activities done by an entity that are part of a process of beginning or bringing into existence an enterprise are activities in carrying on an enterprise. In the Commissioner’s view the term, ‘doing anything in the course of the commencement….of an enterprise’ describes the kind of activities undertaken. The ultimate outcome of the activities and whether or not an ongoing enterprise eventuates is not a determinative factor. If the activities have the character of those ordinarily undertaken to commence an enterprise they will be accepted as falling within the statutory definition. This leads to a broad range of preliminary activities being accepted as an enterprise. These types of activities may still be considered to be commencement activities even where the eventual enterprise is conducted differently from the one originally contemplated. In this case the issue of when the enterprise of property development will commence is dependent on the activities undertaken by the Owners in relation to the property development of the remaining part of the property. Disposal of part of the property The part of the property (X hectares) will be sold under the Put and Call Option when the option is exercised or comes to an end. The Owners contend that this is a separate transaction and should not be considered as an enterprise carried on by the Owners. Based on the facts provided in relation to the sale of this part of the property and the circumstances in which the Owners decided to sell this part of the property, it is our view that the sale of this part of the property will not be sold in carrying on an enterprise of property development. The property has been used in the share farming enterprise carried out by the Owners jointly with Couple B. Capital assets are often referred to as structural assets used by an entity to produce an income. Capital assets are to be distinguished from revenue assets. If the means by which you derive income is through the disposal of assets, those assets will be revenue or trading assets rather than capital assets. The sale of the part of the property under Put and Call Option is considered as capital asset as it is used in the share farming enterprise to produce income. Although this part of the property was used in the income producing activities, the sale will be taxable provided the sale satisfies all of the requirements under section 9-5 of the GST Act. This means when this part of the property is sold and the Owners are required to be registered for GST as a partnership at the time of exercising the Option the sale will be subject to GST. Partnership The Owners have been carrying on an enterprise of share farming in partnership with each other. The partnership also entered into the Put and Call Option to dispose part of the property used in the share farming enterprise. The same partnership will be carrying on an enterprise of property development as explained above, in relation to the subdivision and sale of the remaining part of the property. A partnership is defined in section 195-1 of the GST Act as: (a) 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; or (b) a limited partnership. The first limb of paragraph (a) of the definition refers to ‘an association of persons………carrying on business as partners’. This reflects the common law definition of partnership, which is the relationship between parties carrying on a business in common with a view to profit. The second limb of paragraph (a) of the definition refers to the persons being ‘in receipt of ordinary income or statutory income jointly’. This second limb is often referred to as a tax law partnership, as it expands the common law definition of partnership to persons who are not necessarily carrying on a business in association. From the information provided, we consider that the Owners will be disposing part of the property under the Put and Call Option as partners. They will be carrying on the enterprise of property development as partners. Paragraph 14 of GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property acknowledges that the treatment of a tax law partnership as an entity for GST purposes and the views on how the GST laws apply to transactions involving a tax law partnership differ from the treatment of those transactions under general law or property law. Registration Section 23-5 of the GST Act provides that you are required to be registered for GST if: a) you are carrying on an enterprise, and b) your GST turnover meets the registration turnover threshold. The GST registration turnover threshold is currently $75,000. Section 188-10 of the GST Act provides that you have a GST turnover that meets a particular turnover threshold if: a) your current GST turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold, or b) your projected GST turnover is at or above the turnover threshold. You reach the GST registration turnover threshold if your: ● ‘current GST turnover’ (turnover for the current month and the previous 11 months) totals $75,000 or more ● ‘projected GST turnover’ (total turnover for the current month and the next 11 months) is likely to be $75,000 or more. In working out your projected GST turnover, paragraph 188-25(a) of the GST Act requires that you disregard any supply made or likely to be made, by you by way of transfer of ownership of a capital assets of yours. 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. Goods and Services Tax Ruling GSTR 2001/7 meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses the meaning of a ‘capital asset’ at paragraphs 31 to 36. We have considered section 188-25 of the GST Act in relation to the proposed subdivision and sale of the remaining part of the property and it is our view that this section does not apply as the sale of the subdivided lots has the character of a revenue asset, rather than realisation of a capital asset. As the sale proceeds of these lots will exceed the GST registration turnover threshold, the Owners (the partnership) will be required to register for GST. As explained above, the calculation of GST turnover threshold should be considered while the enterprise is carried on. This means after the commencement of the enterprise of property development by the Owners if the GST turnover is exceeded the threshold of $75,000 in any particular month, the Owners are required to be registered for GST in that month. | Detailed Reasoning - Margin scheme: Paragraph 75-5(3)(b) of the GST Act provides that a supply is ineligible for the margin scheme if you have acquired a thing by inheriting it from a deceased person and the deceased person had acquired all of it through a supply that was ineligible for the margin scheme. In this case, the previous owner acquired the property before 1 July 2000 and therefore, the margin scheme may apply for the supply of subdivided lots by the Owners. Application of subsection 75-11(3) of the GST Act Goods and Services Tax Ruling GSTR 2006/7 Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000 explains how the margin scheme applies to a supply of a freehold interest, stratum unit or long-term lease on or after 1 December 2005 that was acquired or held before 1 July 2000. Paragraph 50 of GSTR 2006/7 explains that if you supply real property that you inherit, and the deceased acquired it before 1 July 2000, then paragraph 75-11(3)(ca) of the GST Act allows you to choose to use the consideration for deceased’s acquisition of the real property when calculating the margin for the supply. However, you may use the consideration for deceased’s acquisition only if you know the amount of consideration paid by the deceased and you choose to use this amount. If you do not know the consideration for the deceased’s acquisition then the margin is calculated under paragraphs 75-11(3)(d) or 75-11(3)(e). Paragraph 53 of GSTR 2006/7 states that paragraphs 75-11(3)(d) applies if, immediately before the time that you inherited the real property, the deceased was neither registered or required to be registered. If under paragraphs 75-11(3)(d) applies, the margin for the supply is the amount by which the consideration for the supply exceeds an approved valuation of the real property as at the latest of: ● 1 July 2000 ● The day on which you inherited the real property ● The first day on which you were registered or required to be registered for GST. If the deceased was registered or required to be registered immediately before the time that you inherited the real property then an approved valuation as at later of 1 July 2000 or the first day on which the deceased registered or required to be registered should be used to calculate the margin. Paragraph 100 of Goods and Services Tax Ruling GSTR 2006/8 explains that the day on which you inherited the real property will ordinarily be the date of death of the deceased. Therefore, the Owners will be considered as inheriting the property on the date of death of the previous owner. Conclusion: ● The Owners will be carrying on an enterprise of property development as a partnership in relation to the subdivision of the remaining part of the property for sale. ● The sale of part of the property under the Put and Call Option will be considered as disposal of capital asset. The sale of this part of the property will be subject to GST if the partnership is registered or required to be registered for GST at the time of the Option is exercised. ● The partnership will be required to be registered for GST in a particular month when the projected GST turnover exceeds the registration threshold. ● The sale of subdivided lots will be eligible for the application of the margin scheme. ● The calculation of the margin will be based on paragraphs 75-11(3)(d) or 75-11(3)(e) of the GST Act. ● It is considered that the Owners have inherited the property on the date of death of the previous owner. | Detailed Reasoning - Detailed reasoning: Yes. Please refer to the detailed reasoning section under question 17 for detailed rationale. | Detailed Reasoning - Detailed reasoning: The partnership is required to register for GST in a particular month when their projected GST turnover exceeds the GST registration threshold of $75,000. Please refer to the detailed reasoning section under question 17 for detailed rationale.

Question 14 and 15: Will each of Owner 1, Owner 2 and Owner 3 be required to register for goods and services tax (GST) under the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) in relation to the property development undertaken at the property?