Private ruling: Capital gains tax - subdivision - revenue v capital
Date of advice: 16 November 2017
Published: April 2018
Ruling period: Income year ending 30 June 201D
Date scheme commenced: 1 July 201C.

Ruling: Q1: Will the profit from the sale of the subdivided lots be treated as ordinary income under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development? | A1: No. | Q2: Will the profit from the sale of the subdivided lots be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character? | A2: Yes. | Q3: Will the profit from the sale of the subdivided lots be treated as statutory income under the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997 as a result of a realisation of a capital asset? | A3: Yes. However, section 118-20 of the ITAA 1997 will apply to reduce the capital gain to the extent that the profit from the sale of the subdivided lots is otherwise included as assessable income under section 6-5 of the ITAA 1997. | Q4: Will the supply of subdivided lots from the Land be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Detailed Reasoning - Taxation treatment of property sales: Broadly, there are three ways profits from a land development, subdivision and sale can be treated for taxation purposes: ● as ordinary income on revenue account, as a result of carrying on a business of property development, involving the sale of land and buildings as trading stock; ● as ordinary income on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, where the land was acquired or subsequently held for the purpose profit making; or ● as statutory income under the capital gains tax legislation on the basis that a realisation of a capital asset has occurred. | Detailed Reasoning - The change of intention: While holding an asset for a considerable period of time may seem to indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition and throughout the ownership period is a crucial aspect. Numerous cases have considered the assessability of profits or proceeds from the sale of land including the following cases: Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer’s activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land. Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 ( Statham ’s case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the 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. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty 's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income. Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 (Stevenson case) where taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970’s he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land. As displayed in the above cases, a taxpayer can embark on a profit making scheme or the carrying on of a business after property was acquired for a different purpose. We will consider whether the project will be viewed as the carrying on of a business, the undertaking a profit making activity or the realising a capital asset when the Property is subdivided and the sale lots are sold as follows: | Detailed Reasoning - Carrying on a business of property development: Section 995 of the ITAA 1997 states the term ‘business’ includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 (TR 97/11) provides the Commissioner’s view of the factors used to determine if you are in business for tax purposes. In the Commissioner’s view, the factors that are considered important in determining the question of business activity are: ● 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. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Application to your situation: You acquired the property a number of years ago and have now made the decision to subdivide the property and sell the sale lots, with you retaining one of the proposed subdivided lots containing your main residence. In this case you have not previously undertaken any similar subdivision activities in the past and do not have any intention to undertake any similar activities in the future. You will fund the subdivision activities, take part in the management of the subdivision activities and will engage the services of a real estate agent/s to sell the sale lots. After reviewing the information and documentation provided, it is the Commissioner’s view that activities arising in relation to the project are not those of an entity carrying on a business of developing and selling property. While you are undertaking some of the activities in relation to the project, they are not of the level or scale as those undertaken by the taxpayer in the Stevenson case. Additionally, the activities undertaken do not display the salient indicator of a business, which are transactions entered into on a continuous and repetitive basis. This is a small, one off project that is not being carried out in a manner similar to other property development businesses. Therefore, any profit made on the disposal of the Sale Lots will not be assessable as ordinary income from the carrying on of a business. We will consider whether or not the profits from the sale of the sale lots will be viewed as being received in relation to a profit making undertaking or a realisation of a capital asset as follows: | Detailed Reasoning - Isolated business transactions: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 ( Myer Emporium )). Taxation Ruling TR 92/3 (TR 92/3) considers the principles outlined in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 as ordinary income. Paragraph 1 of TR 92/3 outlines that isolated transactions are: a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and b) those transactions entered into by non-business taxpayers. TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Paragraph 13 of TR 92/3 outlines the following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction: ● the nature of the entity undertaking the operation or transaction; ● the nature and scale of other activities undertaken by the taxpayer; ● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; ● the nature, scale and complexity of the operation or transaction; ● the manner in which the operation or transaction was entered into or carried out; ● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; ● if the transaction involves the acquisition and disposal of property, the nature of the property, and ● the timing of the transaction or the various steps in the transaction. If a transaction or operation is outside the ordinary course of a taxpayer’s business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. Paragraphs 41 and 42 of TR 92/3 outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer constitutes the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. In addition to the above factors, for the purposes of determining whether the activities undertaken in relation to real property and development equate to a profit-making undertaking or scheme, Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) aligns itself with TR 92/3 and provides a list of factors which, if present may be an indication that a business or profit-making undertaking or scheme is being carried on. In determining whether activities relating to isolated transactions are a profit making undertaking or are the realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above; however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. In the context of considering the above authorities and factors when determining whether the Project would be viewed as a profit making undertaking, the following general observations have been made: ● there is a coherent plan for the subdivision of the property into eighteen lots which is more complex than what would have been involved in the disposal of the land as a whole. The simplest way you could have reduced your land holding would have been to dispose of the land as a whole property, potentially for a reduced price; ● you made the decision to subdivide the whole property unlike the taxpayer in the Casimaty case who subdivided his property in pieces and had never contemplated subdividing the whole property; ● there has been a change in the nature of the property with the proposed subdivision transforming the property from the existing main residence into smaller lots for new residential housing purposes; ● neither you, nor any related entities have been involved in similar activities in the past and do not have any plans to undertake any similar activities in the future. ● the market value of the property unsubdivided was estimated to be $x, with the subdivision costs estimated to be $xx. Based on those figures, the cost to subdivide the property will be more than the market value of the unsubdivided value of the property; ● the proceeds for the lots is estimated to be $xxx. ● there is a demonstrated intention to profit from the subdivision of the property and the transaction has been undertaken in a commercial manner. ● You are borrowing a significant amount to fund the subdivision of the property. ● You have engaged the services of various professionals who will undertake various activities in relation to the subdivision. ● You will engage the services of a real estate agent to market and sell the sale lots. A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion the intention for holding the property has changed upon the commencement of the subdivision activities to a profit making undertaking. The intention in relation to the property changed when you committed to this one-off undertaking in relation to the subdivision of the property and the proposed sale of the sale lots. The decision to pursue the subdivision shows your choice to engage in exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the sale lots. You are funding the subdivision by borrowing funds. You are incurring the risks involved with the subdivision and will have ultimate control of the subdivision activities. However, as outlined above, the facts of this situation are not the same as those of the taxpayer in the Stevenson case. This situation is also not like the Casimaty case as you plan to subdivide the whole property as opposed to the piecemeal subdivision of the property undertaken in that case. Additionally, your situation is not the same as the Statham case where the council had undertaken all of the work relating to the subdivision of the property as they will manage and control the project, engaging the services of the relevant entities to undertake the activities arising in relation to the project. It is viewed that the subdivision activity is of a sufficient scale to characterise it as a commercial or profit-making undertaking. We have determined that based on the facts of this situation that the project will be a profit making undertaking and the profits from the sale of the sale lots will be considered to be ordinary income and will be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Realisation of a capital asset: The term 'business' ordinarily refers to trade engaged in on a regular or continuous basis. Whereas an isolated (one-off) commercial transaction does not amount to a business but has the characteristics of a ‘business deal'. Taxation Ruling TR 92/3 explains, for an isolated commercial transaction to occur, it is usually (but not always) necessary the taxpayer has the purpose of profit-making at the time of acquiring the property and that the property has no use other than as the subject of trade (paragraph 49(g)). In Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001, the mere realisation of a capital asset was described as “liquidating or realising the old assets”. In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams (1972) 72 ATC 4188, Gibbs J explained mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts…even though the realization is carried out in an enterprising way so as to secure the best price… In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J distinguished a mere realisation from a commercial transaction as follows: 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 of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Had he constructed dwelling houses, internal fencing or other improvements, it would have been easier to impute to him an intention to carry on a business of land development and improvement. In Casimaty , Ryan J also discussed the matter of financing a commercial development, referring to Stevenson v FC of T 91 ATC 4476; (1991) 29 FCR 282, where it was held: “not only obtaining finance but risking finance” and referring to Turner v Last (HM Inspector of Taxes) (1965) 42 TC 517, where the financial inability to hold the land indefinitely lead to the determination the land was purchased for development rather than for investment. In your case, although you purchased the property as your main residence, the development works you are undertaking go far beyond the mere realisation of a capital asset. Further, you will obtain finance given by the developer of ‘A’ and the amount will be far more than the unimproved value held in the land. | Detailed Reasoning - Capital gains tax: The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 under section 104-10 of the ITAA 1997 happens if you dispose a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sale. Making an overall assessment on the factors set out in TR 92/3, it is the Commissioner’s view that the subdivision and sale of the sale lots will not be a realisation of capital assets. Therefore, as the disposal of the sale lots is viewed as an isolated transaction, any profit made on their sale will be included in your assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Application to your situation: CGT event A1 will occur on the disposal of your ownership interests in each of the sale lots. The capital gain for the event is worked out by comparing the cost base of their ownership interests in the asset with the capital proceeds for its disposal. If the conditions under Division 115 of the ITAA 1997 are met, the capital gain can be reduced by 50% by applying the CGT discount. Any capital gain made on the disposal of the sale lots will be reduced to the extent that the profit from the sale of the sale lots is included in your assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - GST: In this reasoning: ● unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● all terms marked by an asterisk are defined terms in the GST Act ● all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides that you make a taxable supply if: (a) you make the supply for consideration (b) the supply is made in the course or furtherance of an enterprise that you carry on (c) the supply is connected with the indirect tax zone (Australia), and (d) you are registered, or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. You intend to subdivide the Land into residential lots. For the supply of your subdivided land to be a taxable supply, all of the requirements in section 9-5 must be satisfied. In this case, you will be selling vacant residential lots for consideration in Australia. Therefore, paragraphs 9-5(a) and 9-5(c) will be satisfied. Further, the supply of the lots in your situation will neither be GST-free or input taxed. Accordingly, we must determine whether: (a) your sale of the lots are in the course or furtherance of an enterprise that you are carrying on, and (b) if so, whether you are required to be registered for GST. | Detailed Reasoning - The Development: You are the owner occupier of a 2Ha rural residence. You advise that it was your intention at that time to, renovate the dilapidated dwelling and then use as your long-term rural residence and conduct small scale breeding of livestock for domestic use and enjoyment. When you acquired the property, it was within a masterplan area but its proximity to a livestock farm prevented further development of this or any of the neighbouring lots. The sudden and unexpected factory closure led to lifting of the development buffer zone. At no time prior to the announcement of the closure was there any indication that this operation had any intention to terminate operations. You have subsequently entered into agreements and arrangements with a Developer and other third parties, such that your property will form stage X of a XX Lot development that are fully serviced and for the purposes of sale. This includes Lot XX which is the renovated original residence. It is your contention that the subdivision development works do not go beyond what is required by authorities and that you will not be engaged in the business of selling land as this will be performed by third parties. | Detailed Reasoning - Enterprise: Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done in the form of a business or in the form of an adventure or concern in the nature of trade. The phrase ‘carry on’ in the context of an enterprise includes doing anything in the course of the commencement or termination of the enterprise Miscellaneous Taxation Ruling MT 2006/1 The New Tax System : the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides guidance on what activities will amount to an enterprise. Paragraph 234 of MT 2006/1 distinguishes between activities done in the form of a ‘business’ and those done in the form of ‘an adventure or concern in the nature of trade’. In particular: ● A business encompasses trade engaged in on a regular or continuous basis. ● An adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. | Detailed Reasoning - The change of intention: While holding an asset for a considerable period of time may indicate that it is a long term capital asset, the intention of the taxpayer at the time of acquisition and throughout the ownership period is a crucial aspect. The following cases have considered the issue of intention and whether the proceeds from the venture are of a capital or revenue nature. Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 where the taxpayer acquired 1.584 acres of land for non- commercial purposes. Thirteen years later, the original shareholders sold out and the company and the new ownership adopted an entirely new set of articles. It then embarked on a long and complex course of activity which involved the land being rezoned and developed as a residential subdivision. Vacant lots were sold over a period of many years for a substantial profit. The High Court held that the adoption of a new set of articles resulted in a change in the intended usage of the land. This resulted in the taxpayer’s activities going beyond the realisation of a capital asset, with the activities constituting the carrying on of an actual business of subdividing and selling land. Statham & Anor v. FC of T 89 ATC 4070 20 ATR 228 ( Statham ’s case) where the property was subdivided and sold after a business of raising cattle had failed. The taxpayer relied on the local council to carry out the subdivision work and the local real estate agents handled the advertising and sale of the lots. The Full Federal Court held that what occurred was the 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. Casimaty v FC of T 97 ATC 5135; (1997) 37 ATR 358 ( Casimaty's case) where due to the growing debt and the ill health of the taxpayer, primary production land was progressively subdivided and sold off over a period of 18 years. There was no coherent plan conceived for the subdivision of the whole property. The taxpayer had acquired and had continued to hold and use the residence and conduct the business of a primary producer on the property. Therefore, there was no change of purpose of object for which the property had been held. In his judgment, Ryan J in the Federal Court held that the profits resulted from the mere realisation of a capital asset and as such the profits were not assessable as ordinary income. Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 91 ATC 4476 22 ATR 56 ( Stevenson case) where taxpayer had owned farming land for many years, selling a portion of the land to a third party to be used for agricultural purposes. In the early 1970’s he decided to scale back his farming activities and sell most of the remaining 90 acres, other than a few acres retained for his use. He could not source a developer who would pay his sale price and in 1976 he determined that he would subdivide the land himself. He commenced subdividing the land in stages, obtaining finance and personally arranging for the construction of the necessary earthworks, storm water drains, guttered road works and other improvements to the land. Around the same time his farming income consisted of mainly agistment income. Throughout the process the taxpayer had personally dealt with councils, engineers, and statutory utilities. He advertised the development himself, did not engage the services of any particular real estate agent to assist him, dealt personally with prospective purchasers, did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. It was held that the taxpayer was carrying on a business of developing land. As displayed in the above cases, a taxpayer can embark on a venture in the nature of a business or in the nature of trade, where the property is applied for a different purpose, after the property was first acquired. MT 2006/1 at paragraph 262 explains that whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. The relevant intention or purpose of the taxpayer is not the subjective intention or purpose of the taxpayer but rather it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Paragraph 178 of MT 2006/1 lists a number of indicators to consider when determining whether an activity or series of activities amount to a business and paragraph 265 of MT 2006/1 includes a list of factors from Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) in relation to isolated transactions and sales of real property. The following factors which may be relevant when considering whether an isolated transaction amounts to a business operation or commercial transaction include; ● the nature of the entity undertaking the operation or transaction; ● the nature and scale of other activities undertaken by the taxpayer; ● the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; ● the nature, scale and complexity of the operation or transaction; ● the manner in which the operation or transaction was entered into or carried out; ● the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; ● if the transaction involves the acquisition and disposal of property, the nature of the property, and ● the timing of the transaction or the various steps in the transaction. We acknowledge that you acquired the property as your main residence and for use as a hobby farm. Taxation Ruling TR 92/3 (TR 92/3) at paragraphs 41 and 42 outline that where a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to venture or commit the asset into a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer may constitute the carrying on of a business operation or commercial transaction carrying out a profit-making scheme, as the case may be. | Detailed Reasoning - In the form of an adventure or concern in the nature of trade – (isolated transaction): We consider the following factors important in determining that your development activities conducted on your property, previously used as you place of residence and hobby farm, are an adventure or concern in the nature of trade and therefore an enterprise for GST purposes. 1. Has there been a change in use or purpose of the land. ● Your property has been held for a short period of time (2 - 3 years) before committing the land to residential subdivision development, ● Whilst your primary purpose was to use the property as your main residence, the property at time of acquisition, albeit in a ‘buffer zone’ restricted area, is located in that part of a masterplan that is designated for subdivision into residential development, ● At some time in the future, there was potential for the ‘buffer zone’ that was in place to protect existing livestock farms in the area, to be lifted, ● Due to the lifting of the ‘buffer zone’ there has been a change in the nature of the property for which it was initially acquired, and the proposed subdivision transforms your property from the existing main residence into smaller lots for new residential housing purposes, and ● You made the decision to subdivide the whole property unlike the taxpayer in the Casimaty case who subdivided his property in pieces and had never contemplated subdividing the whole property. 2. The level of development activity on your property is extensive. ● Council has reasonably high subdivision requirements. You are undertaking development activities that improves the value of the land from a 2ha rural lot to xx serviced residential lots through; ● Excavation, Fill and Retaining ● Sewerage services ● Telecommunication ● Power ● Water mains ● Storm water provision ● Landscaping ● Fencing: fauna excluding, fauna friendly and acoustic ● Visitor car-parking ● Work undertaken to obtain a suitable designed house plan example –Construction of new road including access to each lot, and ● A portion of land is being returned to Council as open space ● The value of the development is then realised when the 2ha Lot is subdivided into residential lots for the purpose of sale. 3. There is a coherent and complex plan for the subdivision of the land. ● The simplest option to reduce your land holding would be to dispose of the land as a whole, potentially for a reduced price. Your plan for the subdivision of your property into xx lots (Stage 3) is complex in its own right, and is more involved than what would have been, had there been a disposal of the land as a whole, ● To achieve this subdivision, there is an added level of complexity, where you have entered into a sharing arrangement with next door neighbour, and whilst this is not an acquisition of additional land, it is additional land necessary to achieve your desired subdivision, being stage x of x of an overall xx Lot subdivision. You have agreed with the Neighbour to split costs associated with the development application, civil works and sales, ● You have entered into an in-principle agreement with the Developers financing institution, who have extended finance to fund the work undertaken on your land, ● You have entered into an agreement with ‘A’ for consultancy services, ● You have entered into an agreement on XXXX and appointment a property agent ‘B’ to manage and sell the developed lots either as, house and land packages, or land only, and ● There is a level of complexity about this venture that indicates more than a simple subdivision. We refer to the signed Consultancy Services agreement: Pre construction package (a) to (e) and Development Works Package (f) to (n). 4. Size and scale, and the profit sought or gained. ● The overall development is XX subdivided lots for which XX lots belong to you as part of stage X. The market value of the property, in its current state on a single title was estimated to be $XX, ● The Original Lot has never been advertised for sale since date of acquisition in 201A, ● Subdivision costs are estimated to be $XX, ● The cost to subdivide the Property is greater than the market value of your property in its current state on a single title, and ● The subdivided lots will be sold as fully serviced residential lots, and ● You have entered into an agreement and appointed a property agent to manage the sales and have the indicative proceeds for the XX lots is estimated to be $XX. 5. Legal and financial control and commercial risk rests with the landowner to maximise profit. ● You are and remain the legal and beneficial owner of the subdivided lots after development and subdivision, ● You bear development risk and any profit upside, as you are not receiving an agreed fixed price for the land, and ● You are borrowing $XX to fund the subdivision of the property. Based on an objective view of the facts and circumstances, your intention in relation to the property changed when you committed to this one-off undertaking in relation to the subdivision of the property and the proposed sale of the developed lots. The decision to pursue the subdivision demonstrates that you have chosen to engage in the development together with the exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the sale lots. You are funding the subdivision by borrowing funds. You are incurring the risks involved with the subdivision and will have ultimate control of the subdivision activities. This situation is not like the Casimaty case as you plan to subdivide the whole property as opposed to the piecemeal subdivision of the property undertaken in that case. Your situation is not the same as the Statham case where the council had undertaken all of the work relating to the subdivision of the property as they will manage and control the project, engaging the services of the relevant entities to undertake the activities arising in relation to the project. Your subdivision activity is of a sufficient scale, planned and organised in a business-like manner to characterise it as a commercial or profit-making (one –off) undertaking. Your activities are considered to fall within the definition of an enterprise as per sub section 9-20(1)(b) of the GST Act, namely your activities are activities done in the form of an adventure or concern in the nature of trade (isolated transaction- one off). Your supplies of the lots are in the course or furtherance of an enterprise that you are carrying on and satisfy paragraph 9-5(b). | Detailed Reasoning - Requirement to register for GST: Section 23-5 of the GST Act requires you to be registered for GST if: a) you are carrying on an enterprise and b) your GST turnover meets or exceeds the registration turnover threshold. (The current registration turnover threshold is $75,000.) 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. Paragraph 31 of GSTR 2001/7 provides commentary on what is meant by ‘capital assets’. It refers to those assets that make up the ‘profit yielding structure’, as opposed to trading assets (revenue assets) that are turned over and bought and sold in the course of trading operations. As set out above we consider that: ● you are carrying on a property development enterprise and ● the supplies in this enterprise will be supplies of the Lots of land which resulted from converting your land, a capital asset, to a revenue asset used in your enterprise. Therefore the value of the supply of the lots will be included in your turnover threshold. As the sale value exceeds $75,000 you are required to be registered for GST. You satisfy the requirements of paragraph 9-5(d). The supply of all XX lots, not including Lot X (main residence) will be taxable supplies as per subsection 9-5 of the GST Act. Based on the information supplied, the supply of Lot X will not be a supply of new residential premises as defined under sub section 40-75 of the GST Act, rather the supply satisfies subsection 40-65 (1) of the GST Act and will be input taxed.

Relevant facts: You are not registered for GST | You acquired a property (The property) | You extensively renovated the property and installed new fencing and driveway. | You entered into an agreement with the local council to rehabilitate and replant native trees in 201B. | The property is situated on approximately 2 hectares and is located in a residential growth area. | The property is your main residence and you also used the surrounding land to for small scale breeding of livestock. | The property is within the X council masterplan; however your property is located within a number of meters of a livestock farm which prevented further development of your property and some neighbouring lots as there was a development buffer. | The farm closed in 201B and as a result the buffer zone was removed. | Your neighbour’s property (‘A’) has been on the market prior to your purchase. | The surrounding area is becoming developed and you are no longer able to enjoy the same level of amenity. | You have approached a number of developers in relation to the sale of your property however these have been unsuccessful. | A developer has made a conditional offer on ‘A’, conditional on future development approval. | You have provided your consent to the developer to lodge a plan of subdivision which includes your property. | You have an agreement with ‘A’ to split the costs of the application, civil works and sales. | You have negotiated a management fee payable to ‘A’ to perform the activities on your behalf. | You have entered into an agreement with ‘B’ for consultancy services, | Your property will be subdivided into a number of additional lots with your existing dwelling retained on its own lot. The total area for development is 1 hectare with the second hectare being returned to council as open space. | The combined number of lots is significant. Your lots are undertaken as stage X. ‘A’ is stage X and stage Y. | You do not have an approved plan of subdivision. | Your property is valued at an approximate amount on single 2ha title with residence. | You have entered into an in-principle agreement with the Developers financing institution, who will extend finance through their financial institution. It is expected that the total costs of the subdivision will be approximately $xx. | Finance will be required for the civil works stage; anticipated to start in 201C. You have an in principal agreement with the financier of the Developer to extend a facility that includes your property. The current application costs for your proportion of the development have been met by the developer with interest accruing until the facility is established in 201C. | You have entered into an agreement in 201C and appointed a property agent, ‘B’ to manage and sell the developed lots. | It is expected that the sale price of the subdivided lots will be approximately $XX Million. | The sales will include Lot X which is your current residence. | Sales are either ‘house and land packages’ or ‘land only’. | You are required to build a sealed road to access the subdivided lots. | You are also required to provide electricity and services to the subdivided lots. | The subdivision activities if approved are expected to start in soon and include significant civil works. | You will remain the registered owner of the land after the subdivision. | You have not entered into a development agreement with any party. | You have not undertaken property development previously and do not plan on doing so in the future.