Private ruling: CGT & GST subdivision of land
Date of advice: 24 June 2015
Published: June 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the proceeds received from the sale of the subdivided blocks constitute a mere realisation of a capital asset and be taxed under the capital gains tax provisions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Issue 2 | Q2: Will the proceeds received from the sale of the subdivided blocks be subject to Goods and Services Tax (GST)? | A2: No.

Relevant facts and circumstances: Person A inherited a farming property from their parent in 20XX. Since several decades ago person A and their parent used the land continuously to carry on a farming business. In 20XX the property was transferred from person A to person A and person B. Title of the property is held jointly. Half of the land was rezoned to low density residential. Person A and B subdivided the farming zone land and built their home on the farming zone land. They also wanted to keep a few acres in the residential zone for their children. An application was made to the local shire council for the subdivision of the property into several lots. The planning permit was issued and the Statement of Compliance was provided. The subdivision was into one large block in the residential zone which person A and person B wanted to sell as a whole but could not as they wanted to keep a block for their children and the farming block to live on. There was no interest in the large residential development block so they took if off the market and used it for farming. Person A and person B decided to subdivide one of the blocks into several blocks for sale. The application was lodged, planning permit was approved and the statement of compliance was issued. Person A is operating his farming business on the larger blocks of land and is registered for the goods and services tax (GST). The blocks were developed to the bare minimum that is, electricity and water supply were made available on the land. Person A and B are considering selling these titles as vacant blocks of land. There is no contract of sale yet. The reason for selling the vacant blocks of land is to pay for the home built on the farming zone land. Person A and B do not jointly have an ABN and are not jointly registered for GST.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

Reasons for decision: Summary: The subdivision of the land is considered to be a mere realisation of a capital asset and will be subject to the capital gains tax provisions of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts. Additionally, section 15-15 of the ITAA 1997 specifies that your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997 or which arises in respect of the sale of property acquired on or after 20 September 1985. In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 ( Myer Emporium ), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transaction are income, considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to paragraph 1 of TR 92/3, the term isolated transactions refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment. In your case, you do not carry on a business of buying, selling or developing land. You have had minimal involvement in the subdivision of the land and you have only changed the land to the extent that you were required for council purposes. Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the subdivision is considered to be a mere realisation of a capital asset and the proceeds will be subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Reasons for decision: GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act if: a) you make the supply for consideration; and b) the supply is made in the course or furtherance of an enterprise that you carry on; and c) the supply is connected with 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. All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act. From the information received, person A and person B will satisfy paragraphs 9-5(a) and 9-5(c) of the GST Act when they sell the subdivided blocks of vacant land as they will make the supply for consideration and the supply is connected with Australia as the subdivided blocks of vacant land are located in Australia. There is no provision in the GST Act that makes a supply of vacant blocks of land in Australia GST-free or input taxed. We will now consider whether the sale of the vacant blocks of land will be made in the course or furtherance of an enterprise that person A and person B carry on (paragraph 9-5(b) of the GST Act) and whether they will be required to be registered for GST as they are currently not registered for GST (paragraph 9-5(d) of the GST Act). | Detailed Reasoning - Paragraph 9-5(b) of the GST Act: The definition of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) 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. Miscellaneous Taxation Ruling MT 2006/1 provides guidance on what constitutes an enterprise for the purposes of eligibility for registration for an Australian business number (ABN). Goods and Services Tax Determination GSTD 2006/6 extends the application of MT 2006/1 to GST. The term business ordinarily would encompass a trade that is engaged in, on a regular or continuous basis, while an adventure or concern in the nature of trade may be an isolated or one-off transaction and includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Isolated transactions with a commercial flavour are included in this category. Such transactions are of a revenue nature. In regard to isolated or one-off transaction, paragraphs 262 and 263 of MT 2006/1state: | Detailed Reasoning - Isolated transactions and sales of real property: 262. The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 263. The issue to be decided is whether the activities are an enterprise in that they are of a revenue nature as they are considered to be activities of carrying on a business or an adventure or concern in the nature of trade (profit making undertaking or scheme) as opposed to the mere realisation of a capital asset. ... From the information received, person A and person B are not in the business of property development and subdivision. In this instance, the subdivision of the property and sale of the vacant lots will be a 'one-off' or isolated real property transaction. As the sale of the vacant blocks of land is an isolated transaction, it is necessary to consider whether the subdivision and sale of the vacant land is a transaction with a commercial flavour that is in the form of an adventure or concern in the nature of trade. Paragraph 265 of MT 2006/1 outlines factors that indicate whether activities undertaken on a one-off are an 'adventure or concern in the nature of trade' and states: 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade… If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: … • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of the land; • there is a business organisation - for example a manager, office and letterhead; • borrowed funds financed the acquisition or subdivision; • interest on money borrowed to defray subdivisional costs was claimed as a business expense; • there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and • buildings have been erected on the land. In determining whether activities relating to isolated transactions are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each case. No single factor will be determinative. Rather it will be the combination of factors that will lead to a conclusion as to the character of the activities. Based on the information received, the purpose for which the land was held remains unchanged. It will be person A and person B's main place of residence and the farming business will continue on the land after the subdivision is done except for a block which they are contemplating to sell. Person A and person B have a coherent plan for the subdivision in that they have lodged the development application and completed all the requirements to obtain the subdivision approval. However, the level of development of the land consisted only of the necessary to obtain Council approval for the subdivision and no buildings are erected on the vacant land to be sold. We consider that while some factors listed in paragraph 265 of MT 2006/1 are present, on balance the subdivision does not amount to an enterprise and is a mere realisation of a capital asset. Accordingly, paragraph 9-5(b) of the GST Act is not met as person A and person B will not be selling the vacant blocks on land in the course of an enterprise that they are carrying on. | Detailed Reasoning - Paragraph 9-5(d) of the GST Act: Under section 23-5 of the GST Act, you are required to be registered if: • you are carrying on an enterprise, and • your GST turnover meets the registration turnover threshold (currently $75,000). As determined above, the sale of the subdivided vacant blocks of land will not amount to an enterprise for GST purposes and therefore person A and person B will not be required to be registered for GST. Accordingly, section 23-5 of the GST Act will not apply. As person A and person B are not registered, nor required to be registered for GST, the requirement in paragraph 9-5(d) of the GST Act will not be satisfied. | Summary: As all the requirements in section 9-5 of the GST Act will not be satisfied, person A and person B's sale of the subdivided vacant blocks of land as outlined will not be a taxable supply and therefore will not be subject to GST