Private ruling: Property - subdivision - am i in business? – isolated transaction – mere realisation
Date of advice: 13 December 2018
Published: April 2019
Ruling period: Income year ending 30 June 2019 | Income year ending 30 June 2020 | Income year ending 30 June 2021
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the partnership (you) making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) when you supply or sell subdivided lots located at the Property? | A1: No. | Q2: Are you required to be registered for GST pursuant to section 23-5 of GST Act in relation to the sale of the Property? | A2: No. | Q3: Will the proceeds from the sale of Lot 2 be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No. | Q4: Will you be able to disregard any capital gain made on the disposal of Lot 2? | A4: Yes. | Q5: Will the subdivided block of land containing your main residence (Lot 1) retain its original acquisition date? | A5: Yes.

Relevant facts and circumstances: The partnership ( you ) are not registered for GST. You own the following properties collectively referred to as the ‘ Property ’: ● Lot 25 in DP XXXXXX (Lot 25); ● Lot 26 in DP XXXXXX (Lot 26); and ● Lot 27 in DP XXXXXX (Lot 27). You acquired Lot 25 before 20 September 1985. Lot 25 is described as being 2010 square metres. Lot 25 has been used in part as your main residence and in part farm land from the date of acquisition. Lot 26 and Lot 27 are described as a 4,058 square metre parcel of land used primarily for conducting a specific business. You have progressively inherited Lots 26 and 27 following the death of the original owners with the final portion of the Lots inherited/transferred to you in 19XX. Lot 26 and Lot 27 have always been used to carry on your business, for a period of almost 25 years. The turnover from carrying on your business is less than $75,000 per annum. There has been no change in the ownership of the Property since each parcel was acquired. You are considering retiring from your business and intend to sell the Property. You will lodge an application to the relevant authority for the subdivision of the Property. The development application will enable a portion of Lot 25 to be carved-out/excluded from the subdivision. Subject to the approval of the relevant planning authority you will retain the subdivided lot containing your main residence ( Lot 1 ). The remaining land from Lot 25 will be consolidated with Lot 26 and Lot 27 to form one new consolidated block ( Lot 2 ). You will sell Lot 2 as a whole during the ruling period. You have estimated that the market value of the land in its entirety is $! As you will retain Lot 1 being 900 square metres, you expect to receive approximately $! for the sale of Lot 2. Depending on any requirements attached to the subdivision approval you will only carry out preliminary works such as road widening, pavement, kerbing and drainage works. You have estimated that your costs will be approximately $XXXXX. You will not be borrowing any funds for the purpose of the subdivision. You have neither the experience or intention of carrying out any works beyond what is necessary to enable the approval of the subdivision of the Property. You will not carry out any work in relation to the construction of buildings on Lot 2.

Relevant legislative provisions: 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 Division 188 | 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 Paragraph 188-25(a) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Summary: You are not making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax Act) 1999 (GST Act) when you supply or sell subdivided lots located at the Property. You are not required to be registered for GST pursuant to section 23-5 of GST Act in relation to the sale of the Property. The proceeds from the sale of Lot 2 will not be ordinary income and not assessable under section 6-5. The proceeds represent the sale of a capital asset which will fall for consideration under the capital gains tax provisions in Part 3-1. You acquired Lot 25 before 20 September 1985, therefore the portion of Lot 2 that was originally part of Lot 25 will also be considered as having been acquired before 20 September 1985, and exempt from CGT. The other portion of Lot 2 (post-CGT) satisfies the small business CGT concessions. Lot 2 will be exempt from CGT, either as a pre-CGT asset or by satisfying the small business 15 year exemption. | Detailed Reasoning - Questions 1 and 2: Note: In this reasoning for questions 1 and 2, unless otherwise stated: ● Legislative references referred to herein are from A New Tax System (Goods and Services Tax) Act 1999 (GST Act) ● reference material(s) referred to are available on the Australian Taxation Office (ATO) website ato.gov.au Section 9-40 provides that you are liable for GST on any taxable supplies that you make. Section 9-5 provides you make a taxable supply 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 the indirect tax zone; 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. | Detailed Reasoning - Enterprise: Of relevance is whether you are making a supply of the Property (either as individual lots or as a whole) in the course or furtherance of an enterprise that you carry on and if you are required to be registered for GST. 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 In this case, you acquired a portion of the Property (Lot 25) in or around 1968 with the remainder (Lots 26 and 27) acquired progressively concluding in 1998. The Property has been used as your principal place of residence and to carry on your market garden business since your acquisition. As such we consider that you do carry on an enterprise for GST purposes. The issue of whether a sale is ‘made in the course or furtherance of an enterprise that you carry on’ is discussed in paragraphs 28 to 31 of the Goods and Services Tax Ruling Goods and services tax: when does an entity have a decreasing adjustment under Division 132? (GSTR 2004/8). Paragraph 28 of GSTR 2004/8 provides that for the sale of a thing to be made in the course or furtherance of an entity’s enterprise, the sale of the thing must have a connection with that enterprise. Whether a connection between the sale of the thing and that enterprise exists will depend on the facts and circumstances. Paragraph 28 of GSTR 2004/8 also makes reference to the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) where the EM states at paragraph 3.10: 'In the course or furtherance' is not defined but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise…’. Paragraph 29 of GSTR 2004/8 continues, providing that given the broad meaning of 'in the course or furtherance', a sale of a thing is capable of being made in the course or furtherance of an enterprise regardless of the extent to which it has a connection with the enterprise, so long as it has some connection. The GST Act does not require that the thing must be applied primarily or principally in carrying on the enterprise for the supply of the thing to be in the course or furtherance of an enterprise. Accordingly, a connection between the sale of the thing and your enterprise exists even if, at the time of its sale, the thing is applied in carrying on the enterprise to a minor or secondary extent. Paragraphs 30 and 31 of GSTR 2004/8 contain a non-exhaustive list of indicators where the sale of a thing has a connection with an enterprise including where at the time of sale it was applied in carrying on your enterprise to at least some extent. Whether a sale/supply is made in the course or furtherance of an enterprise is determined after an examination of all the relevant facts and circumstances. Given the above we consider that the sale of the Property (either as individual lots or as a whole) has a sufficient connection to your specific enterprise to be regarded as being made ‘in the course or furtherance’ of that enterprise. | Detailed Reasoning - GST registration: As you are not registered for GST, the next issue to consider is whether you are required to register for GST. Section 23-5 provides that you are required to be registered for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold (currently $75,000). The meaning of GST turnover is contained in Division 188. Section 188-10 provides that your GST turnover will meet the registration turnover threshold if: a) your current GST turnover is at or above the threshold ($75,000) and the Commissioner is not satisfied that your projected GST turnover is below $75,000, or b) your projected GST turnover is at or above $75,000. Your ‘current GST turnover’ is the sum of your turnover for the current month and the previous 11 months. Your ‘projected GST turnover’ is the sum of your turnover for the current month and the next 11 months. Paragraph 188-25(a) provides that when calculating your projected turnover you disregard any supply made, or likely to be made, by way of transfer of ownership of a capital asset of yours. As such, we need to consider whether your sale of the Property is excluded from the calculation of your projected GST turnover. Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses what is regarded as a ‘capital asset’ at paragraphs 31 to 36. Whilst not specifically defined for GST purposes, the term ‘capital assets’ generally refers to those assets that make up the profit yielding subject of an enterprise and may be described as ‘the business entity, structure or organisation set up or established for the earning of profits’. Capital assets are to be distinguished from revenue assets. A revenue asset is an asset whose realisation is inherent in, or incidental to, the carrying on of a business. Given the facts in this case we consider the sale of the Property (either as individual lots or as a whole) constitutes the transfer of a capital asset for the purposes of section 188-25 and will therefore be disregarded when calculating your projected GST turnover. Your current GST turnover, being the turnover generated from your specific activities is less than $75,000 per annum and does not meet the GST registration turnover threshold. Furthermore, as the proceeds from the sale of your Property are disregarded when calculating your projected GST turnover, your projected GST turnover will also be below the GST registration turnover threshold. As both your current and projected GST turnover do not meet the GST registration turnover threshold, you are not required to be registered for GST under section 23-5. | Detailed Reasoning - Conclusion: GST is payable on any taxable supplies that you make. However, the requirements of a taxable supply includes that you are registered or required to be registered for GST. In your case, you are neither registered nor required to be registered under section 23-5 and as such will not be making a taxable supply when you sell the Property pursuant to section 9-5. | Detailed Reasoning - Question 3: Legislative references referred to herein are from the ITAA 1997. There are three ways profits from property sales can be treated for taxation purposes: 1. As ordinary income under section 6-5, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock; or 2. As ordinary income under section 6-5, 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, which is the commercial exploitation of an asset acquired for a profit making purpose; or 3. As statutory income under the capital gains tax legislation, sections 10-5 and 102-5, on the basis that a mere realisation of a capital asset has occurred. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business of property development: Section 995-1 states the term ‘business’ includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: It is the words “carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. …activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit…manifested the essential characteristics required of a business. For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property. The Commissioner’s view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11) which uses the following indicators to determine whether a taxpayer is carrying on a business: ● whether the activity has a significant commercial purpose or character; ● whether there is repetition and regularity of the activity; ● whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; ● whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a 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 circumstances: In your situation, the Commissioner is satisfied you are not carrying on a business of property development. The repetition, scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business. Therefore, any gain made on the disposal of Lot 2 will not be assessable as ordinary income from the carrying on of a business. | Detailed Reasoning - Isolated business transactions: Profits from isolated transactions will be assessable as ordinary income where the 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 out a business operation or commercial transaction Taxation Ruling TR 92/3 (TR 92/3) sets out the Commissioner’s view of the general principles and factors that have been considered in determining whether an isolated transaction is of a revenue nature. The direction provided within TR 92/3 and in case law indicates that profits in this context are more likely to be considered ordinary income if they are made in the ordinary course of carrying on a business. Further, ordinary income may be derived from an isolated transaction which becomes commercial in nature, or as a result of profits on a transaction in which the initial intention was to make a profit on sale. 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. | Detailed Reasoning - Application to your circumstances: In this case, you had not acquired the Property for the purpose of subdivision and resale. Instead, it was originally acquired for the purpose of residing on the Property as your main residence, and in part for your business activities, which expanded as you gradually acquired an ownership interest in Lot 25 and Lot 26. Your intention in relation to the Property has changed due to the period of life you are now in. You are looking to retire from your business and as such no longer have use for a property of that size. You want to continue residing in the house located on the Property and will retain 900 square metres of land around the house. You will sell Lot 2 as one whole block. The subdivision is not considered to be an isolated business transaction or a property development undertaking. | Detailed Reasoning - Capital gains tax: A CGT event A1 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. However, any capital gain or capital loss made on the disposal of a CGT asset will be disregarded if the asset was acquired before 20 September 1985. When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided blocks is not a CGT event. Where the original land was acquired before 20 September 1985, each new block retains its pre-CGT status. | Detailed Reasoning - Application to your situation: In this case you acquired Lot 25 before 20 September 1985. Therefore, this portion of the Property is a pre-CGT asset. When the Property is subdivided, the portion of the new block (Lot 2) of land that was originally part of Lot 25 will retain the CGT status of Lot 25. That is, that portion of the land will be exempt from CGT. While CGT event A1 will occur when the sale contract on Lot 2 is entered into, as this portion of the subdivided block of land is a pre-CGT asset, any capital gain made on the disposal of this portion of land will be disregarded. Lot 1, being the remainder of Lot 25, will retain its pre -CGT status. | Detailed Reasoning - Small Business Concessions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply. A detailed explanation of each of the concessions and the eligibility conditions can be found by searching ‘QC 22655’ on ato.gov.au | Detailed Reasoning - Small business 15 year exemption: To be eligible for the small business 15 year exemption you must satisfy the basic conditions and two further conditions: ● you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened; and ● you are: ● at least 55 years old at that time and the event happened in connection with your retirement | Detailed Reasoning - Application to your situation: In your case, it is accepted that you meet the basic conditions due to the following: ● a CGT event will occur when you dispose of Lot 2 ● the event will result in a capital gain ● you’re a small business entity with an aggregated turnover of less than $2 million ● the Property meets the active asset test as you have held the Property for more than 15 years and you have used it in your market gardening business for more than 7.5 years. It is also accepted that you meet the two further conditions necessary for the 15 year exemption and you are you are entitled to the small business 15 year exemption on the disposal of Lot 2.