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1 Will the proceeds from the sale of the New Dwellings by Person A be assessable as a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

1 Yes. Question 2 If the answer to Question 1 is 'no', did the New Dwellings become committed to a profit-making scheme in MM 20YY? Answer 2 Not necessary to answer given our answer to Question 1. Issue 2 - GST Question 3 Is Person A required to be registered for goods and services tax (GST) in connection with the sale of the New Dwellings under section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Answer 3 No. Person A's ruling applies for the following periods : Income year ended DD MM 20YY Income year ending DD MM 20YY

Person A purchased the Original Property in MM 20YY. The purchase was obtained with a home loan secured over the Original Property. The Original Property contained 2 existing dwellings (Original Dwellings), both of which were first leased by Person A in or around MM 20YY. In MM 20YY, Person A started considering options to replace the Original Dwellings with 2 new dwellings for Person A's children Person B and Person C who were XX and XX years old respectively at that time. Person A's intention at the time was to lease the new dwellings initially (in the short-term) and then eventually sell them to Person A's children at a discount with funds loaned to them by Person A, as a way of helping them into the property market. Person A began the process of arranging the construction of new dwellings with Builder. However, the onset of the Covid-19 pandemic coupled with concerns about retaining Person A's job led Person A to postpone that process. The Original Dwellings continued to be rented instead.

During 20YY, Person A re-signed the building contract with Builder and a Development Application for dual occupancy to replace the Original Dwellings was submitted on Person A's behalf by Builder to the local council in MM 20YY. Development Approval was given by the local council in MM 20YY In MM 20YYthe tenants vacated the Original Dwellings. They had been leased and managed by rental agents from MM 20YY through to MM 20YY. In MM 20YY the Original Dwellings were demolished. Construction of the New Dwellings began in MM 20YY and, due to periods of significant wet weather and trade shortages, was completed in MM 20YY. The cost of construction of the New Dwellings, up to the obtainment of the Occupancy Certificates, was approximately $XX That cost was primarily funded by a Residential Investment Variable Loan which commenced in MM 20YY and was secured against equity in Person A's principal place of residence. The loan was for a term of 30 years, interest-only for years X to X and reverting to a principal and interest loan thereafter. A strata plan was registered in MM 20YY and the New Dwellings were granted Occupancy Certificates in MM 20YY.

Person A's employment was terminated in MM 20YY and Person A has not actively looked for work since. From MM 20YY Person A has been doing some contracting work which Person A expects to continue at approximately 8 hrs per week until just before Christmas 20YY. Person A doesn't intend to seek any full-time work again. Person B purchased a property with their (now) fiancé in MM 20YY. As a consequence, Person B is financially committed to that property. Person C has been studying overseas and is expected to return in MM 20YY to continue their tertiary studies through to the end of 20YY. Person B will live with Person A and Person A's spouse on their return. Person A estimates that the potential income from the New Dwellings (should they be leased) would be approximately $XX per annum and the likely outgoings (including loan repayments) would be $XX per annum.

As a result of Person A's employment being terminated, Person A is no longer in a financial situation to be able to fund the shortfall between any potential rental income and the expenses associated with the New Dwellings. Neither are Person B and Person C in a position where they could financially afford to take on the New Dwellings. As a result, Person A made the decision to sell the New Dwellings. One of the New Dwellings was sold in MM 20YY, prior to commencement of formal listing, and settled in MM 20YY. The other New Dwelling was listed for sale in MM 20YY, sold in MM 20YY and settled in MM 20YY Neither of the New Dwellings had been leased prior to their sale. Person A has never engaged in construction activities or property development, either directly or through an associated entity. Person A is not, and has never been, registered for GST.

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-20(1) A New Tax System (Goods and Services Tax) Act 1999 section 23-5 A New Tax System (Goods and Services Tax) Act 1999 paragraph 23-5(a) A New Tax System (Goods and Services Tax) Act 1999 section 195-1 Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 70-10 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 subsection 104-10(4) Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 section 118-20 Income Tax Assessment Act 1997 subsection 118-20(2)

All subsequent legislative references are to the ITAA 1997, unless otherwise indicated. Issue 1 Question 1 Summary Proceeds received by Person A from the sale of the New Dwellings are not ordinary income assessable under section 6-5. The proceeds represent a mere realisation of a capital asset assessable under the CGT provisions in Part 3-1. Detailed reasoning Proceeds or profit (as applicable) from the sale of land will be taxed for income tax purposes as ordinary income under section 6-5: •                     where the land is held as trading stock and sold as part of carrying on a business involving the sale of land (or a business of property development); or •                     where the land is sold as a result of an isolated transaction entered into by a non-business taxpayer or outside the ordinary course of business by a taxpayer carrying on a business, and which is the commercial exploitation of an asset acquired for a profit-making purpose. Alternatively, gains from the sale of land can be assessable on capital account as statutory income under the CGT regime contained in Part 3-1 on the basis that a mere realisation of a capital asset has occurred. Trading stock

The term 'trading stock' is defined in section 70-10 as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business. Taxation Determination TD 92/124 1 provides 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. Both the required purpose of resale and the business activity must be present before land is treated as trading stock. For these purposes, the business activity is taken to have commenced when a taxpayer embarks on a definite and continuous cycle of operation designed to lead to the sale of the land. The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 2 . TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer 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 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. Isolated commercial transactions In

FC of T v The Myer Emporium 87 ATC 4363 ( 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 3 discusses profits on isolated transactions and the application of the principles outlined in Myer Emporium . According to TR 92/3 (at paragraph 1), 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. TR 92/3 (at paragraph 6) provides that a profit from an isolated transaction is generally income when both of the following elements are present: (a)          the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and (b)          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.

It is not necessary that the intention or purpose of profit-making, as discerned from an objective consideration of the facts and circumstances of the case, be the sole or dominant intention or purpose for entering the transaction. It is sufficient if profit-making is a significant purpose (paragraphs 7 and 8 of TR 92/3). The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property (paragraph 9 of TR 92/3). However, as the High Court decisions in White v. FC of T (1968) 120 CLR 191; 15 ATD 173 and FC of T v. Whitfords Beach Pty Ltd (1982) 150 CLR 355 ; 82 ATC 4031 ;

12 ATR 692 demonstrate, that is not always the case. TR 92/3 acknowledges (at paragraph 42) that even if 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 profit from that profit-making undertaking or scheme will be income. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (paragraph 12 of TR 92/3). Whether an isolated transaction amounts to a business operation or commercial transaction will depend on the circumstances of each case. TR 92/3 (at paragraph 13) lists the following factors to be considered: (a)          the nature of the entity undertaking the operation or transaction; (b)          the nature and scale of other activities undertaken by the taxpayer; (c)          the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (d)          the nature, scale and complexity of the operation or transaction;

(e)          the manner in which the operation or transaction was entered into or carried out; (f)          the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; (g)          if the transaction involves the acquisition and disposal of property, the nature of that property; and (h)          the timing of the transaction or the various steps in the transaction. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations (paragraph 49 of TR 92/3). Mere realisation of capital asset The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme, and the courts have often said that the profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way (paragraph 36 of TR 92/3).

However, where the original asset is transformed so that it no longer retains its original character, the disposal of that asset will go beyond a mere realisation of an investment. The extent of the transformation is therefore relevant when determining whether the undertaking is profit-making in nature. Where the sale of a property is a mere realisation, the sale is on capital account and (subject to the operation of the anti-overlap provision of section 118-20 4 ) CGT rules will generally apply. These proceeds are not ordinary income. CGT event A1 under section 104-10 happens if you dispose of a CGT asset. CGT event A1 will happen upon the sale of land and a capital gain will be made pursuant to subsection 104-10(4) to the extent that the capital proceeds received on the sale exceed the cost base of the CGT asset. Application to your circumstances None of the facts and circumstances on which Person A's ruling is based indicate that: •                     Person A has intended to engage in a business involving the sale of land or property development;

•                     the disposal of the New Dwellings involved, or was part of, any repetitive or regular activity undertaken by Person A; or •                     there is any permanency associated with the activities undertaken by Person A in connection with the disposal of the New Dwellings. It is evident from the facts and circumstances on which Person A's ruling is based that: •                     neither Person A, nor any entity associated with Person A, has acquired or held land for the purpose of development or subdivision and resale; •                     since its acquisition in 2007, the Original Property was intended to be held long-term; •                     since their acquisition in 2007 and until their demolishment in March 2022, the Original Dwellings have been leased to derive rental income;

•                     at the time Person A had decided, and arranged, to demolish the Original Dwellings and construct the New Dwellings, the New Dwellings were intended to be held, initially to be leased by Person A to derive rental income and ultimately to be transferred (at a discount) to Person A's children as a way of assisting them into the property market for them to either live in themselves or hold as an investment property; and •                     Person A's personal circumstances, as well as those of Person B, changed during the construction of the New Dwellings and the decision to sell the New Dwellings only arose as a consequence of those changed circumstances; that is, the unanticipated cessation of Person A's employment and Person A's inability to service the loan procured to fund the construction, and the fact that Person B and Person C did not have the financial means to acquire the New Dwellings themselves, as intended.

Based on the above, Person A is not carrying on a business involving dealing in land held for the purpose of resale or property development. It follows that neither of the New Dwellings constitute an item of trading stock as defined in section 70-10 and the proceeds from their transfer will not be treated as ordinary income assessable under section 6-5. While the sale of the New Dwellings may constitute an isolated transaction entered into by a 'non-business taxpayer', Person A is not considered to have acquired the Original Property or begun the construction of the New Dwellings with the sole or dominant intention to make a profit from its resale or sale, as applicable, nor is it considered that the sale of that land, and any profit from that sale, arose in the course of carrying out a business operation or commercial transaction. As such, any net profit realised by Person A from the sale of the New Dwellings will similarly not be treated as ordinary income assessable pursuant to section 6-5.

The sale of the New Dwellings therefore represent a mere realisation of a capital asset. CGT event A1 happened upon the sale of the New Dwellings (CGT assets under section 108-5) and a capital gain was made by Person A pursuant to subsection 104-10(4) to the extent that the capital proceeds received on each transfer exceeds the cost base of the relevant CGT asset. Issue 2 Summary Given the proceeds from the sale of the New Dwellings represent the mere realisation of a capital asset, Person A has not carried on an enterprise and is not required to be registered for GST pursuant to section 23-5 of the GST Act. Detailed reasoning Section 23-5 of the GST Act states 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. Carrying on an enterprise Subsection 9-20(1) of the GST Act states that an enterprise is an activity, or series of activities, done: (a)          in the form of a business; or (b)          in the form of an adventure or concern in the nature of trade; ...

Section 195-1 of the GST Act states that the phrase 'carrying 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 5 provides the ATO view on the meaning of 'enterprise' for the purposes of entitlement to an ABN and Goods and Services Tax Determination GSTD 2006/6 6 provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act. Whether or not an activity, or series of activities, amounts to an enterprise is a question of fact and degree having regard to all of the circumstances of the case (paragraph 159 of MT 2006/1).

The phrase 'in the form of a business' (in paragraph 9-20(1)(a) of the GST Act) clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own (paragraph 170B of MT 2006/1). However, the phrase 'in the form of' does not have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. The activity must still be reasonably intended to be profit-making (paragraph 170A of MT 2006/1). For the purposes of paragraph 9-20(1)(b) of the GST Act, one-off and isolated property transactions can fall within something done in the nature of trade. Person A's is particularly in the circumstances where the property was purchased, developed (although Person A's may not be necessary) with the intention to resell at a profit. Paragraph 237 of MT 2006/1 provides:

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 ... Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal (paragraph 234 of MT 2006/1). While an activity such as the selling of an asset may not of itself amount to an enterprise, account should be taken of the other activities leading up to the sale to determine if an enterprise is carried on. The 'badges of trade' are considered at paragraphs 247 to 261 of MT 2006/1, and include the length of period of ownership, the frequency and number of similar transactions, supplementary work on or in connection with the property realised, the circumstances that were responsible for the realisation and trade versus investment assets.

Paragraphs 262 and 263 of MT 2006/1 provide that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. 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. Events leading up to the sale of the New Dwellings do not amount to activities in the form of a business carried on by Person A, nor activities in the form of an adventure or concern in the nature of trade. Broadly, Person A's is because the sale of the New Dwellings were not transactions of a commercial nature entered into for profit-making, as reflected by a number of factors which are largely the same as those upon which the answer to question 1 of issue 1 in Person A's ruling is based, including: •                     Person A has not engaged in any activity or trade on a regular or continuous basis;

•                     the Original Property was purchased for investment purposes; it was not purchased with the intention to resell at a profit, nor was it developed with the intention to resell at a profit; •                     the Original Dwellings provided rental income to Person A over a long period of time (approximately 15 years); and •                     the decision to sell the New Dwellings only arose as a consequence of a material change in Person A's and Person B's circumstances which were not foreseen at the time the development of the New Dwellings had begun. The sale of the New Dwellings by Person A represents a mere realisation of a capital asset and is therefore not considered to be made in the course or furtherance of an enterprise that he carries on, meaning paragraph 23-5(a) of the GST Act is not satisfied and Person A is not required to be registered for GST in connection with the sale of the New Dwellings. > 1 Income tax: property development: in what circumstances is land treated as 'trading stock'? 2 Income tax: am I carrying Son a business of primary production? 3 Income tax: whether profits on isolated transactions are income. 4

Section 118-20 provides that a capital gain made from a CGT event will be reduced if, because of the event, the amount is otherwise assessable under another provision of the ITAA (outside of Part 3-1). The gain will be reduced to zero if it doesn't exceed the amount included (subsection 118-20(2)). 5 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number . 6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999?