1 Are the proceeds from the sale of the Lots assessable as statutory income, on capital account, as a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary Yes. The proceeds from the sale of the Lots will be mere realisation of a capital asset. Issue 2 Question 1 Will goods and services tax (GST) apply to the sale of subdivided Lots?
No. The sale of the Lots will not be a taxable supply and consequently, there will be no GST payable in respect to the sale pursuant to section 9-40 of the GST Act. This ruling applies for the following periods : Year Ended 30 June 2024 Year Ending 30 June 2025 Year Ending 30 June 2026 Year Ending 30 June 2027 The scheme commenced on: 1 July 2023
During 20XX and 20XX you were looking to purchase residential land in the vicinity of your spouse's new employment and to build a home. Your desire was to have a couple of acres of land for the house and to plant a garden. However, you could not find the suitable land size in a semi-rural setting in close proximity to schools, transport, town facilities, and a drivable distance to your spouse's work and your family. In 20XX, you and the family trust purchased a block of land (the Land). Ownership The registered owners of the land are tenants in common: Table 1: The registered owners of the land are tenants in common: Name Ownership The company as trustees for the family Trust X% undivided shares You X% undivided shares Your spouse and you are both directors of the company and beneficiaries of the family Trust. The land remains the sole asset of the family Trust, and the registered ownership remains unchanged after the subdivision. Neither the company, the family Trust, you, nor your spouse are registered for GST. The Land The block of land included an old house. The land size was somewhat larger than you wanted.
To achieve the desirable size of the land, you divided the land into 3 lots in accordance with the Low-Density Residential zoning as follows: Lot A with the existing old house, Lot B which was vacant land, and Lot C which you intended to keep and build a new home on it. Lot C (the Property) is accessed by a driveway that passes between lots A and B. You intended to live in the existing old house while construction of the new house was going on. Your spouse commenced living in the old house. Subdivision You submitted an application to subdivide the Land into 3 lots. Architects have drawn up plans for your new house to be built on the Property. You lived in the old house for a brief period. In 20XX, titles were created for lot A, B and C. The building project was put on hold and you decided to proceed with your original plan of selling lot A and lot B. The Property was retained for own use and eventual return to build a home on it. However, you never returned to live or build the new house. Lot A with the old house was sold. No GST was included in the sale price. Lot B with vacant land was sold. No GST was included in the sale price.
From 20XX to 20XX, there was little activity (grass cutting) or no activity on the remaining land, the Property. Rates were paid. You were not in a position to return to live or to build the new house. The Property remained vacant and unused. In 20XX, approximately XX years after the subdivision, and entering into your 60's, you began to feel the Property was beyond your physical capabilities to establish and maintain. You decided to subdivide the land into five lots and sell four of the five lots. Although, you wish to make a profit, your primary motivation was to downsize the property, as it had become too large for you to manage. In 20XX, you authorised a firm of engineers to apply for the subdivision on your behalf. In 20XX, a permit was granted to subdivide the Property into five lots connected to the sewer system. You decided to proceed with the subdivision and you engaged an engineer to design the private driveway, drains, electrical supply etc.
In 2019, you terminated the engineer's services as very little progress was made since their engagement. You then engaged another engineer to carry out the detailed design of the private driveway, drainage, electrical supply etc. More specifically, they would: • survey the property, • engineer and design the common driveway, • engineer and design utility connections to each lot (water, power gas, NBN, sewer and stormwater systems), • submit the design to the Council for approval, • obtain quotes for construction on your behalf, and • oversee construction to ensure quality and compliance with the design and specifications. In 2020, when the pandemic commenced in Australia, design work proceeded sporadically for the following six months. In 2020, the Council approved the detailed design. In 2021, a contractor was engaged to construct and provide site supervision and site access was granted to the contractor and construction commenced.
In 2022, the construction was mostly completed. The subdivided Lots were put on the market after construction of the common driveway but before the titles were available. This was to gauge potential buyers' interest in making a deposit in advance of titles being issued. Lot D was never on the market. A practical completion letter was then issued by the Council. In 2023, a certificate of final completion was issued by the Council. In 2024, titles for the five Lots were registered and released. Currently the Lots are advertised at $XXX,000 each. Over time, you reduced the asking price and now have Lot 4 listed at $XXX,000, but there is no interest. Your intention is to sell the Lots while retaining Lot D to eventually build a home on when your personal circumstances and finance permit. You have undertaken the sales process by yourselves and listed the Lots as "For Sale by Owner", but there were no offers and no Lots have been sold. You will engage a real estate agent if you are unsuccessful in selling the Lots. You have a local law firm to undertake the conveyancing. The following improvements were made to the property: driveway improvement utilities connection
construction of sewer and stormwater systems establishment of gardens along the common driveway and installation of paling fences on the boundary building, painting and installation of the entry gate. You have personally undertaken the following activities related to the subdivision of the land: overseeing engineering work engaging the construction contractor spraying and removing acres of weeds, and slashing grass removing dead trees clearing rubbish and waste left from construction conducting site inspections during construction establishing garden beds on the common ground planting and maintaining driveway gardens and trees installing garden watering systems designing, building, and installing entry gates and fences painting fence posts along the driveway regularly attending the site to sweep the driveway, pull weeds, clear leaves and branches, and feed garden beds advertising and selling the Lots.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3 A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 section 9-15 A New Tax System (Goods and Services Tax) Act 1999 section 9-20 A New Tax System (Goods and Services Tax) Act 1999 section 9-25 A New Tax System (Goods and Services Tax) Act 1999 section 9-30 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 38 A New Tax System (Goods and Services Tax) Act 1999 Division 40 A New Tax System (Goods and Services Tax) Act 1999 section 1
Question 1 Are the proceeds from the sale of the Lots assessable as statutory income, on capital account, as a mere realisation of a capital asset and subject to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary Yes. The proceeds from the sale of the Lots will be mere realisation of a capital assets. Detailed reasoning Income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 6-10 of the ITAA 1997 states your assessable income also includes some amounts that are not ordinary income, which is assessable as statutory income. There are 3 ways the proceeds from a property development can be treated for taxation purposes: • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from carrying on a business of property development; • Assessable ordinary income under section 6-5 of the ITAA 1997 as income from an isolated commercial transaction with a view to profit; or
• A mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 as statutory income. Carrying on a business Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view on whether a taxpayer is carrying on a business. Although TR 97/11 deals with the issues in determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is carrying on any type of business including property subdivision and development. Paragraph 13 of TR 97/11 states that the following indicators are relevant in determining whether a taxpayer is carrying on a business: a) whether the activity has a significant commercial purpose or character; b) whether there is repetition and regularity of the activity; c) 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; d) 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
e) whether the activity is better described as a hobby, a form of recreation or a sporting activity. f) Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. Isolated Transactions Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997. Paragraph 6 of TR 92/3 states profit from an isolated transaction is generally income when both of the following elements are present: a) the intention or purpose of the 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.
Paragraph 7 of TR 92/3 goes on to state 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 states some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction: 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. If a transaction satisfies the elements set out above, it is generally not a mere realisation of an investment. Application to your situation You acquired the Land in 2002 to build a home and extensive garden, but due to changing family circumstances decided to subdivide it into three lots. You sold two of the lots and kept the Property. In 2017 you decided to subdivide the Property into a 5-lot subdivision, because the last lot was too big for you to manage so you wished to downsize. Your intent was to dispose of the Lots you didn't need and keep Lot D to live on. The trust has been inactive, and its only activity has been the part ownership of the Land. The activity of the subdivision was undertaken by you and your spouse who used your personal funds to pay for the subdivision instead of borrowing money. The amount of funds used for the subdivision were relatively low in comparison to others in the industry.
This is a one-off project and although the land has been subdivided a second time, these activities did not occur in a short period, unlike typical trade so would not be considered to being carried out in a manner similar to other property development businesses. It does not have a commercial purpose or character because even though there was a hope of making a profit that was not the intention of the subdivision. There is no repetition or regularity to the activity as the subdivision has only occurred twice and this was due to you wanting to downsize the land size. The activity is on a small scale in comparison to that of the ordinary trade. The activity is not planned and organised in a businesslike manner as most of the activities undertaken were done by you. No other significant service provides or other parties such as architects or consultants were involved in the development except for the actual construction contractor and engineer.
Though a profit was made, it was over the course of many years, and not in a shorter period as typically occurs in the property subdivision industry. The Land was originally purchased as low density residential and was not rezoned during the ownership period. Hence, from an objective consideration of the facts and circumstances we consider that the activities you have undertaken do not have the indicators of carrying on a business or isolated commercial transaction with a view to profit. Therefore, it is considered that the proceeds from the disposal of the Lots is not from an isolated, commercial or business transaction of you or the trust. It is viewed as a mere realisation of a capital asset and will be assessable under Part 3-1 and Part 3-3 the ITAA 1997. Issue 2 Question 1 Will goods and services tax (GST) apply to the sale of subdivided Lots? Detailed reasoning Unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act.
all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au The requirements of a taxable supply are set out in section 9-5, which states: 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 indirect tax zone; and (d) You are registered or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. For the sale of the Lots to be a taxable supply, all requirements in section 9-5 must be satisfied. The circumstances in which a supply is GST-free or input taxed are found in Divisions 38 and 40 respectively. In your case, there are no provisions in the GST Act under which your sale of the Lots would be a GST-free or input taxed supply.
The sale of the Lots will satisfy the requirements in paragraph 9-5(a) and 9-5(c), as the sale will be a supply of the Lots for consideration (the sale price of the Lots) and will be connected with the indirect tax zone since the Lots is located in Australia. However, you are not registered for GST. The primary issue to resolve is whether the supply of the Lots will be made in the course or furtherance of an enterprise you carry on under paragraph 9-5(b). If so, a further issue to consider is whether you are required to be registered for GST as per paragraph 9-5(d). Enterprise The term 'carrying on' an enterprise is defined in section 195-1 and includes doing anything in the course of the commencement or termination of the enterprise. The term 'enterprise' for GST purposes is defined in subsection 9-20(1) and includes, among other things, 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. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number
(MT 2006/1) provides the Commissioner's view on the meaning of 'enterprise' in the context of the A New Tax System (Australian Business Number) Act 1999 . Paragraph 20 of MT 2006/1 provides that the ruling's discussion on 'enterprise' applies equally to the GST Act. Goods and Services Tax Determination GSTD 2006/6 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? (GSTD 2006/6) also provides that the discussion on 'enterprise' in MT 2006/1 applies to the GST Act. Paragraph 159 of MT 2006/1 discusses how to determine whether an activity or a series of activities amounts to an enterprise: 159. 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. Furthermore, paragraph 160 of MT 2006/1 discusses the need to identify all relevant activities to determine the existence of an enterprise:
160. It is important that the relevant activity or series of activities are identified in order to determine whether an enterprise is being carried on. This is because one activity may not amount to an enterprise but that activity taken into account with other activities may form an enterprise. All activities need to be taken into account including activities from the commencement to the termination of the enterprise. For further information on commencement and termination activities, see paragraphs 120 to 148 of this Ruling. Paragraph 180 of MT 2006/1 explains that small scale activities can still constitute an enterprise: Small scale activities 180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.
Based on the facts of your case, the relevant activities are the activities associated with preparing the Lots for sale, including the process of subdividing the Property into five Lots and eventual sale of the subdivided Lots. These activities are in line with your intention to reduce the land size to a manageable level for when you decide to build a new house on Lot D. These activities will now be examined in light of the relevant types of enterprises listed under section 9-20, as described above. Are the relevant activities relating to the land in the form of a business? Section 195-1 broadly defines 'business' to include: any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business. Paragraph 178 lists the main indicators as follows: a significant commercial activity; a purpose and intention of the taxpayer to engage in commercial activity; an intention to make a profit from the activity; the activity is or will be profitable; the recurrent or regular nature of the activity; the activity is carried on in a similar manner to that of
other businesses in the same or similar trade; activity is systematic, organised and carried on in a businesslike manner and records are kept; the activities are of a reasonable size and scale; a business plan exists; commercial sales of product; and the entity has relevant knowledge or skill. The facts in this case suggest that the indicators outlined in paragraph 178 of MT 2006/1 are not sufficiently present to conclude that you are carrying on a business within the context of the GST Act. The main purpose of the subdivision was to reduce the land to a manageable size for you and to retain Lot D to build your new home. Your actions were confined to those necessary to subdivide and make the Lots attractive for sale. While you hope to make a profit from this activity, it is not the primary purpose and intention of the subdivision. Your activities were not conducted on a regular and repetitive basis. Therefore, we consider that you are not carrying on a business in the context of the GST Act in relation to your activities on the Property. We now consider whether your activities fall under the form of an adventure or concern in the nature of trade, as per paragraph 9-20(1)(b).
In the form of an adventure or concern in the nature of trade Paragraph 244 of MT 2006/1 explains that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business, but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. Paragraph 245 of MT 2006/1 refers to 'the badges of trade' which provides a 'common sense guidance' in reaching a conclusion on whether a transaction has the characteristics of a business deal and whether an asset is held as a trading/revenue asset or a capital/investment asset held for either investment or personal enjoyment. 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 Commissioner's view on the badges of trade in MT 2006/1 includes: The subject matter of realisation
247. This badge of trade considers the form and the quantity of property acquired. If the property provides either an income or personal enjoyment to the owner it is more likely to be an investment than a trading asset... The length of period of ownership 249. A trading asset is generally dealt with or traded within a short time after acquisition. The frequency or number of similar transactions 251. The greater the frequency of similar transactions the greater the likelihood of trade. Supplementary work on or in connection with the property realised 252. Improving property beyond preparing an asset for sale, to bring it into a more marketable condition and gain a better price suggests an element of trade. The circumstances that were responsible for the realisation 253. Trade involves operations of a commercial character. As assets can be sold for reasons other than trade, the circumstances behind the sale need to be considered. For example, a quick resale may have occurred as a result of sudden financial difficulties. 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... 264. The cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset. 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 (a profitmaking undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). 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 your activities relating to an isolated transaction were in the form of an adventure or concern in the nature of trade, we examined your facts and circumstances, and considered the badges of trade outlined above. The Land was purchased with the intention of eventually building your family home. Since acquiring the Land in 20XX, you have neither built on it nor conducted any form of business there, and it has not generated any income. The Land has always been treated as your capital asset. The only improvements to the Land were subdivisions in 20XX and 20XX. In 20XX, you subdivided the Land to achieve a desirable land size for establishing an ornamental and productive garden, and building a new home, as the Land was too large for you to manage. However, your circumstances changed when your spouse became redundant, preventing you from realising your plan. In 20XX, upon entering your 60's, you decided to subdivide again, as the Property became too large to maintain. You aim to retain Lot D and eventually build a house. There was never a change in the purpose for which the Property was held.
Although the Land has been subdivided a second time, these activities did not occur in a short period, unlike typical trade. Your activities to improve the Lots did not go beyond preparing an asset for sale and you financed the subdivision with your own funds. You are not registered for GST and you do not carry on any enterprise or run a business on the Property. The Property remained vacant and idle since your first subdivision in 20XX. Conclusion Having considered the facts of the case against the badges of trade and other factors listed above, we conclude that the activities undertaken to subdivide and sell the Lots do not amount to an enterprise for GST purposes pursuant to subsection 9-20(1). As paragraph 9-5(b) is not satisfied, all the requirements for a taxable supply are not met. Therefore, the sale of proposed the Lots will not be a taxable supply pursuant to section 9-5. You are not required to be registered for GST and you will not be liable for GST on the sales under section 9-40.