1 Will the supply of the property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
1 No. Issue 2 Question 1 Are the proceeds from the sale of Lot 2 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 of the Income Tax Assessment Act 1997 (ITAA 1997) and Part 3-3 of the ITAA 1997? Answer 1 Yes. Question 2 Will you incur a CGT event A1 under section 104-10 of the ITAA 1997 and be entitled to use the CGT discount under Division 115 of the ITAA 1997 in connection with the sale of Lot 2? Answer 2 Yes. This ruling applies for the following period : From 1 July 20YY until the financial year ending 30 June 20YY. The scheme commenced on: 1 July 20YY
You are a senior XX who works fulltime. You have no Australian Business Number (ABN). You are not and have never been registered for goods and services tax (GST). In 20YY, your child travelled interstate, away from where you are located, to spend time on a personal project. Due to travelling restrictions and quarantine requirements which arose because of the COVID-19 pandemic, your child decided to remain interstate. Your child only returned occasionally to visit family. Once your child completed their personal project, they were to return permanently. You wanted to secure a home for your child as house prices were rising. In 20YY, you purchased the property. Your child obtained no legal or equitable interest in the property. The size of the property was less than 900 m2. The purchase price was over $X00,000. This was within your price range. The amount financed was over $X00,000.
Upon purchase, the property consisted of one dwelling. Your intention was to construct an additional dwelling whilst retaining the original dwelling. Your child was to reside in the original dwelling when returning from interstate to visit family. By the time your child was to return permanently, construction of the additional dwelling was expected to be completed. Your child was then to move into the additional dwelling and as a result, you would make the original dwelling available for rent. The original dwelling was expected to serve as a proficient rental income stream. You wanted to engage in one purchase which would result in you having an investment property and another property for your child to live in. In 20YY, you lodged a development application to construct the additional dwelling. Later, this application was approved. There are stamped plans which show Council has approved the development and has deemed it compliant with their regulations.
You engaged an inexperienced builder who struggled to organise the contract and building approval. As a result, there were constant delays and approximately one year was poorly used. Payment was never made to the builder; however, was made to a preferred building certifier to issue a construction certificate. This certificate was never issued. In mid-20YY, your child occupied the original dwelling. This was the first time the dwelling had been occupied since state borders were reopened. In 20YY, you engaged with another builder. This builder successfully completed the required paperwork, had issued contracts and had organised a construction certificate. In mid-20YY, your child occupied the original dwelling again. Later in 20YY, construction of the additional dwelling was ready to commence. The new builder sent out their surveyor for the pegging of the slab, who noticed inconsistencies. As a result, the development application needed to be modified. In the meantime, the original dwelling was disconnected from electricity. In late 20YY, the modified development application was approved.
In the meantime, your child got married and established a family and local connections interstate. As a result, they began to spend significantly less time with you; however, continued to use the original dwelling with their spouse. Your child's in-laws also used the original dwelling whilst visiting from overseas. Your child's spouse found a full-time job. In 20YY, your child's spouse completed their probation period in their new job. At this time, your child began to have considerations of remaining interstate permanently. In mid-20YY, construction of the additional dwelling was finalised. The original dwelling had also been reconnected to electricity. You subdivided the property into 2 lots, Lot 1 and Lot 2. Lot 1 consists of the original dwelling while Lot 2 consists of the additional dwelling. The size of Lot 1 is over 500 m2 and the size of Lot 2 is less than 300 m2. Each of the subdivided lots has been valued at $X. The subdivision was carried out in accordance with government regulations.
The builder who finalised construction of the dwelling on Lot 2 surrendered possession of the dwelling pursuant to the construction contracts. There were defects which were your responsibility and an occupation certificate was not provided. Since then, you have received advice from the building certifier. By mid-20YY, you expect the occupation certificate to be issued. Throughout the property construction and subdivision process, you have relied on drafting services provided by A, building services provided by B and strata titling provided by C. At no point has Lot 1 been rented to date. The dwelling on Lot 1 needs repairs before it can be rented. These include landscaping, electrical repairs, leaking tiles in the bathroom and roof repairs. You deem the dwelling on Lot 1 to be habitable; however, state standards require the improvements to be made. At no point has Lot 2 been rented. You have decided to sell Lot 2 as your intentions with this subdivided lot have changed since purchase. In addition to your child's consideration to remain interstate permanently, you have incurred a notable tax liability. You have not earned any income from the property to date.
You plan on selling Lot 2 upon receipt of this private ruling. You are considering retirement after the sale. Your additional current and prior property ownership shows you own two properties, one of which is a subdivision and the other is your current residence. You have owned at least 2 houses that became subdivisions. To fund the construction and subdivision associated with the property, you took out a loan with AA Bank at residential retail rates. The interest rate of the loan was approximately Y%. This rate is now approximately Y+%. The undertaking of the loan was organised by a mortgage broker. AA Bank was only aware of the property acquisition. The loan was refinanced with BB Bank via substitution for other securities held by BB Bank. In the 20YY-YY financial year, these securities were sold. The terms of the loan with BB Bank were never interest only. The loan was then refinanced with CC Bank. The terms of the loan with CC Bank were interest only. This was to facilitate cashflow.
You did not seek from your financiers the application of their hardship policies to temporarily reduce loan repayments as you expected there to be adverse effects in the future. You determined the reduction in repayments would be insufficient to repay your tax liability. Your child also provided you a gift to fund the property construction and subdivision. You have intentions of repaying them.
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 40-75 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 6-10 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3 Does IVA apply to this private ruling? No.
Issue 1 Question 1 Will the supply of the property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? The property was purchased within the last four years and, after a subsequent subdivision, Lot 2 is expected to complete in mid-20YY. Lot 2 will be considered 'new residential premises' as defined in the GST Act as you have not rented it for any period, whereas subsection 40-75(2) requires that it be rented continuously for XX years. Where a supply of real property is new residential premises it is, prima facie, a taxable supply where the conditions of section 9-5 are met. Whether the sale of Lot 2 is taxable depends on whether those section 9-5 conditions are met. Section 9-5 provides that 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 to the indirect tax zone (Australia); and (d) you are registered or required to be registered for GST. However, the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.
The sale of Lot 2 will be made for arm's length consideration and is located in Australia. As such, we will consider whether the sale of the property is made in the course or furtherance of any enterprise that you carry on and, if so, as you are not registered for GST, whether you are required to be registered. Finally, it needs to be considered whether the supply of Lot 2, if it is made in the course of any enterprise, would be input taxed or GST-free. In the course or furtherance of an enterprise The term 'enterprise' is defined in section 9-20. Subsection 9-20(1) states: 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; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or ...
You are not currently renting Lot 1 or Lot 2 but you are renting other properties. You intend to rent Lot 1 once it is renovated and sell Lot 2 which you originally intended your child to live in. Leasing property is an enterprise and you intend to bring Lot 1 into that enterprise. 'Carrying on' an enterprise is defined in section 195-1 to include activities in the commencement and termination of the enterprise. We consider your activities in relation to Lot 1 is an enterprise as it meets paragraph 9-20(1)(c) because you are taking steps well beyond the feasibility stage and you intended to hold Lot 1 out on regular or continuous basis in the form of a lease. Therefore, we consider you are carrying on an enterprise of leasing. However, Lot 2 was constructed in order that your child could reside there. This activity is not within the enterprise of leasing and amounts to a personal or private and domestic arrangement.
Other activity or series of activities you conduct may be considered to be an 'enterprise' for GST purposes if they amount to a business, or are in the form of a business, or is a one-off adventure in the nature of trade, profit undertaking or scheme. This is primarily because the activities of construction and eventual sale of Lot 2 may be in the commencement and termination of a property development enterprise. Therefore, the only potentially relevant enterprise is in relation to the development and sale of Lot 2. The Commissioner, in 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 (MT 2006/1) provides guidance on the meaning of the term 'enterprise' for GST purposes. According to MT 2006/1, a business generally includes a trade that is engaged in on a regular or continuous basis, while 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. Isolated or one-off transactions will fall into this category.
The use of the words 'in the form of' before 'business' or 'an adventure or concern in the nature of trade' has the effect of extending the meaning of enterprise beyond entities carrying on a business or an adventure or concern in the nature of trade. Despite this, the focus is still on making an assessment of the factors indicating a business. Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), provides the main indicators of carrying on a business. These indicators include: • a significant commercial activity; • the purpose and intention of the taxpayer in engaging in the activity; • an intention to make a profit from the activity; • the activity is or will be profitable and there was a purpose of profit; • repetition and regularity of activity; and • 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.
These factors in turn are derived from a number of common law authorities spanning a number of jurisdictions but importantly approved by the High Court of Australia in matters including FCT v Whitfords Beach Pty Ltd (1968) 120 CLR 191 ( Whitfords Beach ), Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226, and Casimaty v FCT 97 ATC 5135 ( Casimaty ). A leading case considering isolated transactions is FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199 ( Myer ). The principles in this case, amongst others, were picked up and followed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income . These principles are considered below.
These cases indicate that the question whether a business is being carried on is a question of fact and the conclusion generally depends on weighing up all the relevant factors set out above. Considering your arrangement, you purchased the property with the intention of holding it long term as a place to rent as residential premises and also to house your child. This indicates that, when you purchased it, you did not have the intention to acquire and sell at a profit. The property was acquired 4 years before your intended date of sale of Lot 2. It is relevant that you have not held the asset long term. In terms of assessing the scale of your activity, Lot 2 is a strata titled less than 300m2 block. On this basis, the activity is only small scale. However, it is noted that at you have conducted previous subdivisions, construction and sales indicating some repetition of the activity.
The facts indicate that you do not have a significant commercial purpose or intention on your part in this arrangement. You arranged for a builder to construct a new residence which you have not yet fully completed and you were assisted by Z in relation to the strata titling. In this way, you retained experts but only to the extent of hiring builders. This factor, of itself, does not point to an enterprise. In Whitfords Beach , a factor pointing to the business character of the arrangement is the skill of the parties. It is noteworthy that you are not employed in a sector related to building or construction as an employee but you have some previous experience with projects of construction and renting the property and selling after some period. These factors suggest it is possible the sale is a business-like venture, but this factor alone is not determinative.
You acquired the property for over $X00,000. Even with finance costs and construction costs there is a prospect of a small profit given the lots are valued at around $X each. However, the facts do not indicate that you had the intention to profit from these activities even though there is profit potential. Even if the fact that there is a profit points to the activities being more business-like, it is, by itself, not sufficient to point to the activities being in the form of a business as profit needs to be considered against the entirety of the facts. On balance, we consider the abovementioned factors do not indicate you are conducting a business of property development in the form of a business or as a profit-making undertaking or scheme. It is not large scale. You do not have a business plan for developing the property as the original intent was to rent the property. You have not financed the arrangement in a way that a business would ordinarily finance a development as you had some family assistance with finance.
As the transaction volume may be described as one-off, we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade. MT 2006/1 provides guidance on the meaning of this expression. An 'adventure or concern in the nature of trade' refers to transactions that have a commercial nature which are entered into for a profit-making purpose. Paragraph 237 of MT 2006/1 states: 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, See McClelland v Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority said:
It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'. Paragraph 6 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case. Paragraph in 13 TR 92/3 provides that: 13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following: (a) badges of trade (b) the nature of the entity undertaking the operation or transaction (c) the nature and scale of other activities undertaken by the taxpayer
(d) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained (e) the nature, scale and complexity of the operation or transaction (f) the manner in which the operation or transaction was entered into or carried out (g) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (h) if the transaction involves the acquisition and disposal of property, the nature of that property, and (i) the timing of the transaction or the various steps in the transaction. These factors are considerably similar to the factors considered above. In relation to badges of trade, MT 2006/1 at paragraph 247 sets out that it: 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. Here Lot 1 is to be a rental property once renovated and it is accepted it is more likely to be an investment asset. Lot 2 is more personal in nature given the purpose for its construction as a family residence.
Your intention in relation to Lot 2 had to be altered significantly due to factors which were largely out of your control as your child was intended to reside there but his circumstances changed. The scale is very small and you are not employed in a related field. The arrangement is not complex and the nature of the property is that it was not acquired with profit in mind but rather as a rental and subsequent capital accretion and Lot 2 was for use of relatives. There are no other land parcels being adjoined to yours, you do not operate as a property developer although you or a related entity have done this activity before and have no future plans to do so. After weighing up the information, we consider that you are not carrying on an enterprise of developing Lot 2 for sale. Issue 2 Question 1 Are the proceeds from the sale of Lot 2 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 of the Income Tax Assessment Act 1997 (ITAA 1997) and Part 3-3 of the ITAA 1997? Income
Subsection 6-5(2) of the ITAA 1997 provides 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 Part 3-1 of the ITAA 1997 and Part 3-3 of the ITAA 1997 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 construction and subdivision. Paragraph 13 of TR 97/11 states the following indicators are relevant in determining 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.
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: • the intention or purpose of the taxpayer in entering 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.
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, which are: 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 way 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 property in 20YY, which already contained a dwelling. You had the intention to construct an additional dwelling. You intended for your child to use the original dwelling as a secondary place of residence whilst the additional dwelling was being constructed. When construction of the additional dwelling was to be finalised, your child was then to use this dwelling as their primary place of residence and you were to rent out Lot 1. You decided to subdivide the property into a 2-lot subdivision, with Lot 1 consisting of the original dwelling and Lot 2 consisting of the additional dwelling. Due to changing family circumstances, you decided to sell Lot 2. You are intending to retain Lot 1 and use this lot for rental purposes once the relevant dwelling satisfies regulations.
You are a senior xxxx. You borrowed money to pay for the construction and subdivision. You have conducted similar projects to this; however, these activities did not occur in a notably short period, unlike typical trade. This would not be considered as carrying out in a manner resembling other property development businesses. The activity does not have a commercial purpose or character. The facts do not indicate making a profit was the primary intention of the subdivision. There is no repetition or regularity to the activity as the subdivision has only occurred once. 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 and the associated affairs were your responsibility. The only significant service providers involved in the development were the drafting services, building services and strata titling. Though a profit is expected to be made upon the disposal of Lot 2, this will be after several years since purchase. This will not be in a shorter period as typically occurs in the property subdivision industry.
From an objective consideration of the facts and circumstances, we consider the activities you have undertaken do not have the indicators of carrying on a business or isolated commercial transaction with a view to profit. Though subdivision has been carried out by you in the past, your activities are more personal in nature and lack the commercial, intention and structure typically required to be regarded as carrying on a business or isolated commercial transaction with a view to profit. It is considered the proceeds from the disposal of Lot 2 is not from an isolated, commercial or business transaction. It is viewed as a mere realisation of a capital asset and will be assessable under Part 3-1 of the ITAA 1997 and Part 3-3 the ITAA 1997. Question 2 Will you incur a CGT event A1 under section 104-10 of the ITAA 1997 and be entitled to use the CGT discount under Division 115 of the ITAA 1997 in connection with the sale of Lot 2? As the proceeds from the sale of Lot 2 will be the mere realisation of a capital asset, it is considered a disposal of a capital gains tax (CGT) asset will occur which will be subject to CGT.
A CGT event A1, as per subsection 104-10(1) of the ITAA 1997, occurs if you dispose of a CGT asset. As per subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset if your ownership interest in a CGT asset changes to another entity. As per subsection 104-10(3) of the ITAA 1996, a CGT event A1 occurs when you enter a contract to dispose of the CGT asset. Therefore, at the time of entering the contract for the disposal of Lot 2, a CGT event A1 will occur as per section 104-10 of the ITAA 1997. Subdivision 115-A of the ITAA 1997 provides a discount capital gain is a capital gain that meets the requirements of section 115-10 of the ITAA 1997, section 115-15 of the ITAA 1997, section 115-20 of the ITAA 1997 and section 115-25 of the ITAA 1997. Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied: • you are an individual, a trust or a complying superannuation entity, • a capital gains tax (CGT) event happens to an asset you own, • the CGT event happened after 11.45am (by legal time in the Australian Capital Territory) on 21 September 1999,
• you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. Section 115-100 of the ITAA 1997 provides the discount percentage for an individual is 50%. In this case, you acquired the property in 20YY. As you owned the property for more than 12 months and its sale will occur after 21 September 19YY, you will be able to make a discount capital gain where the sale of Lot 2 results in a capital gain.