GST and income tax - subdivision of land Issue 1 - GST

1 Are you carrying on an enterprise under section 9-20 of the A New Tax Systems (Goods and Services Tax) Act 1999 ( GST Act ) ?

Yes, you are carrying on an enterprise under section 9-20 of the GST Act . Question 2 Are you required to be registered for GST under Section 23-5 of the GSTAct ? Answer Yes, you are required to be registered for GST if you are carrying on an enterprise and you have a GST turnover of more than $75,000. Question 3 Is the sale of the lots a taxable supply under section 9-5 of the GST Act? Answer Yes, the sale of the lots will be a taxable supply under section 9-5 of the GST Act if you are registered or required to be registered for GST. Issue 2 - Income Tax Question 1 Are you considered to be running a business of land subdivision with the income being assessable under section 6-5 of the Income Tax Assessment Act 1997 ( ITAA 1997)? Answer No. Question 2 Is the income you received from the land subdivision treated as an isolated profit-making transaction and assessable under section 6-5 of the ITAA 1997? Answer Yes. Question 3 Will the sale of the property constitute the mere realisation of a capital asset and be subject to the capital gains tax (CGT) provisions under section 104-10 of ITAA 1997? Answer No. Question 4

Do you meet the eligibility requirements under Division 35 of the ITAA 1997 to offset your losses against your other income? Answer No. This ruling applies for the following periods: GST: GST tax periods: 1 April 2021 to 30 June 2028 Income Tax: Year ended 30 June 2021 Year ended 30 June 2022 Year ended 30 June 2023 Year ended 30 June 2024 Year ending 30 June 2025 The scheme commenced on: 1 July 2020

You are an individual who is registered for an ABN. You are not registered for GST. You are the Director and Public Officer of XXX Pty Ltd. XXX Pty Ltd carries on a business activity. XXX Pty Ltd is registered for GST. Your son works for XXX Pty Ltd as an employee. Your son is not registered for GST. On XX XXX 2020, you and your son entered into a property purchase agreement for approximately 40 acres of vacant land for $XXX. The purchase price did not include GST. XXX Pty Ltd secured a loan to pay part of the property purchase cost and both you and your son were listed as guarantors for that loan. The contract for this purchase was signed by the seller on XX XXX 2020. The purchase price for this land was negotiated with the knowledge that work would need to be done clearing the land for compliance with council planning requirements. Settlement on this contract took place on XX XXX 2020. You sought no taxation or legal advice prior to purchasing the land. Purpose of property purchase Both you and your son are named as joint tenants on the contract for the sale and also on the settlement documentation.

Your original intention was to allow XXX Pty Ltd to use approximately 20 acres of the property and to secure subdivision permission for the remaining 20 acres to four 5-acre lots. XXX Pty Ltd is currently co-located with your residence in an area that has been rezoned and is no longer suitable for that business. Your son had also indicated that he wanted to build a home on the block at some future date. You and your son have a verbal agreement that all profit from the subdivision was to go to you and he would have a right to build a home on a portion of the land. This was confirmed in a discussion with your tax agent. In this discussion, it was confirmed that both you and your son considered any contributions he made to financing the purchase and subdivision of the property would be considered as a prepayment for his right to build on the land.

Advantages of having him included on the land title had been identified in prior discussions with both the mortgage broker and the solicitor engaged for conveyancing for the purchase of the land. The mortgage broker said that to secure finance to build his home, his name would need to be included on the property title. The solicitor also gave advice that he should be included on the title if he was a guarantor for the loan. You were also in favour of including him in the property title. On your retirement, you intend for him to become director of XXX Pty Ltd. Purchasing this land and moving the business operations onto the property also allowed an opportunity, once the land had been subdivided, for him to hold an asset and land on which to build a home You believed the land was undervalued as it included approximately 8,000m3 of landfill, old machinery, and other debris that was to become the new owner's responsibility under the terms of the sale. You have gained the skills and experience necessary to prepare the land for subdivision from your work with your business and ownership of a rural property.

You estimated, based on your knowledge of the area and your experience, that you could sell the 5-acre lots for $XX each and make a profit from the land that you had purchased. There has been no business plan developed for subdivision of the property. Property purchase The payment for the purchase price of the land and the additional costs on settlement included $XX paid from the loan secured to purchase the property and $XX paid from your retirement savings. You have incurred $XX in further costs since the property purchase. You do not know the ultimate cost of the subdivision activity as you have not developed a business plan and are meeting the individual expenses as they arise. You have made a quick estimate that it will cost $XX to bring the subdivision lots to the point where they can be sold. Finance for the property purchase You secured a loan of $XX to purchase the property, with XXX Pty Ltd as borrower. Interest on this loan was to be paid at a rate of 12.99%. The funding was approved, as per letter of offer dated XX XXX 2020, subject to the following conditions: • You and your son would be registered as the owners of the property • The loan offer was made to XXX Pty Ltd

• You and your son would be registered as guarantors for the loan • The loan period would be for 12 months • First registered security was over the purchased property with your personal residence as the second registered security. These funds were an on-loan agreement to you by XXX Pty Ltd to allocate the expenses and liability to the correct entity and not to XXX Pty Ltd. You applied for a 3 month extension to this loan at the end of the 12 month term but were not happy with the terms of the 6 month extension offered to you. The amount loaned was refinanced on XX XXX 2022 through a private loan for approximately $XX from a family member arranged by your solicitors. The amount required to pay out the original loan was $XX plus fees. You paid the difference between this amount and the $XX borrowed under the new private arrangement by selling some old equipment and other assets. Interest on the private loan is calculated at the St George Bank portfolio loan variable rate. This interest rate was 5.53% at the time the loan agreement was entered into.

Repayments on this loan have increased in line with interest rates as they have risen since the loan was entered into. The lender has agreed to continue providing this credit on these terms until the first subdivided lot has been sold. You and your son are each contributing half the monthly $XX repayments for this loan. The Private loan is secured by a mortgage over the purchased property. Subdivision of the property You engaged a town planner to prepare a submission to subdivide the land in XXX 2021. You gained approval, subject to satisfying conditions, with effect from XX XXX 2024 from the Western Australian Planning Commission to subdivide the property into five proposed lots: This approval is valid until XX XXX 2028. Under stage 1 of the subdivision plan, 4 of the proposed lots will be transferred into your name, and you hope to sell these 4 lots for market value. The remaining proposed lot will likely continue to be held by you and your son, but as tenants in common - (likely 75% to you) but this decision will only be made once the blocks are ready for the titles to be changed.

The owners of neighbouring properties were listed on the approval plan along with the address of their properties. Approval of the subdivision required their agreement to allow emergency access or passage through their properties. They received no benefits from the subdivision beyond the mutual emergency access provisions and incurred no costs. Under a potential stage 2 of the subdivision plan, you intend to further subdivide the remaining 20-acre lot into two 10-acre lots You will have the option of subdividing one of the 10-acre lots into two further 5-acre lots to be sold at market value. The other 10-acre lot will be set aside for your son to build a residence. A further subdivision application will be required for this possible second stage of the property subdivision. You are not able to estimate the costs of this possible further subdivision as costs are increasing rapidly. You do not yet have a firm date for this possible second stage of the subdivision.

Once the initial subdivision of the property is finalised, you intend to establish a settlement date for transfer of the property registration from joint ownership to individual title (in your name) for four of the proposed lots. These lots will then be sold by you. You plan to complete the subdivision activities as soon as resources and permissions allow. You have not yet considered what payment, or payments, will take place between you and your son to transfer title over the lots, or how the amounts of these payments might be determined. You have no prior experience managing a subdivision but believe the knowledge and contacts you have gained throughout your career will help you develop the skills required for this task. You have been managing the subdivision. You will also be undertaking the work of the subdivision using either your own resources or the resources of XXX Pty Ltd. You have engaged consultants between 2021 to 2024 to provide the following services: • Planning advice • Bushfire rating assessment • Environmental report • Drilling and testing • Electricity infrastructure • Access safety review • Surveying • Engineering report • Geotechnical investigation

Work on the subdivision is currently on hold pending the completion of diagrams by underground power design contractors and then you will be looking for supplies of bitumen for road extensions. Work on the subdivision commenced with initial clearing of the block in XXX 2020 and this work continued into 2021. Further work has been undertaken in the years from 2022 until 2024 as required by consultants or the conditions of the subdivision approval. You have not engaged any real estate agents to sell the four 5-acre lots that will be available for sale after this initial stage of the subdivision. Financial records for the subdivision are maintained by your bookkeeper and accountant when required. No dedicated bank accounts have been created for this subdivision. Use of company resources You have also allocated resources from XXX Pty Ltd to undertake work on this subdivision. Bookkeeping for the work performed by XXX Pty Ltd on the land you intend to subdivide is done by the XXX Pty Ltd's Bookkeeper. Use of XXX Pty Ltd resources, including labour, for work on the purchased property has been listed below by the financial year in which the work was undertaken:

• 2020-21 financial year - work performed clearing the property and cartage to and from the property while used as an earthmoving yard for XXX Pty Ltd. No invoices have been issued for this work. • 2021-22 financial year - 5.5 hours drilling test holes for the soil testing for the subdivision. This has been documented as requiring an invoice to yourself for $XX plus GST. • 2022-23 financial year - $XX plus GST in machine hours for work on drainage under the road and other block work regarding the subdivision. This has been documented as requiring invoicing to yourself. • 2023-24 financial year - $XX plus GST in machine hours to continue the subdivision (road base etc). This has been included in the 2023-24 financial accounts as income but has not yet been paid. Invoicing of subdivision work to yourself was initiated on advice from your accountants in 2024. Prior year tax returns may need to be amended to reflect these charges for work for his private purposes. Costs for work performed by XXX Pty Ltd are recorded in a block expense (no GST) account and treated as drawings to yourself.

Any debit balances arising from this work at the end of the financial year will be treated as ITAA 1936 Division 7A loans. Your and your son's roles in the subdivision You have managed all work on the subdivision to date. Your son has no control over the subdivision activities, no intention to profit from the activities, no intention to be involved in the activities, and has not taken any steps to be involved in the activities. You have met all refinancing fees and other fees and amounts to do with financing. You have met all legal and development costs in the financial years ending 30 June 2022, 30 June 2023 and 30 June 2024 including surveyor fees, application fees, and all works required to get the preliminary subdivision approved. You and your son are in receipt of distributions from a family trust. You have used these distributions as a source of funding for the loan repayments. Your son will continue to receive trust distributions for his share of the loan payments until the subdivision is completed and he raises the funds to pay his portion of the land and/or loan.

Your son has met 50% of the loan monthly repayments as his contribution to the land he will be building on, being $XX to date. There is no written agreement between you and your son that states that he holds his share of the property on your behalf. It was only a verbal agreement between you. Future intentions In the future, you may move your business to the remaining 10 acre lot or subdivide this lot into two 5-acre lots that can then be sold. Your son has no intentions of and has never planned to undertake any subdivision activities. Upon your retirement, expected in 3-5 years, your son will take over XXX Pty Ltd. You will not retire until the subdivision is complete as you have used your retirement savings to fund the property purchase and subdivision and have no other superannuation. Current and previous property ownership You and your son have owned property together previously but have never done a property subdivision before.

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 23-5 A New Tax System (Goods and Services Tax) Act 1999 section 188-10 Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 Division 35 Income Tax Assessment Act 1997 subsection 35-5(2) Income Tax Assessment Act 1997 paragraph 35-10(1)(a) Income Tax Assessment Act 1997 subsection 35-10(4) Income Tax Assessment Act 1997 subsection 35-55(1) Income Tax Assessment Act 1997 section 102-5 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 118-20

Please note: • all references to legislation within Issue 1 of this edited version are to the A New Tax Systems (Goods and Services Tax) Act 1999 unless otherwise specified. • all references to legislation within Issue 2 of this edited version are to the Income Tax Assessment Act 1997 unless otherwise specified. A full court report of the court cases referred in the following decisions can be found as follows: • for cases that include 'HCA' in any of the citations refer to www.hcourt.gov.au • for case that include 'FCA' in any of the citations refer to www.fedcourt.gov.au • for cases that include 'AATA' in any of the citations refer to www.austlii.edu.au and search via Administrative Appeals Tribunal of Australia link Issue 1 Question 1 Summary Yes, you are carrying on an enterprise under section 9-20 the GST Act. Detailed reasoning The term 'enterprise' is defined for GST purposes in section 9-20 and includes, among other things, an activity or series of activities done: • in the form of a business (paragraph 9-20(1)(a)) or • in the form of an adventure or concern in the nature of trade (paragraph 9-20(1)(b)).

The phrase 'carry 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 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 the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN). 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) provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes. In the form of a business Paragraphs 177 to 179 of MT 2006/1 discuss the main indicators of carrying on a business which include those indicators contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) discussed below at issue 2; question 1.

For the same reasons set out below, we consider that the activities undertaken in the subdivision of the Property and the subsequent sale of the subdivided lots, do not display the salient indicators of a business which, amongst other things, include transactions entered into on a continuous and repetitive basis. The indicators set out in paragraph 178 of MT2006/1 (which are identical to those factors included in paragraph 13 of TR 97/11) are not present to a sufficient degree to warrant the conclusion that you are carrying on an enterprise in the form of a business. 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. Paragraph 245 of MT 2006/1 refers to 'the badges of trade' with paragraphs 247 to 257 discussing the various 'badges of trade' that may be taken into account when determining whether assets have the characteristics of 'trade' and held for income producing purposes or held as an investment asset or for 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. Paragraph 262 of MT 2006/1 acknowledges that the question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions. Paragraph 263 continues, stating that the issue to be decided is whether the activities being conducted 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. Paragraph 265 of MT 2006/1 discusses that the cases of Statham & Anor v. Federal Commissioner of Taxation ( Statham ) and Casimaty v. FC of T ( Casimaty ) have established a number of factors to assist in determining whether activities are a business or an adventure or concern in the nature of trade with reference to real property transactions including: • 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. Paragraphs 252, 253, 266 and 270 of MT 2006/1 provide the following commentary: 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. 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.

266 In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. In relation to land bought with the intention of resale paragraph 270 of MT 2006/1 specifically provides:

270. In isolated transactions, where land is sold that was purchased with the intention of resale at a profit (which would be ordinary income) the Commissioner considers these activities to be an enterprise. This would be so whether the land was sold as it was when it was purchased or whether it was subdivided before sale. An enterprise would be carried on in this situation because the activities are business activities or activities in the conduct of a profit making undertaking or scheme and therefore an adventure or concern in the nature of trade. Example 28 and 29 at paragraphs 271 to 276 of MT 2006/1 cover scenarios which we consider to be on foot with yours. Examples of subdivisions of land that are enterprises Example 28 271. Stefan and Krysia discover that the local council has recently changed its by-laws to allow for smaller lots in the area. They decide to take advantage of the by-law change. They purchase a block of land with the intention to subdivide it into two lots and to sell the lots at a profit. They carry out their plan and sell both lots of land at a profit.

272. Stefan and Krysia are entitled to an ABN in respect of the subdivision on the basis that their activities are an enterprise being an adventure or concern in the nature of trade. Their activities are planned and carried out in a businesslike manner. Example 29 273. Tobias finds an ocean front block of land for sale in a popular beachside town. He devises a plan to enable him to afford to live there. He decides to purchase the land and to build a duplex. He plans to sell one of the units and retain and live in the other. The object of his plan is to enable him to obtain private residential premises in an area that would otherwise be unaffordable for him. 274. Tobias carries out his plan. He purchases the land, and lodges the necessary development application with the local council. The development application is approved by the council, Tobias engages a builder and has the duplex built. He sells one unit, and lives in the other. 275. Tobias is entitled to an ABN. His intentions and activities have the appearance of a business deal. They are an enterprise.

276. Further, there is a reasonable expectation of profit or gain (see paragraphs 378 to 405 of this Ruling) as his plan has enabled him to be able to keep and live in one of the units We consider that it is relevant that when you purchased the Property you were already aware of its subdivision potential and within a short period of acquiring the Property, you conducted research, made formal enquiries with the Council, and lodged a development application for its subdivision. You expect to make a profit from the sale of the lots. Notably you have not ruled out further subdividing the balance lot. Overall, this indicates that the activities undertaken by you to subdivide and sell the lots are activities in the conduct of a profit-making undertaking or scheme and are therefore in the form of an adventure or concern in the nature of trade. As such, in weighing up all of the facts of this case, and in line with the reasons set out below for concluding that the profits made on the sale of the lots will be assessable as ordinary income, we consider that your activities amount to an enterprise. Question 2 Summary

Yes, you must register for GST if you are carrying on an enterprise and you have a GST turnover of more than $75,000. Detailed reasoning Section 23-5 of the GST Act provides that you are required to be registered if: (a) you are carrying on an enterprise; and (b) your GST turnover meets the registration turnover threshold. Currently, the registration turnover threshold is $75,000. You must register for GST when you expect your GST turnover to reach the registration turnover threshold (or more). According to subsection 188-10(1) of the GST Act, your GST turnover meets a particular turnover threshold if: (a) your current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or (b) your projected GST turnover is at or above the turnover threshold. Your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the previous 11 months.

Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months. Your GST turnover is your total business income (including GST-free sales), minus: • GST included in sales to your customers • sales to associates that aren't for payment and aren't taxable • sales not connected with an enterprise you run • input-taxed sales you make • sales not connected with Australia. In your case, the proceeds from the sale of the lots will be included in the calculation of your projected GST turnover. Based on the expected selling price of $XX for each lot, the sum of the value of your supplies will exceed $75,000. Consequently, your projected turnover will exceed the registration turnover threshold, and you will be required to be registered for GST. Question 3 Summary Yes, the sale of the lots will be a taxable supply under section 9-5 if you are registered or required to be registered for GST. Detailed reasoning 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 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 subdivided vacant lots would be a GST-free or input taxed supply. In this case, the sale of the lots will be made for consideration, the supply will be made in the course or furtherance of an enterprise that you carry on and the supplies are connected with the indirect tax zone as the lots are located in Australia. As such, subsections 9-5 (a); (b); and (c) are satisfied. Before we can determine if the sale of the lots will be a taxable supply, it needs to be determined whether you are registered or required to be registered for GST. You are not presently registered for GST, but as you are carrying on an enterprise, you can choose to register for GST.

If you reach the GST turnover threshold of $75,000, you will be required to register for GST. You reach the GST turnover threshold if either: • your current GST turnover - your turnover for the current month and the previous 11 months - totals $75,000 or more ($150,000 or more for non-profit organisations) • your projected GST turnover - your total turnover for the current month and the next 11 months - is likely to be $75,000 or more ($150,000 or more for non-profit organisations). Conclusion Once your projected turnover is likely to exceed the registration turnover threshold. you will be required to be registered for GST and will then meet the other requirements of section 9-5. As such, your supply of the four lots will be a taxable supply. Issue 2 Question 1 Summary You are not considered to be running a business of land subdivision and the income from this activity will not be considered assessable as business income under section 6-5 of the ITAA 1997. Detailed reasoning

Under section 6-5 of the ITAA 1997 your assessable income includes income according to ordinary concepts (known as ordinary income) derived directly or indirectly from all sources, during a relevant financial year. There are two ways the proceeds or profit from the sale of land can be treated for taxation purposes as ordinary income under section 6-5 of the ITAA 1997: • as income from carrying on a business • as income from an isolated business or commercial transaction with a view to a profit. Whether the proceeds are treated as income or capital will depend on the situation and circumstances of each case. In determining whether the proceeds of your land subdivision activity are income from carrying on a business, income from an isolated business or commercial transaction with a view to profit, or the mere realisation of an asset no single factor will be determinative; rather, it will be a combination of factors that will lead to a conclusion as to the character and nature of the activity from which the income is derived. The question of whether you are carrying on a business with your land subdivision activity is discussed below.

The Commissioner's view on whether a taxpayer is carrying on a business is found in TR 97/11. 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 land subdivision. Paragraph 13 of TR 97/11 states that 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 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. Determining whether a business is being carried on depends on the impression gained from looking at all the indicators against the facts of the case and deciding whether these indicators provide the operation with a commercial flavour. Application to your situation Each of the indicators outlined in TR 97/11 that a taxpayer is carrying on a business are applied to your circumstances as follows: Whether the activity has a significant commercial purpose or character • your original intention when purchasing the property was to secure permission to subdivide 20 acres into 5 acre lots for resale, allow your son to build a residence on a further 10 acre lot, and either provide land for the operations of XXX Pty Ltd or further subdivide the remaining 10 acres into 5 acre lots for resale.

• you believed the land was undervalued when you purchased it for $XX and that it would cost you an addition $XX to bring the subdivision work to the point where you could sell the four individual 5 acre lots. You estimate that each of these 5-acre lots can be sold for $700,000 given the recent increase in property prices. As a result, you expect to make a profit from the subdivision of this property. • you secured funding through a 12 month loan for $XX from FF in the name of the XXX Pty Ltd. This loan was refinanced in the months following the expiry of the 12 month term through a private loan to you and your son with interest charged at market rates. You also contributed $XX from your retirement savings towards this purchase. • on completion of this initial subdivision activity, you intend to exchange titles on the subdivided lots so you are registered as the sole owner of the four 5 acre subdivided lots derived from the 40 acre property. • the remainder 20 acre lot is likely to be further subdivided to: - 10 acres of land for your son to construct a residential dwelling for a family home, and

- You will then have the option of further subdividing the remaining 10 acre lot you hold into two further 5 acre lots that can then be sold. • you are managing the subdivision activity but have no experience in managing a subdivision. You are, however, confident that the knowledge and contacts gained through your business activity in the earth moving business will provide insights as you develop your ability to undertake the subdivision of the property. • you have not prepared a business plan. Whether the taxpayer has more than just an intention to engage in business • you and your son entered into a contract to purchase the property to be subdivided on XX XXX 2020. • you engaged the town planner in the 2021 calendar year to prepare a submission to subdivide the land. • you began work preparing the property for the initial subdivision of the property into 1 lot of 20 acres and 4 lots of 5 acres with the clearing work done by XXX Pty Ltd in the 2020-21 financial year. • you have continued this activity throughout the 2021-22, 2022-23, and 2023-24 financial years.

• you obtained conditional approval for the initial subdivision on XX XXX 2024 from Western Australian Planning Commission. The approval is valid until XX XXX 2028. You plan to complete the subdivision activities as soon as resources and permissions allow. • once the initial subdivision work is complete, you and your son will arrange for a settlement date upon which ownership of the four 5 acre lots will be changed from joint tenants to separate titles in your name. • under a potential stage 2 of the subdivision plan, you intend to further subdivide the remaining 20-acre lot into two 10-acre lots • you will have the option of subdividing one of the 10-acre lots into two further 5-acre lots to be sold at market value. • The other 10-acre lot will be set aside for your son to build a residence. Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • you believed there was a profit to be made from subdivision of this property when you first purchased it. You believed the property was undervalued at the $XX purchase price you paid and estimated that you could sell the four 5 acre lots produced by your initial subdivision activity for $XX each.

Whether there is repetition and regularity of the activity • you have made consistent progress on preparing the property for subdivision since you took possession of the land on XX XXX 2020 • this is the only property subdivision activity you and your son have carried on • you intend to retire in the next 3-5 years • you and your son have owned land previously but have not undertaken a subdivision activity previously. 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 • the activity of self-managing a land subdivision activity does not occur in the ordinary trade of business • you are actively involved in the subdivision process. You are the decision maker during subdivision activity • the scale of the subdivision activity is small. You currently plan to create 5 lots of land with your subdivision activity , and to sell 4. You may subdivide the remaining lot you hold to create 2 further lots to also be sold and one lot to be held by your son for personal use. • the subdivided land will be marketed to the public • you have not yet engaged any real estate agent to sell the blocks.

Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit • you are scheduling and coordinating the consultancies and services required for the subdivision activity and liaising with other stakeholders such as the owners of neighbouring properties. • you are relying on records kept by theXXX Pty Ltdbookkeeper to keep track of the cost of work performed byXXX Pty Ltd on the property you are subdividing . • other records will be kept by your accountant when required. • you have not opened a separate bank account for the activity. The size, scale and permanency of the activity • you are subdividing your property into 5 lots and intend to sell 4 of those lots in the first instance. You have the option of subdividing the remaining lot to create 2 further lots to be sold and one other lot to be held by your son for his own private use. • you do not intend to undertake any further subdivision activity. Your subdivision activity is not of a permanent nature. • the scale of your activity is relatively small. Whether the activity is better described as a hobby, a form of recreation or a sporting activity

• you intended to make a profit through your purchase and subsequent subdivision of the property • the purchase of the property was not connected to any particular interest or hobby you have. Conclusion On the balance of the application of these indicators to the facts of your case, the Commissioner is satisfied that you are not carrying on a business of property subdivision. When you acquired the property, you recognised there was potential to subdividing the land and making a profit. Your actions demonstrate your motive in undertaking this activity was to make a profit and you have some prospect of making that profit.

You did not, however, have any intention of carrying on a business, had no business plan, no prior experience in property subdivision, and did not consult or seek any expert advice or opinion before you commenced your activity. The activity you are undertaking is on a small scale and will not be of a permanent nature. You have relied on records kept by theXXX Pty Ltd bookkeeper to keep track of the cost of work performed byXXX Pty Ltd. Your accountant also kept other records when required. You did not use a separate bank account for the subdivision activity. Overall, your records have not been maintained in a systematic manner. Question 2 Summary The income you will receive from the sale of the lots from subdivided land will be treated as an isolated profit-making transaction and assessable under section 6-5 of ITAA 1997. Detailed reasoning Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) sets out the Commissioner's view on the application of the decision in Commonwealth of Taxation v Myer Emporium Ltd

[1987] HCA 18; (1987) 163 CLR 199and provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 asordinary income. Isolated transactions are described in paragraph 1 of TR 92/3 as • those transactions outside the ordinary course of business of a taxpayer carrying on that business; and • those transactions entered into by non-business taxpayers. An isolated commercial transaction is considered to be a transaction made outside the ordinary course of business of a taxpayer carrying on a business, as well as a transaction entered into by a non-business taxpayer. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction or operation is generally income when both of the following elements are present: • the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and • the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction.

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.Also, it is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. As discussed in paragraph 49 of TR 92/3: 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. Whether an isolated transaction is a business operation or commercial in character will depend on the circumstances of each case, and the distinction has often been discussed in the context of case law. In Federal Commissioner of Taxation v Whitfords Beach Pty Ltd [1982] HCA 8; [1982] 150 CLR 335 ( Whitfords Beach)

the taxpayer acquired 1,584 acres of land in 1954 to secure access to beach shacks for its shareholders. In December 1967 all the shares in the taxpayer were acquired by three companies for $1.6 million. These companies acquired the shares to gain control of the land with the intention of developing, subdividing, and selling the land for a profit. Investigations of sources of services and roads for the subdivided lots commenced from that time. In 1969, the land was rezoned. It was expected after the development and sale of the subdivided land the taxpayer would make a profit of $7 million. Subdividing the land commenced in 1970, the first subdivided lots of land were sold 1971 and the final lots were sold in 1975. The High Court held that the subdivision of the land was a business operation that commenced in December 1967 with the intention to make a profit from subdividing the land. The extent of the taxpayer's activities was a key factor in this decision, and the profits were held to be assessable as ordinary income.

Some indicators that may be taken into account in determining whether an isolated transaction amounts to a business operation or commercial transaction are listed in paragraph 13 of TR 92/3: • the nature of the entity undertaking the operation or transaction; • the nature and scale of other activities undertaken by the taxpayer; • the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; • the nature, scale and complexity of the operation or transaction; • the manner in which the operation or transaction was entered into or carried out; • the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; • if the transaction involves the acquisition and disposal of property, the nature of that property; and • the timing of the transaction or the various steps in the transaction. In considering whether the profits on the subdivision of your property and the sale of the subdivided lots are income from an isolated commercial transaction these indicators have been applied to the facts of the case and your circumstances below:

The nature of the entity undertaking the operation or transaction • you jointly own the land that you intend to subdivide and sell the majority of lots • you are managing the land subdivision and are the sole decision maker for this activity • the other party to the purchase of the land you are subdividing is your son. The nature and scale of other activities undertaken by you • you have a background in carrying on a business. You are the Director and Public officer of XXX Pty Ltd, the company that owns the business • your son is taking no part in the activity beyond paying 50% of the loan repayments and is not expecting any of the profits on the sale of the subdivided lots. • your son is an employee of the business • neither you nor your son have undertaken a subdivision activity previously. The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained • you and your son purchased the land for $XX in 2020. • you paid additional costs associated with the purchase • you secured a 12 month loan of $XX fromFF in the name of XXX Pty Ltd which was refinanced later to a private loan to you and your son personally

• your expenses to date in undertaking this subdivision total at least $XX • based on the broad cost amounts provided, the land subdivision works for 4 lots in the first stage of this operation will cost a further $XX to reach the selling point • you have yet to pay at least $XX for work performed byXXXX Pty Ltd preparing your property for subdivision. • you originally estimated that you could sell each lot of land produced by the initial subdivision for $XX . The nature, scale and complexity of the operation or transaction • you are currently subdividing the 40 acre property you have purchased into 5 lots • this first subdivision will produce: - Four 5 acre lots to be sold and one 20 acre lot to be further subdivided in the future. • The proposed subdivision of the remaining 20 acres will provide: - 10 acres of land for Liam to construct a residential dwelling for his family home, and - you will then have the option of further subdividing the remaining 10 acre lot into two further 5 acre lots that can then be sold.

• you and your son experienced difficulties in securing funding for the purchase of the 40 acres of land. You needed to satisfy FF's conditions to obtain the finance. After extending the term of the finance, you refinanced the FF loan and secured a private loan. • you are managing the land subdivision activity • in managing this subdivision, you are scheduling work performed by contractors, service providers and other third parties, and coordinating this work with the various approval processes required to complete the subdivision activity. • you engaged the town planner to prepare a submission to subdivide the land in the 2021 calendar year. You received approval, subject to satisfying conditions, from the Western Australian Planning Commission on XX XXX 2024, approval is valid for 4 years. The subdivision approval process has taken 4 years and you still need to satisfy conditions attached to the approval. You needed to engage with your neighbours surrounding the property to create an emergency access or passage through their properties. You will need further approval from the WA Planning Commission to subdivide the remaining 20 acre lot.

The manner in which the operation or transaction was entered into or carried out • you sought no expert advice on the subdivision activity prior to your purchase of your property but have been relying on knowledge of the process and contacts gained through your business experience. • you and your son experienced difficulties financing the purchase of the land • you have engaged consultancy and other services as required as you have carried out your subdivision activity • you have not engaged a real estate agent to sell the four 5 acre lots • you intend to sell the 5 acre lots for market value. The nature of any connection between the relevant taxpayer and any other party to the operation or transaction • you are the manager and decision maker for the land subdivision activity • your son has made half the repayments on the loan you secured to assist with the purchase of the property, $XX to date • you and you son are listed as joint tenants on the registered property title • your son has no interest in the subdivision activity, is taking no part in it, and expects no profit from it

• you and your son have agreed that he is to hold 10 acres of the property until completion of the subdivision activity • you and your son intend to register the title for the subdivided lots you each hold in your respective names on completion of the subdivision activity • you are dealing at arm's length with third parties you have engaged to provide consultancies, services, or undertake work on the land subdivision activity • you have also used the resources ofXXX Pty Ltd and are being invoiced for the work XXX Pty Ltd has performed. If the transaction involves the acquisition and disposal of property • you and your son have purchased 40 acres of vacant land in XXX 2020. Your original intention was to subdivide and sell at least half this land as it was more than you and your son required for your personal use.

• at a future date, after the completion of the subdivision of the 40 acres of land, you and your son intend to transfer ownership of the property from joint tenants into separate lots of land owned in your own names. Your son will have 10 acres of the land transferred into his own name to reside on. You will have a total of 30 acres of land transferred into your name solely. You intend to use the land as follows: four 5 acres lots of land for you to sell and a further 10 acres you may either retain for yourself or seek approval to further subdivide for sale in 5 acre lots. The timing of the transaction or the various steps in the transaction. • you purchased your 40 acre property with the intention of making a profit from subdividing and selling at least half of the property • you commenced work on this subdivision shortly after you settled on your purchase of the property on XX XXX 2020, have continued with this work up to the current time • you have approval for the subdivision activity you are currently undertaking and that approval is valid until XX XXX 2028 • you plan to complete the subdivision activities as soon as resources and approvals allow

• you do not yet have a firm date for the possible further subdivision of the remaining 20 acre lot. Conclusion In this case a purpose of profit can be objectively discerned from your activity. You had several motives in purchasing this property and these included an intention to profit from the subdivision and sale of at least half the land you purchased. You recognised an opportunity to enterprisingly make a profit on the purchase and subdivision of the undervalued land by using your existing skills and experience and industry contacts, have gained planning approval to proceed with the subdivision, and have taken significant steps towards that end.

While the scale of your activity is commensurate with that of other individual investors buying and reselling property, your activity extends to a level of complexity that goes beyond that which would be expected in property investment. You have experienced difficulties in financing the purchase of the property. You have involved your son in the activity to assist with gaining the initial finance and to provide an opportunity for him to acquire a lot, and for succession planning with your view to retirement in the next 3 to 5 years. In undertaking the work required to subdivide and sell the portion of the property that is excess to your and your son's requirements, you are treating this property as trading stock rather than an asset that can be simply resold for a capital gain. Your activity has a commercial character.

You have recognised the property provided an opportunity to profit from an undervalued purchase price. Once the subdivision work is completed and the land is suitable to be marketed to the public, it is your perception, you will profit from the sale of the lots of land. The decisions and effort you have made to acquire the land and manner in how you have proceeded to carry out the subdivision of the property is similar to the action of the taxpayers in the Whitfords Beach case.

The subdivision activity that you carry on is not considered to be carrying on a business activity (refer to the decision for Question 1 above). We have formed the view the subdivision activity is an isolated profit making transaction. You have shown you have undertaken the subdivision activity with the intention or purpose to make a profit. You intend to carry out the subdivision activity in a commercial manner. As you intend to make a profit from your activity and it has a commercial characterthe profits made from the sale of the subdivided lots will be considered profits from an isolated commercial transaction. Therefore, any profits obtained from the sale of the lots will be assessable income under section 6-5 of the ITAA 1997. Question 3 Summary The sale of the subdivided lots of land will not be treated as a mere realisation of a capital asset and will not be subject to capital gains tax. Detailed reasoning

Proceeds from the sale of property more often represent the mere realisation of capital assets, with gains subject to the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997. In discussing the distinction between mere realisation of an asset and commercial transactions paragraph 36 of TR 92/3 states: 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. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme. In Stratham & Anor v Federal Commissioner of Taxation [1988] FCA 761; 20 ATR 228 ( Stratham ), which was an appeal by the taxpayers against the previous decision Case V65 , the issue of the matter involving the Commissioner seeking to assess the profits from the realisation of the land sold during the 1981-82 income tax year as assessable income.

The taxpayers were the trustees of the estate of the deceased. In 1970 the deceased acquired the family farm of approx 240 acres (approximately 97 hectares). The deceased did not acquire the property with the purpose of subdividing and selling of the lots of land. In 1976 some of the land was sold and a half interest in most of the reminder of the land was sold to a company (Bickerton Holdings) that was controlled by relatives of the deceased. The company acquired the interest in the land without any dominant intention to resell the land by subdivision. In 1976, the deceased and the company formed a partnership to raise beef cattle on the property. Unfortunately the activity was unsuccessful because of the decease's decline in health and the work commitments of the company's controllers.

In middle to later 1979 the deceased and the company decided to sell the whole or part of the land. The owners sought approval for a staged plan of subdivision from the local council. The process the owners undertook with the local council involved lodging an application to subdivide the property and the provision of a bond by way of a bank guarantee. After the local council approved the subdivision application, the local council undertook all necessary subdivisional work. The owners obtained some professional advice but did not engage any contractors. The deceased died in October 1980. The owners sold the subdivided land simply by listing it with the local real estate agents. The owner did not participate in the marketing of the subdivided land. Between 1 July 1980 and 30 June 1986 105 lots were sold through four stages of subdivision. The facts presented to the court demonstrated the way in which the subdivision and sale progressed was simple. Significant characteristics of the activity included at 229: • the owners were satisfied to sell the land as one parcel but were unable to do so;

• no moneys were borrowed by them, although a bank guarantee was provided to the local council; • only very limited clearing and earthworks were involved; • the owners relied upon the local council to carry out roadworks, kerbing, electricity and sewerage works; • the owners did not erect buildings on land including a site office; • the owners had no business organisation, no manager, no office, no secretary, no letterhead; • the owners did not advertise the land for sale; • the owners did not engage any contractors, although they did obtain some professional advice; • books were kept in relation to land sales and • the land was sold simply by listing it with the local real estate agent. The Full Court of the Federal Court of Australia decided the applicant's subdivision of the land was merely the advantageous and enterprising realisation of the capital asset rather than a business of land development carried on by the owners or an undertaking or scheme for the purpose of profit-making. The court said on page 12 (FCA):

It is well established... that the mere realisation of an asset at a profit does not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. The mere magnitude of the realisation does not convert it into such a business, undertaking or scheme; but the scale of the realisation activities is a relevant manner to be taken into account in determining the nature of the realisation, ie in determining whether the facts establish a mere realisation of a capital asset or a business or profit-making undertaking or scheme. In Casimaty v Commissioner of Taxation [1997] FCA 1388; (1997) 37 ATR 358 ( Casimaty

) the taxpayer, Casimaty, carried on a primary production business on a property comprising 988 acres (400 hectares approx) of land acquired from his father in 1955. The taxpayer experienced severe financial hardship and deteriorating health. In 1972 or 1973, Casimaty attempted to sell the land as a whole without success. Left with no alternative, the taxpayer decided to sell of parts of his land. Between 1975 and 1995 the taxpayer arranged for creating eight subdivisions equivalent to two-thirds of his property. Casimaty arranged for works to be carried out to the extent of preparing the land for sale such as farm fencing on boundaries, extension of water mains, making water connections, construction of road entrances, construction of road access and satisfying conditions set out by the Council. The taxpayer also slashed and cleared scrub, filled in some creeks and waterholes and stabilised creek levy banks. Casimaty did not provide any public facilities. The taxpayer was not involved in the sale and marketing of the subdivided lots of land nor did he acquire land for subdivision or resale.

The Federal Court of Australia, Ryan J presiding, held the taxpayer's activities were no more than mere realisation. The court's decision was based on: • Casimaty had acquired and continued to hold the land to carry on the primary production business and it was the location of his family's residence; • he undertook only necessary activities to obtain local Council approval for the subdivision of the parts of the land. If Casimaty had constructed houses, provided internal fencing or other improvements these may indicate the taxpayer had intention of carrying on a business of land development and improvements; • there is nothing to suggest a change in the purpose or object with which the land was held; • he did not acquire additional land to added to the original 'stock' of land. If additional land was acquired it may have indicated an intention to carry on a business of land development; • the taxpayer did not claim as a business expense the interest on moneys borrowed to finance the subdivisional costs; • Casimaty outsourced the sales and advertising of the land lots. In McCorkell v Federal Commissioner of Taxation [1998] AATA 562; (1998) 39 ATR 1112 ( McCorkell

) the taxpayer's family had carried on an orchard farm since 1917. McCorkell had inherited the property and orchard. During the early 1980's, the land was rezoned as future residential zone. McCorkell had been approached by property developers but the price they quoted was too low for McCorkell. In 1982 McCorkell had approach surveyors and engineers about subdividing the property but they advised McCorkell he would experience difficulties to sewer the property and did not take the matter further. In 1984. McCorkell obtained Council approval for part of four hectares of land to be subdivided into 40 lots. During this time, McCorkell had been contemplating retirement. He had no family to continue the orchard and residential development was now surrounding his land. McCorkell had been experiencing complaints from nearby residents about the effects of spraying his orchard on the neighbours. In 1987, the taxpayer met with a consulting engineer and surveyor who advised the sewer issue could be resolved and the land could be subdivided. A draft subdivision plan was prepared. In 1988 McCorkell was introduced to a consultant who made applications, on McCorkell's behalf, to council to obtain approval for the subdivision. The council approved the subdivision of the balance of the four hectares of land to subdivide into 17 lots. In 1989, McCorkell engaged joint real estate agents to sell the lots of land.

The subdivision of the land was carried out in two stages. McCorkell obtained a short-term bank loan to supplement his funds to pay for the first stage of the subdivision. Sales from the land during the first stage repaid the loan. Based on the facts of the case, the tribunal decided McCorkell had no direct involvement in planning and contracting work for the subdivision or in selling the lots of land. Therefore, the tribunal held McCorkell was not carrying on a business of subdividing and selling land. The proceeds from the sale of land were capital in nature and was not assessable income. In comparison, Stevenson v Federal Commissioner of Taxation [1991] FCA 284; (1991) 22 ATR 56 ( Stevenson

) the taxpayer's family had carried on a farm activity on 476 acres of land since 1904. Stevenson inherited the property in 1953. From the 1960's, Stevenson decided to sell most of the land and engaged a third party to find a buyer. Around this time, the local Water Authority acquired 26 acres from the taxpayer and used the land to form a lake. Stevenson decided to take advantage of the lake views and determined the value of the land had increased. In the 1970's, Stevenson decided to sell 360 acres to a plantation company but retained 35 acres bordering the lake. In 1975, a third party on behalf of Stevenson submitted an application to Council to rezone the 35 acres of land. The Water Authority objected to the application and imposed stringent conditions relating to water supply and sewerage. As a result of these conditions, Stevenson found he could not engage a developer willing to pay his price without a rezoning approval. Consequently, from 1977, Stevenson developed the land himself by subdividing the land into residential lots in stages. Stevenson organised finance and marketing of the subdivision. The subdivided lots were sold from 1980 to 1986.

The Federal Court held the extent of the activities and the how Stevenson went about to realise the land amounted to a business. Capital gains tax The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own. CGT event A1 under section 104-10 of the ITAA 1997 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. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. Section 118-20 of the ITAA 1997 contains anti-overlap provisions which operate to reduce any capital gains by any amounts which are included in your assessable income under a provision of the ITAA outside of Part 3-1 as a result of the sale. Application to your circumstances

The expression 'mere realisation' is used to contrast the activity with a business operation or a commercial transaction carrying out a profit-making scheme. We have already addressed the latter two above. In considering if profit will be the result of mere realisation, we would consider relevant court cases. Conclusion In comparing your facts and circumstances with the court cases of Stratham , Casimaty and McCorkell , you do not share similar characteristics. Characteristics described in each court report state: • the three parties inherited or were gifted their properties and carried on their respective business activity to varying degrees. None had intentions when inheriting the land to carry out a land subdivision activity to gain a profit. • each had their own reason for ceasing the business activity and making the decision to subdivide the properties. • each party did not have the knowledge and experience of land subdivision. • each engaged different parties to carry out the land subdivision without the taxpayer being involved. • each party had different ways of financing the activity. • each party was not involved in the marketing and sales of the lots. Compared with

Stratham , Casimaty and McCorkell, you have not held the property for a long period of time, nor have you been conducting a different activity on the property to generate an income. Your case is similar to the Stevenson case in that you recognised the subdivision potential and the profit to be gained from the property. You are managing the subdivision activity and you are the decision maker. Therefore, the Commissioner is satisfied the future sale of the lots from the property is not a mere realisation of your capital asset. Capital gains tax Generally, a CGT event A1 will occur on the disposal of your ownership interests in each of the subdivided lots. The capital gain for the event is worked out by comparing the cost base of your ownership interests in the asset with the capital proceeds for its disposal. However, in your case, the Commissioner views the future sale of the subdivided lots is not a mere realisation of capital assets, but an isolated commercial transaction, any profit on the sale will be assessable under section 6-5 of the ITAA 1997.

Therefore, any capital gain made on the sale of the subdivided lots will be reduced to the extent that the profit from the sale is included in your assessable income under section 6-5 of the ITAA 1997. Question 4 Summary You do not meet the eligibility requirements under Division 35 as you are not running a business. Detailed reasoning Division 35 prevents losses from a non-commercial business activity carried out by an individual (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless: • the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a); • an exception in subsection 35-10(4) applies; or • the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more financial years. Subsection 35-5(2) of the ITAA 1997 specifies that Division 35 is not intended to apply to activities that do not amount to carrying on a business.

As the Commissioner has determined that you are not carrying on a business of land subdivision, you do not meet the eligibility requirements under Division 35 of the ITAA 1997 to offset your losses against your other income