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 ) ?
1 No, you are not 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 2 No, you are not required to be registered for GST as you are not carrying on an enterprise. Question 3 Is the sale of the lots a taxable supply made by you under section 9-5 of the GST Act? Answer 3 No, as you are not 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 receive from the land subdivision to be treated as an isolated profit-making transaction and assessable under section 6-5 of the ITAA 1997? Answer 2 No. Question 3 Will the transfer of title of the subdivided land from joint ownership to individual ownership be subject to the capital gains tax (CGT) provisions under section 104-10 of ITAA 1997? Answer 3 Yes, if it results in your holdings being less than a 50% interest in the subdivided land. Question 4
Do you meet the eligibility requirements under Division 35 of the ITAA 1997 to offset your losses against your other income? Answer 4 No. This ruling applies for the following periods : GST tax periods: 1 April 20XX to 30 June 20XX Income Tax: Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
You work for XXX Pty Ltd as an employee. You are not registered for GST. Your parent is the Director and Public Officer of XXX Pty Ltd. XXX Pty Ltd carries on an earthmoving business activity. XXX Pty Ltd is registered for GST. On XX XXX 20XX, you and your parent entered into a property purchase agreement for approximately XX acres of vacant land. 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 parent were listed as guarantors for that loan. The contract for this purchase was signed by the seller on XX XXX 20XX. 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 20XX. You sought no taxation or legal advice prior to purchasing the land. Purpose of property purchase Both you and your parent are named as joint tenants on the contract for the sale, and also on the settlement documentation.
The original intention for the purchase was to allow XXX Pty Ltd to use approximately XX acres of the property and to secure subdivision permission for the remaining XX acres to X-acre lots. XXX Pty Ltd is currently co-located with your parent's residence in an area that has been rezoned and is no longer suitable for that business. You had also indicated that you wanted to build a home on the block at some future date. You and your parent have a verbal agreement that all profit from the subdivision will go to your parent and you 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 parent considered any contributions you made to financing the purchase and subdivision of the property would be considered as a prepayment for your right to build on the land.
Advantages of including your name 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 this home, your name would need to be included on the property title. The solicitor also gave advice that you should be included on the title if you were a guarantor for the loan. Your parent was also in favour of including you on the property title. On your parent's retirement, he would like you to become director of XXX Pty Ltd. He also recognised the opportunity for you to acquire a lot of the land on subdivision that you could use for residential purposes. Your parent believed the land was undervalued as it included approximately XX of landfill, old machinery, and other debris that was to become the new owner's responsibility under the terms of the sale. Your parent estimated, based on his knowledge of the area and his experience, that he could sell the X-acre lots for $XX each and make a profit from the purchased property. 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 parent's retirement savings. Your parent has incurred $XX in further costs since the property purchase. Finance for the property purchase XXX Pty Ltd secured a loan from FF to pay part of the property purchase cost and both you and your parent were listed as guarantors for that loan. Interest on this loan was to be paid at a rate of XX%. The funding from FF was approved, as per letter of offer dated XX XXX 20XX, subject to the following conditions: • You and your parent would be registered as the owners of the property • The loan offer was made to XXX Pty Ltd • You and your parent 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 parent's personal as the second registered security.
These funds were an on-loan agreement to you and your parent by XXX Pty Ltd to allocate the expenses and liability to the correct entity and not to XXX Pty Ltd. You and your parent 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 by FF. The amount loaned from FF was refinanced on XX XXX 20XX through a private loan from a family member arranged by your solicitors. The amount required to pay out the FF was $XX plus fees. Your parent paid the difference between this amount and the amount borrowed under the new private arrangement by selling some of his old equipment and other assets. Interest on the private loan is calculated at the X Bank portfolio loan variable rate. This interest rate was X% 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 parent are each contributing half the monthly repayments for this loan.
The Private loan is secured by a mortgage over the purchased property. Subdivision of the property Your parent engaged a town planner to prepare a submission to subdivide the land in July 20XX. Approval was granted, subject to satisfying conditions, with effect from 1 March 20XX from the Western Australian Planning Commission to subdivide the property into five proposed lots. This approval is valid until XX XXX 20XX. Under stage 1 of the subdivision plan, four of the proposed lots will be transferred into your parent's name, and he hopes to sell these 4 lots for market value. The fifth proposed lot will be larger, and will likely continue to be held by you and your parent, but as tenants in common - (likely 75% to your parent) 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, your parent intends to further subdivide the remaining large lot into two lots Your parent will have the option of subdividing one of the lots into two further X-acre lots to be sold at market value. The other X-acre lot will be set aside for you 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 and your parent intend to establish a settlement date for transfer of the property registration from joint ownership to individual title (in your parent's name) for the four proposed lots to be sold. Your parent plans to complete the subdivision activities as soon as resources and permissions allow. You and your parent have not yet considered what payment, or payments, will take place upon the transfer of title over the lots between you, or how the amounts of these payments might be determined.
You have no prior experience managing a subdivision and are relying on your parent's ability to use the knowledge and contacts gained throughout his career to carry on the activity of the subdivision. Your parent has been managing the subdivision. Your parent has also been undertaking the work of the subdivision using either his own resources or the resources of XXX Pty Ltd. Your parent has engaged consultants between 20XX to 20XX to provide the following services. Work on the subdivision is currently on hold pending the completion of diagrams by underground power design contractors and then your parent will be looking for supplies of bitumen for road extensions. Work on the subdivision commenced with initial clearing of the block in 20XX and this work continued into 20XX. Further work has been undertaken in the years from 20XX until 20XX as required by consultants or the conditions of the subdivision approval. Your parent has not engaged any real estate agents to sell the four X-acre lots that will be available for sale after this initial stage of the subdivision.
Financial records for the subdivision are maintained by your parent's accountant and XXX Pty Ltd.'s bookkeeper when required. No dedicated bank accounts have been created for this subdivision. Your and your parent's roles in the subdivision You have no control over the subdivision activities, no intention to profit from the activities, no intention to be involved in the activities, and have not taken any steps to be involved in the activities. Your parent has managed all work on the subdivision to date. Your parent has met all refinancing fees and other fees and amounts to do with financing. Your parent has met all legal and development costs in the financial years ending 30 June 20XX, 30 June 20XX and 30 June 20XX including surveyor fees, application fees, and all works required to get the preliminary subdivision approved. You and your parent are in receipt of distributions from a family trust. You have both used these distributions as a source of funding for the loan repayments. You will continue to receive trust distributions for your share of the loan payments until the subdivision is completed and you raise the funds to pay your portion of the land and/or loan.
You have met 50% of the loan monthly repayments as your contribution to the land you will be building on, being $XX to date. There is no written agreement between you and Your parent that states you hold your share of the property on his behalf. It was only a verbal agreement between you and your parent l. You have no intentions of and have never planned to undertake any subdivision activities. Current and previous property ownership You and your parent 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 23-10 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 No, you are not 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 by you in relation to 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 in 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. You have no control over the subdivision activities, no intention to profit from the activities, no intention to be involved in the activities, and aside from contributing 50% of the loan repayments, you have not taken any steps to be involved in the activities. 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. We consider that your involvement in the subdivision is minimal - you have no control over the subdivision activities, no intention to profit from the activities, no intention to be involved in the activities, and aside from contributing 50% of the loan repayments, you have not taken any steps to be involved in the activities. 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 not be assessable as ordinary income, we consider that your activities do not amount to carrying on an enterprise. Question 2 Summary
No, as you are not carrying on an enterprise you cannot register for GST. 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. Additionally, section 23-10 of the GST Act provides that you may be registered if: (a) you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold) (b) you intend to carry on an enterprise from a particular date. As you are not, and do not intend to carry on an enterprise, you cannot register, nor are you required to register for GST. Question 3 Summary No, the sale of the lots will not be a taxable supply by you under section 9-5 as you are not considered to be making the supply, and you are not 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 supplies are connected with the indirect tax zone as the lots are located in Australia. However, the supplies will not be made in the course or furtherance of an enterprise that you carry on. Conclusion As you are not registered or required to be registered for GST, and you are not making a supply of the property in the course or furtherance of an enterprise that you carry on, you do not meet the requirements of section 9-5 of the GST Act and will not be making a taxable supply. Issue 2 Question 1 Summary
You are not considered to be running a business of land subdivision and any 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 part in the purchase and ongoing subdivision activity had no commercial purpose or character. You have no prior experience in this activity and had no business plan. All research into the potential of the subdivision activity for generating a profit was undertaken by your parent. All initial costs, including the deposit on the land and other costs associated with the purchase have been met by your parent. • Your intention in signing the contract for the purchase of the land and agreeing to contribute to the loan repayments was to secure one of the subdivided lots to build yourself a home. Whether the taxpayer has more than just an intention to engage in business • You had no intention to engage in business through your involvement in the purchase and subdivision of this land. Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • Your activity had no profit-making purpose and was undertaken for personal purposes. You have a verbal agreement with your parent that he is to keep all profits from the subdivision activity.
• You have a common understanding with your parent that you will transfer your share of the title in the subdivided lots that are to be held by him on completion of the activity into his name. You are also expecting him to transfer his share of the subdivided lot to be retained by yourself into your name. Whether there is repetition and regularity of the activity • Your involvement in the subdivision activity has been limited to making 50% of the repayments on the loan secured to purchase the land, and involvement as an employee of XXX Pty Ltd in work performed on the land that has been arranged by your parent. 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 • Your involvement in the land subdivision activity has been on a smaller scale and of a more domestic nature than ordinary trade in this line of business. Your involvement in this activity has been limited to your initial inclusion on the land titles, ongoing contributions to loan repayments, and work performed as an employee of XXX Pty Ltd.
• All other work undertaken in managing and implementing the subdivision has been undertaken by your parent. The costs of refinancing the original loan secured for purchase of the land have been met entirely by your parent, as have the ongoing costs of the subdivision activity. Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit • Your parent has been responsible for all commercial aspects of this activity and those records of a business nature that have been kept have been kept on his initiative. The size, scale and permanency of the activity • The scale of your financial contribution is to this activity is consistent with your stated intent of acquiring land to build yourself a residence. You have contributed 50% of the repayments on the loan secured to purchase the land. Monthly repayments at current variable market rates are $XX. Your total contributions to these repayments have totalled $XX to date. Whether the activity is better described as a hobby, a form of recreation or a sporting activity
• Your involvement in this activity is for personal purposes and of a domestic scale and nature . It is not likely to amount to a business. Conclusion Overall, the Commissioner considers that you are not carrying on a business, and any income generated by your involvement in this subdivision activity will not be assessable as business income under section 6-5 of the ITAA 1997. Question 2 Summary Any income received from the sale of the subdivided lots will not 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 as ordinary 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. 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 your parent intends to subdivide and sell • the other party to the purchase of the land to be subdivided is your parent, your parent • your parent is managing the land subdivision and is the sole decision maker for this activity • you have no control over the subdivision activity. The nature and scale of other activities undertaken by you • neither you nor your parent have undertaken any previous subdivision activity •
you are taking no part in the activity beyond paying 50% of the loan repayments and are not expecting any of the profits on the sale of the subdivided lots • your parent has arranged for XXX Pty Ltd to undertake work on the land as part of his subdivision activity • you are an employee of XXX Pty Ltd and have worked on the subdivision of the land as an employee of XXX Pty Ltd. The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained • you and your parent purchased the land for $XX in 20XX. • you paid no part of the initial deposit for this purchase or the additional costs associated with the purchase. • by agreement with your parent, your financial contribution to this subdivision activity is limited to 50% of ongoing repayment of the loan secured to finance the purchase of the land. The monthly loan repayments at current variable market rates are $XX. You have contributed $XX to these repayments to date. • your parent is meeting all other expenses associated with the subdivision activity. • your parent l originally estimated that he could sell each lot of land produced by the initial subdivision for $XX.
The nature, scale and complexity of the operation or transaction • your parent is currently subdividing the property you have jointly purchased into X lots • this first subdivision will produce: o XX X acre lots to be sold and one large lot to be retained by you and your parent . • The remainder large lot is likely to be further subdivided to: o XX acres of land for you to construct a residential dwelling for a family home, and o your parent will then have the option of further subdividing the remaining XX acre lot he will hold into two further XX acre lots that can then be sold. • you and your parent experienced difficulties in securing funding for the purchase of the land . You were both required to act as guarantors for the loan to satisfy FF's conditions to obtain the finance. After extending the term of the finance, your parent refinanced the FF loan and secured a private loan in both your names. • your parent is controlling, managing, and coordinating all work for the land subdivision activity • your parent engaged the town planner to prepare a submission to subdivide the land in the 20XX calendar year. Approval was granted, subject to conditions, by the Western Australian
Planning Commission on XX XXX 2024. The approval is valid for XX years. The subdivision approval process has taken XX years and you still need to satisfy conditions attached to the approval. 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 with your parent but have been relying on his knowledge of the process and contacts gained through his business experience. • you and your parent experienced difficulties financing the purchase of the land • your parent has engaged consultancy and other services as required as he has carried out the subdivision activity • your parent intends to sell the XX X XX acre lots for market value. The nature of any connection between the relevant taxpayer and any other party to the operation or transaction • your parent is the manager and decision maker for the land subdivision activity • you have made half the repayments on the loan you secured to assist with the purchase of the property, $XX to date • you and your parent are listed as joint tenants on the registered property title •
you have no interest in the subdivision activity, are taking no part in it, and expect no profit from it • you and your parent have agreed that you are to hold XX acres of the land until completion of the subdivision activity • you and your parent intend to register the title for the subdivided lots you each hold in your respective names on completion of the subdivision activity. If the transaction involves the acquisition and disposal of property • you and your parent purchased vacant land in XX 20XX. The original intention was for your parent to subdivide and sell at least half this land as it was more than you and he required for your personal use. • at a future date, after the completion of the subdivision of the land you and your parent intend to transfer ownership of the property from joint tenants into separate lots of land owned in your own names. You will have XX acres of the land transferred into your name for you to reside on. Your parent will have a total of XX acres of land transferred into his name solely. •
the intended use of the land held by your parent is as follows: XX x XX acres lots of land to be sold and a further XX acres to be possibly retained or further subdivided for sale in XX acre lots. The timing of the transaction or the various steps in the transaction. • you joined your parent in the purchase of XX acres of land with the intention of securing a portion of that land once it was subdivided by your parent . • your parent intended to make a profit from the purchase by subdividing and selling at least half of the property • your parent commenced work on this subdivision shortly after settlement on the purchase on XX XX 20XX, and has continued with this work up to the current time • approval has been granted for the subdivision activity and that approval is valid until XX February 20XX • your parent plans to complete the subdivision activities as soon as resources and approvals allow • you and your parent intend to register the title for the subdivided lots you each hold in your respective names on completion of the subdivision activity. Conclusion
In this case no purpose of profit can be objectively discerned from your activity. Your only motive in entering into the purchase agreement for the XX acres of land as a joint tenant with your parent was to secure a portion of that land for your own residence. By a verbal agreement with your parent, you expect no part of the profit from the subdivision and sale of land that is excess to your and his requirements. You expect to gain full title over the XX acre portion of that land you are holding for your parent on completion of the subdivision activity. There is nothing commercial or businesslike in the manner in which you have gone about securing this portion of land for yourself. Your contribution to the activity has consisted of: • signing the purchase agreements for the XX acre block of land as a joint tenant • agreeing to act as guarantor for the loans secured to purchase the land • making a 50% contribution to the monthly repayments for those loans, and • performing work on the land as an employee of XXX Pty Ltd. You have had no control over the subdivision activity and it has been entirely managed and coordinated by XXXX.
The scale and complexity of your involvement in this subdivision activity is commensurate with your domestic and personal purpose in entering into this arrangement. Your contribution to the subdivision activity that is being carried on is not considered to be in the nature of an isolated profit making transaction, and any income generated for you through this activity will not be assessable as such under section 6-5 of the ITAA 1997. Question 3 Summary A CGT event A1 will occur when you dispose of your legal and beneficial ownership in the property. As you and XXXX own the XX acre property as joint tenants, your share in the joint property is XX acres. You will be subject to CGT for any transfer of title to your parent that results in your holding being less than XX acres. As the transaction between you and your parent will not be at arm's length, if the subdivided land is transferred to XXXX for either no consideration or more or less than its market value, the market value substitution rules will apply, and you will be taken to have received the market value of the subdivided land transferred to your parent . Detailed reasoning
Section 102-20 of the ITAA 1997 advises that you can make a capital gain or loss if and only if a CGT event happens to a CGT asset that you own. A CGT event A1 under section 104-10 of the ITAA 1997 happens if you dispose of a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. A change in ownership does not occur if you stop being the legal owner of the CGT asset but you continue to be the beneficial owner (104-10(2) of the ITAA 1997). Under subsection 116-20(1) of the ITAA 1997, your capital proceeds from a CGT event include the total of the money you have received, or are entitled to receive, in respect of a CGT event happening. Where on the disposal of an asset no money or property is received, the market value substitution rule contained in section 116-30 of the ITAA 1997 generally applies, such that you are taken to have received the market value of your ownership interest in the asset at the time the CGT event occurs. If you sell, transfer or gift property to family or a friend for less than it is worth, you'll be treated as if you received the market value of the property for CGT purposes.
You use the market value of a property to calculate your CGT if both of the following are true: • what you receive was more or less than the market value of the property • you and the new owner were not dealing with each other at arm's length. This is called the 'market value substitution' rule. Capital gains are included as assessable income under section 102-5 of the ITAA 1997. Application to your circumstances In your case, you and your parent were registered as joint tenants of the XX acre property that was purchased on XX XXX 20XX. You and your parent have each maintained an ownership interest in the property since then. Your title to a portion of your 50% interest in the property will be transferred to your parent on competition of the subdivision. You will dispose of your interest in the CGT asset when you cease being a legal and beneficial owner of the asset. A CGT event A1 will happen on any change in beneficial ownership resulting in you holding less than XX acres. You and your parent have not reached a decision on payment amounts on any transfer of title or how the amount of any payment will be determined. As the transaction between you and
your parent will not be at arm's length, if part of your interest in the property in the form of subdivided lot is transferred to your parent or either no consideration or more or less of its market value of the property, the market value substitution rules will apply. You will be treated as if you had received the market value of the subdivided lots transferred to your parent . 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.