1 Will the gain or profit you make on the sale of your existing home (Dwelling A) and the second home you will construct (Dwelling B) be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 ?
No. Issue 2 Capital gains tax - Main residence exemption Question 1 Are you eligible for the full main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 on the sale of the existing house (Dwelling A) and its adjacent land? Answer Yes. Question 2 Are you eligible for the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 on the sale of the second house (Dwelling B) from when the land was purchased? Answer No. Issue 3 Goods and services tax Question 1 Will you need to pay goods and services tax on the sale of the existing house (Dwelling A) under section 9-40 of A New Tax System (Goods and Services Tax) Act 1999 ? Answer No. Question 2 Will you need to be GST registered for the construction of your new home (Dwelling B) under section 23-5 of A New Tax System (Good and Services Tax) Act 1999 ? Answer No. This ruling applies for the following period : Year ending 30 June 20XX The scheme commences on: 1 July 20XX
You are Individual taxpayers. In 20XX you jointly purchased a property (the property), for $X. The property consists of an existing house (Dwelling A) on a block of land less than 2 hectares in size. The land valuation was $X in 20XX. Over the last XX years you have gradually renovated Dwelling A and the garden at a cost of approximately $X. The most recent work was in 20XX. You have lived in Dwelling A as your main residence continuously from when you purchased the property to present. You did not have a commercial objective when you purchased the property. You have neither used the property for business purposes, nor rented it out. The property has been the only property you have owned in the past XX years. The property is currently estimated to be worth $X. The current land valuation is $X. Recently the state government overrode the planning rules of your local council to allow greater floor space ratios and taller buildings on the property. This now allows you to build a more suitable house for your future needs in an area that you love.
You propose to subdivide the land into two blocks and build a second house (Dwelling B) on the block in front of the block containing Dwelling A. The size of each subdivided block will be half the original X sqm of land. The estimated build cost for Dwelling B is $X including legal and other fees. Development is of Dwelling B only. Dwelling A will be unchanged. No property developer is involved. You will continue to live in Dwelling A until construction of Dwelling B is complete. You will then move into Dwelling B. You will sell Dwelling A within 6 months of moving into Dwelling B. Dwelling A will not be rented out during the period after you move out of it up to settlement of its sale. You will make a capital gain on the sale of Dwelling A. The estimated sale value of Dwelling A is $X. You are not undertaking the subdivision and construction of Dwelling B with the intention of making a profit. You have no history of property development. Dwelling B will be your main residence starting from the time that construction is complete. You intend to reside in Dwelling B as your main residence for several years after which time you may sell Dwelling B and expect to make a capital gain.
Dwelling B will not be rented out at any time up to settlement of its sale. You are not registered for goods and services tax (GST).
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 109-5 Income Tax Assessment Act 1997 section 112-25 Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-120 Income Tax Assessment Act 1997 section 118-125 Income Tax Assessment Act 1997 section 118-140 Income Tax Assessment Act 1997 section 118-150 Income Tax Assessment Act 1997 section 118-185 Income Tax Assessment Act 1997 section 995-1 A New Tax System (Good and Services Tax) Act section 9-5 A New Tax System (Good and Services Tax) Act section 9-20 A New Tax System (Good and Services Tax) Act section 9-40 A New Tax System (Good and Services Tax) Act section 23-5 A New Tax System (Good and Services Tax) Act section 40-75 A New
Issue 1 Ordinary income Question 1 Summary The gain or profit you make on the sale of your existing home (Dwelling A) and the second home you will construct (Dwelling B) will not be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997. Detailed reasoning All legislative references are to the Income Tax Assessment Act 1997. Income Subsection 6-5(2) states that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Under section 6-10, your assessable income also includes certain amounts that are not ordinary income but are included in your assessable as statutory income. Broadly, there are three main ways the proceeds from a property development can be treated for taxation purposes: • as ordinary income under section 6-5, on revenue account as a result of carrying on a business of property development, involving the sale of land as trading stock
• as ordinary income under section 6-5, on revenue account from an isolated transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose • as statutory income under the capital gains tax (CGT) legislation, from a mere realisation of a capital asset, assessable under Parts 3-1 and 3-3 in accordance with section 6-10. Whether the proceeds are treated as ordinary income (on revenue account), or statutory income (on capital account) depends on the situation and circumstances of each particular case. Business of property development The term 'business' is defined in section 995-1. It '...includes any profession, trade, employment, vocation, but does not include occupation as an employee' . Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.
Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant to determining the question of whether a business is being carried on: • 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 regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from examination of the facts ( Martin v. FC of T
(1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). The weighting to be given to each indicator may vary from case to case. Application to your circumstances After weighing your facts and circumstances against the above indicators, we consider that you will not be carrying on a business of property development because: • you have no intention to engage in business • although you may make a gain on the sale of Dwelling A and the later sale of Dwelling B, the purpose of carrying out the property development (the arrangement/activity) is not profit making • you purchased the property to be your home, and that purpose will not change with the arrangement • the activity is one-off; it is not recurrent or regular in nature • the activity is not of a size and scale to signify commercial activity
• we expect you will liaise with professionals throughout the subdivision, construction and sale stages as any homeowner selling a home and having a home built is required to do, but not in the same manner as a property developer would • you have no previous dealings in property or experience in property development. Profits from isolated transactions A profit arising from an isolated commercial transaction will be ordinary income if the purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of a taxpayer's business ( FC of T v Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693). Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are ordinary income and assessable under section 6-5. The term isolated transaction refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business; and • those transactions entered into by non-business taxpayers.
Paragraph 35 of TR 92/3 provides that a profit from an isolated transaction will be ordinary income where: • 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. Profit-making does not need to be the sole or dominant purpose for entering into the transaction. A profit-making purpose must exist at the time the transaction or operation was entered into. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Paragraph 13 of TR 92/3 lists the following factors: • 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 • the timing of the transaction or the various steps in the transaction. No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. Paragraph 56 of TR 92/3 explains that a profit is income where it is made in any of the following situations: • a taxpayer acquires property with a purpose of making a profit by whichever means prove most suitable and a profit is later obtained by any means which implements the initial profit-making purpose, or • a taxpayer acquires property contemplating a number of different methods of making a profit and uses one of those methods in making a profit.
Paragraph 57 of TR 92/3 states that the Commissioner also considers that an assessable profit arises if a taxpayer enters into a transaction or operation with a purpose of making a profit by one particular means but actually obtains the profit by a different means. Therefore, a taxpayer may contemplate making a profit by sale but may ultimately obtain it by other means that were not originally contemplated. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Paragraph 42 of TR 92/3 explains that when a taxpayer's intended use of an asset changes, and they decide to venture into a profit-making scheme with the characteristics of a business operation or commercial transaction, the activity of the taxpayer will constitute the carrying out of a profit-making scheme, although the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.
However, paragraph 44 of TR 92/3 explains when a taxpayer derives a profit from a transaction outside the ordinary course of carrying on its business and the taxpayer did not enter that transaction with the purpose of making a profit, the profit is not assessable income. Application to your circumstances We do not consider that you will be selling Dwelling A or Dwelling B as part of an isolated profit-making transaction based on the following factors: • you are individual taxpayers and not a business entity • the long-term use of the property and Dwelling A as your main residence • your intended use of Dwelling B as your main residence for several years • the property development is a private or domestic arrangement to provide a new house that better suit your needs • due to changes in government planning rules, you can now build another dwelling on the same land whereas previously there was never any intention, purpose or capacity to sub-divide the land • we do not consider the arrangement is substantially different from you building on another parcel of land and then selling your existing home after moving into your new home
• the relatively small scale and low complexity of the proposed arrangement • it is expected that you will take the necessary steps required by council to achieve the subdivision and engage with industry professionals in the construction of Dwelling B and the sale of the dwellings however there are no other parties to the arrangement (such as a property developer) • the amount of money involved in building Dwelling B is not considered extraordinary given the location of the property, and it is indicated that the proceeds sought for Dwelling A is no more than its market value • you have no history of property development. Conclusion It is not your intent or purpose to carry out the development of the property and sell the dwellings to make a profit. The gains you make from the sales will not be the result of you carrying on a business or from a business operation or commercial transaction. The profit or gain arising from the arrangement will not be ordinary income under section 6-5.
The proceeds from the sale of Dwelling A and Dwelling B will arise from the mere realisation of a capital asset, which will fall for consideration under the CGT provisions in Part 3-1. Issue 2 Main residence exemption Question 1 Summary You are eligible for the full main residence exemption on the sale of the existing house (Dwelling A) and its adjacent land. Detailed reasoning All legislative references are to the Income Tax Assessment Act 1997. Section 118-110 includes that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: a) you are an individual; and b) the dwelling was your main residence throughout your ownership period. Section 118-120 extends this to the dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling.
Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by the exemption for the CGT event is 2 hectares, less the area of the land immediately under the dwelling. Subdivision of land Subsection 112-25(2) states that splitting a CGT asset (for example, subdividing a parcel of land into separate blocks) is not a CGT event. The registration of separate new titles under a land subdivision has the effect of dividing the original parcel of land into two or more CGT assets. Ownership interest For CGT purposes, subdivided blocks of land are taken to have been acquired by the owner when the original land parcel was acquired. Rules extending the main residence exemption - changing main residence The general rule is that only one dwelling can be treated as a main residence at any one time. However, changing residences is the exception, that is, moving house before selling your existing dwelling.
Under section 118-140, if you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of: a) 6 months ending when your ownership interest in your existing main residence ends; or b) the period between the acquisition of the new ownership interest and the time when your ownership interest in your existing main residence ends. Your existing main residence must have been your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and must not have been used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence. Application to your circumstances You are Individual taxpayers. You acquired the property in 20XX. The property consisted of land less than 2 hectares and an existing dwelling (Dwelling A). On purchasing the property, Dwelling A became your main residence and has remained so for the last XX years.
The subdivision of the land will not alter the date you acquired Dwelling A or its adjacent land. You will continue to live in Dwelling A as your main residence until construction of Dwelling B is completed and you move into Dwelling B as your main residence. Dwelling A will be sold within 6 months of you moving out of it and into Dwelling B. Dwelling A will never have been used for income producing purposes and its adjacent land always used primarily for private or domestic purposes in association with the dwelling. Section 118-140 will apply to allow both Dwelling A and Dwelling B to be your main residence for a period of up to 6 months, counting back from when Dwelling A is sold. Conclusion As Dwelling A, which includes its adjacent land, will be your main residence for your whole period of ownership, you are entitled to the full main residence exemption for Dwelling A. You can disregard the capital gain you make on the sale of Dwelling A. Note
that if you choose under section 118-150 for Dwelling B to be your main residence for a period of time that Dwelling A is your main residence you will lose the full main residence exemption for Dwelling A and only be entitled to a partial main residence exemption. This is discussed further in Question 2 below. Question 2 Summary You are not eligible to apply the main residence exemption to Dwelling B from when the land was purchased in 20XX. You will only be eligible for a partial main residence exemption for Dwelling B. Detailed reasoning All legislative references are to the Income Tax Assessment Act 1997 . Section 118-110 includes that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: a) you are an individual; and b) the dwelling was your main residence throughout your ownership period.
Section 118-120 extends this to the dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling. Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by the exemption for the CGT event is 2 hectares, less the area of the land immediately under the dwelling. Under section 118-185, you get only a partial exemption if the dwelling was your main residence for part only of your ownership period. You calculate your capital gain or capital loss using the following formula: Capital Gain or Capital Loss amount x non-main residence days total days in your ownership period Subdivision of land Subsection 112-25(2) states that splitting a CGT asset (for example, subdividing a parcel of land into separate blocks) is not a CGT event. Each subdivided block is a new CGT asset. Ownership interest For CGT purposes, the subdivided blocks are taken to have been acquired by the owner when the original land parcel was acquired.
Rules extending the main residence exemption - constructing a dwelling Generally, if you build a dwelling that is to become your main residence, on vacant land that you already own, the land does not qualify for the main residence exemption until the dwelling actually becomes your main residence. Section 118-150 however allows you to choose that the dwelling being built was your main residence from the time you acquired your ownership interest in the land rather than from the time you commenced using the dwelling as your main residence. You can make the choice only if: a) a dwelling on the land that you construct becomes your main residence as soon as practicable after the work has finished; and b) it continues to be your main residence for at least 3 months. The choice is limited to the shorter of: • 4 years before the dwelling becomes your main residence, or • the period starting when you acquired your ownership interest in the land and ending when the dwelling becomes your main residence.
Once you make the choice, no other dwelling can be treated as your main residence during the limited period referred to above except if section 118-140 (about changing main residences) applies. Taxation Determination TD 2000/13 and Taxation Determination TD 2000/14 express the Tax Office's view about how the main residence exemption applies to entities undertaking an arrangement similar to the one you propose to undertake, where they choose not to apply, or choose to apply, section 118-150. TD 2000/13 and TD 2000/14 conclude that where you build another dwelling on subdivided vacant land and the existing dwelling ceases to be your main residence and the new dwelling becomes your main residence, you are not entitled to the full main residence exemption for both dwellings. TD 2000/13 - where you choose not to apply section 118-150
Paragraph 2 explains that if you sell dwelling A and choose to not apply section 118-150 for dwelling B, you are entitled to a main residence exemption for dwelling A throughout the entire period of ownership that it was your main residence. The exemption also applies to adjacent land sold with dwelling A because it had been used primarily for private or domestic purposes in association with that dwelling throughout the ownership period. Paragraph 5 states that you are only entitled to a partial main residence exemption on the sale of dwelling B and explains that this is because dwelling B is not your main residence for the whole of its ownership period - your ownership period of dwelling B commences when you have an ownership interest in the land on which dwelling B is built but dwelling B is only your main residence from when it actually becomes your main residence. Paragraph 9 confirms that the partial main residence exemption will also apply to the land adjacent to dwelling B. TD 2000/14 - where you choose to apply section 118-150
Paragraph 2 explains that when you sell dwelling A and choose to apply section 118-150 for dwelling B, you are entitled to a main residence exemption for dwelling A, but only up to the time that you begin to treat dwelling B as your main residence. Paragraph 5 makes it clear that you are only entitled to a partial main residence exemption on the sale of dwelling A. Paragraph 3 explains that if you choose to apply section 118-150 for dwelling B, dwelling B is treated as your main residence for the shorter of 4 years before it actually becomes your main residence or the period from when you acquired your interest in the land (prior to subdividing it) and ending when dwelling B actually becomes your main residence. Paragraph 8 advises that you will be entitled to disregard the capital gain you make on dwelling B for the shorter period above plus the period it is actually your main residence. Rules extending the main residence exemption - changing main residence Generally, only one dwelling can be treated as a main residence at one time. However, changing main residences is the exception, that is, moving into a new main residence before selling your existing dwelling.
Section 118-140 allows you to treat two dwellings as your main residence for a period of up to 6 months while you move from one dwelling to the other. Under section 118-140, if you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of: a) 6 months ending when your ownership interest in your existing main residence ends; or b) the period between the acquisition of the new ownership interest and the time when your ownership interest in your existing main residence ends. Your existing main residence must have been your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and must not have been used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence. Section 118-140 and section 118-150 can apply in conjunction with one another. Application to your circumstances You purchased the property in 20XX.
There was an existing house on the property (Dwelling A) which became your main residence on purchase of the property. You propose to subdivide the land and build a second house (Dwelling B) in the front section of the property, covering half of the X sqm of land. As soon as construction of Dwelling B is completed you will move out of Dwelling A and into Dwelling B which will become your main residence. You will sell Dwelling A within 6 months of moving into Dwelling B. You may sell Dwelling B after a number of years. Dwelling B will be your main residence for the whole time you own it and never used for the purpose of producing assessable income. As Dwelling A will be sold within 6 months of you moving out of it and moving into Dwelling B, up to 6 months (ending on the date of settlement of the sale of Dwelling A) can be counted as main residence days for Dwelling B, even though you will have treated Dwelling A as your main residence for that same time. When you sell Dwelling B When you subdivide the land, you will be taken to have acquired your ownership interest in the block that will contain Dwelling B in 20XX.
You can choose to apply section 118-150 for Dwelling B because Dwelling B will become your main residence as soon as construction is completed, and it will be your main residence for at least 3 months. If made, the choice will operate to extend the main residence exemption for Dwelling B for the 4 years before you move into it. This is because 4 years is shorter than the period starting from when you acquired the land in 20XX and ending when you move into Dwelling B. CGT implications for Dwelling A if you choose to apply section 118-150 to Dwelling B If you choose to apply section 118-150 you will not be entitled to a full main residence exemption for Dwelling A. Instead, a partial main residence exemption will apply to Dwelling A. When calculating your partial main residence exemption for Dwelling A, the 4 year period ending when you move into Dwelling B will be non-main residence days for Dwelling A. This is because, once you make the choice, no other dwelling can be treated as your main residence during the period the main residence exemption is extended for Dwelling B. Conclusion
You are not entitled to a full main residence exemption for Dwelling B because it will not have been your main residence for your entire period of ownership back to 20XX. Accordingly, you will not be able to disregard the capital gain you make on the sale of Dwelling B. You will be entitled only to a partial main residence exemption under section 118-185 when you sell Dwelling B, regardless of whether you choose not to apply, or you choose to apply, section 118-150. You will need to calculate your capital gain on Dwelling B based on the number of days Dwelling B was, and was not, your main residence throughout your total ownership period, commencing in 20XX. If you choose not to apply section 118-150, the number of days from when you purchased the property in 20XX to the date you move into Dwelling B will be non-main residence days in the calculation of your partial main residence exemption for Dwelling B. If you choose to apply section 118-150, the number of days from purchase in 20XX and ending 4 years before you move into Dwelling B will be non-main residence days in the calculation of your partial main residence exemption for Dwelling B. Issue 3 Goods and services tax
Question 1 and Question 2 Summary You will you not need to pay GST on the sale of the existing house, and you will not need to be GST registered for the construction of your new home. Detailed reasoning All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 . There are goods and services tax (GST) considerations in developing land regardless of whether normal income tax or CGT applies. Section 9-40 requires you to pay GST on any taxable supply you make. Subsection 40-75(1) provides the meaning of new residential premises. 1) Residential premises are new residential premises if they: a) have not previously been sold as residential premises (other than commercial residential premises) and have not previously been the subject of a long term lease; or b) have been created through *substantial renovations of a building; or c) have been built, or contain a building that has been built, to replace demolished premises on the same land. (*as defined in section 195-1, substantial renovations
of a building are renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases). In your case, your existing home (Dwelling A) has previously been sold as a residential premises. You have gradually renovated Dwelling A however the facts do not indicate they are substantial renovations as defined above. Accordingly, Dwelling A is not a new residential premises. The new home you propose to build (Dwelling B) is a new residential premises as it meets the requirement in paragraph 40-75(1)(a). The supply of real property that is new residential premises, is a taxable supply where the conditions of section 9-5 are satisfied. Section 9-5 states you make a taxable supply if: a) you make the supply for consideration; and b) the supply is made in the course or furtherance of an enterprise that you carry on; and c) the supply is connected with the indirect tax zone; and d) you are registered or required to be registered for GST.
In your case, the supply of Dwelling B will be for consideration and the sale will be connected with the indirect tax zone as the property is located in Australia. Therefore, the supply of Dwelling B meets the requirements of paragraph 9-5(a) and 9-5(c). What remains to be determined is whether the sale of Dwelling B, as part of your proposed arrangement, will be a supply made in the course or furtherance of an enterprise that you carry on and whether you are required to be registered for GST. Supply in the course or furtherance of an enterprise The definition of 'enterprise' for GST purposes in subsection 9-20(1) includes that an enterprise is an activity, or series of activities, done in the form of a business, or in the form of an adventure or concern in the nature of trade. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number contains the Commissioner's view on what constitutes an enterprise for the purposes of eligibility for 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 extends the application of MT 2006/1 to the GST Act. The principles in MT 2006/1 apply equally to the term enterprise and can be relied upon 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, and state: Indicators of a business 177. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. 178. TR 97/11 discusses the main indicators of carrying on a business. Based on that discussion some indicators are: • a significant commercial activity • a purpose and intention of the taxpayer to engage in commercial activity • an intention to make a profit from the activity • the activity is or will be profitable • the recurrent or regular nature of the activity • the activity is carried on in a similar manner to that of other business in the same or similar trade
• activity is systematic, organised and carried out in a business-like way and records are kept • the activities are of a reasonable size and scale • a business plan exists • commercial sales of product; and • the entity has relevant knowledge and skill. In the Detailed reasoning for Issue 1 Question 1, we determined that you will not be undertaking a business of property development in the form of a business or as a profit-making undertaking or scheme after considering all the indicia summarised in TR 97/11 and TR 92/3. As your proposed arrangement may be described as 'one-off', we also need to consider the extended definition of enterprise and whether these activities are in the form of an adventure or concern in the nature of trade. In the form of an adventure or concern in the nature of trade Paragraphs 243 to 257 of MT 2006/1 discuss the characteristics of trade, including the following badges (or identifying features) of trade referred to in a number of judicial decisions: • the subject matter of the realisation • length of period of ownership • frequency or number of similar transactions
• supplementary work on or in connection with the property realised • circumstances that were responsible for the realisation; and • motive. Paragraph 262 of MT 2006/1 states 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 of MT 2006/1 states 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 lists the following factors that assist in determining whether activities are a business or adventure or concern in the nature of trade: • 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 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. Paragraph 266 of MT 2006/1 advises that whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset are determined by weighing up these factors and other relevant factors. No single factor is determinative rather it will be a combination of factors what will lead to a conclusion as to the character of the activities. MT 2006/1 includes examples of subdivisions of land that are not enterprises. Examples which align with your proposed arrangement are found atparagraphs 288 to 293 in: Example 32
Astrid and Bruno live on a large suburban block. The council has recently changed their by-laws to allow for smaller lots in their area. They decide to subdivide their land to allow their only child, Greta, to build a house in which to live. They arrange for the approval of the subdivision through the council, for the land to be surveyed and for the title of the new block to be transferred to Greta. She pays for all the costs of the subdivision and the cost of her new house. Astrid and Bruno have not carried on an enterprise and are not entitled to an ABN in respect of the subdivision. It is a subdivision without any commercial aspects and is part of a private or domestic arrangement to provide a house for their daughter. Example 33 Ursula and Gerald live on a 2.5 hectare lot that they have owned for 30 years. They decide to sell part of the land and apply to subdivide the land into two 1.25 hectare lots. The survey and subdivision are approved. They retain the subdivided lot containing their house and the other is sold.
Ursula and Gerald are not carrying on an enterprise and are not entitled to an ABN in respect of the subdivision as the subdivision and sale are a way of disposing of some of the land on which their home is situated. It is the mere realisation of a capital asset. Registration for GST Section 23-5 states that you are required to be registered for GST if: • you are carrying on an enterprise; and • your GST turnover meets the registration turnover threshold (currently $75,000). Application to your circumstances You have jointly owned the property for X years and lived in the existing house (Dwelling A) as your main residence for the entire time. The property is the only property you have owned in the last X years, and you have not undertaken a similar arrangement before. You are not in business and the property is not a business asset. A change in council planning rules has been the motivation for you to undertake the arrangement - to subdivide your home block and build a new house (Dwelling B) that will better suit your needs, in a location that you love.
You have renovated Dwelling A and garden gradually over your X years of ownership but not with the intent to bring it into a more marketable condition and gain a better price. The most recent work was in 20XX, and the arrangement will not include any changes to Dwelling A. A building (Dwelling B) will be erected on the subdivided land however there will not be a change of purpose for which the land is held. Your intention will continue to be to use the property as your main residence. You will not subdivide the original land and sell Dwelling B for a profit. You will move into Dwelling B as your main residence on completion of the build and have no intention of selling it within X years. Selling Dwelling A and its adjacent land will facilitate you being able to build a new home. Your proposed arrangement is not commercial and there is no indication that you will undertake the arrangement in a business-like manner. No property developer will be involved in the arrangement. Conclusion You are not carrying on an enterprise of developing the land.
Your proposed arrangement does not constitute a property development enterprise. We consider the sale of both dwellings to be the mere realisation of capital assets. As you are not carrying on an enterprise you are not required to be registered for GST. You will not be making a taxable supply when you sell Dwelling A and Dwelling B and therefore not required to pay GST.