1 Are you considered to be running a business of land subdivision with the income from the sale of the subdivided lots being assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 No Question 2 Will the income from the sale of the subdivided lots 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 sale of the subdivided lots constitute a mere realisation of a capital asset and be subject to the capital gains tax (CGT) provisions under section 104-10 of ITAA 1997? Answer 3 Yes Issue 2 - GST Question 1 Will the supplies of the subdivided lots be a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Answer 1 No This ruling applies for the following periods : 30 June 20XX The scheme commenced on: 1 July 20XX
You inherited a parcel of land located from your deceased parent (the Property). The Property was originally part of a larger parcel of land that your parent acquired which comprised a farm and a residential dwelling. A development application was previously lodged by your parent and was approved by the local council for a two-stage subdivision. Stage one of the subdivision was completed by your parent, and the resulting subdivided lot was subsequently sold. Stage two of the subdivision project involving the subject Property was commenced by your parent at a later date. A company associated with your parent (Company A) undertook the subdivision activity which included the construction of roads. Before the stage two subdivision was completed, your parent passed away, and you inherited the Property. You became involved in stage two of the subdivision project after your sibling as executor, advised that your parent's intention was for you to complete stage two of the subdivision. Stage two of the subdivision project was completed and subsequently approved by the local council resulting in several subdivided lots. You undertook the following in connection with the subdivision project:
• submitted final plans to the local council and paid the required contributions as per the council's requirements • engaged surveyors to undertake the survey, calculations and preparation for the subdivision. • lodgement for subdivision certificates with the local council, and • liaised with other relevant authorities. You have incurred costs in relation to the subdivision project. Company A also invoiced you for the costs incurred in the subdivision works. The subdivided lots are currently advertised for sale. You do not own properties other than the properties you have inherited from your parent. You have no prior experience in property development. You have not prepared a business plan in regards of the property subdivision project as the subdivision activity was initiated and commenced by your parent. You do not maintain records or separate bank account in relation to the subdivision activities. GST registration
Following your sibling's advice, you obtained an Australian Business Number (ABN) and registered for Goods and services tax (GST), backdating the effective date to a specified date. You lodged your BAS for the relevant tax period and claimed the input tax credits (GST credits) at Label 1B for the subdivision costs charged to you to effectively transfer the cost base of the subdivision to you.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 subsection 6-5(2) Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 section 102-5 Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 subsection 104-10(2) Income Tax Assessment Act 1997 subsection 104-10(4) Income Tax Assessment Act 1997 section 108-5 A New Tax System (Goods and Services Tax) Act 1999 Division 38 A New Tax System (Goods and Services Tax) Act 1999 Division 40 A New Tax System (Goods and Services Tax) Act 1999 Section 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 9-40 A New Tax System (Goods and Services Tax) Act 1999 Section 11
Issue 1 - Income Tax In this section , all legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Question 1 Are you considered to be running a business of land subdivision with the income from the sale of the subdivided lots being assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary The Commissioner has determined that you are not running a business of land subdivision. Your activity lacks significant commercial character, and your involvement was limited to taking steps necessary to complete the subdivision process which is previously initiated by your deceased parent. Accordingly, the income from the sale of the subdivided lots will not be assessable as ordinary income under section 6-5 of the ITAA 1997. Detailed reasoning Under subsection 6-5(2), 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. 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 ways the proceeds from a land subdivision can be treated for taxation purposes: • as ordinary income under section 6-5 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 as a result of an isolated commercial 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; or • 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 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 presence of a significant commercial purpose, a genuine profit-making intention, repetition or regularity of activities and the organization of operations in a businesslike manner - are not individually decisive but are assessed collectively to form an overall picture. The question of whether you are carrying on a business of your land subdivision is discussed below. The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production?
(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 property development. 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. No one factor is decisive. Whether a business is being carried on depends on the impression gained from looking at all the indicators against the case facts and whether these indicators provide the operations with a commercial flavour. Application to your circumstances After weighing the facts and circumstances against the above indicators, we have made the following observations: • The activity lacks significant commercial purpose or character. There was no business plan, and you only became involved in the subdivision of the Property after your parent's death, following your sibling's advice that your parent had intended for you to continue the subdivision activity. • There was no regularity or repetition of the activity. The subdivision was limited to the subject Property and will not be repeated. • The activity cannot be said to be carried out in a businesslike manner. There was no formal record-keeping process, and no separate bank account was maintained for the subdivision activity.
• The size and scale of the subdivision activity is relatively small. • The works on the Property involved no more than is necessary to affect the subdivision and sale of the subdivided lots. Having considered the indicators outlined in paragraph 13 of TR 97/11 and your circumstances, the Commissioner has determined that you are not carrying on a business of land subdivision. Accordingly, the income you will receive from the sale of the subdivided lots is not assessable income from carrying on a business under section 6-5. Question 2 Will the income from the sale of the subdivided lots be treated as an isolated profit-making transaction and assessable under section 6-5 of the ITAA 1997? Summary The sale of the subdivided lots will not be treated as an isolated profit-making transaction as there is lack of profit-making motive. Your activity involved no more than is necessary to complete the subdivision and to sell the subdivided lots. Accordingly, the income from the sale of these lots will not be assessable as ordinary income under section 6-5. Detailed reasoning Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income
(TR 92/3) provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Paragraph 1 of TR 92/3 provides that the term 'isolated transactions' 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. 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. Paragraph 6 of TR 92/3 and also paragraphs 16 and 35 provide 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.
Whether an isolated transaction is business or commercial will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of the land can be assessed as ordinary income within section 6-5 of the ITAA 1997. Paragraphs 7, 8 and 9 of TR 92/3 provides guidance in characterising profits on isolated transactions and states: 7. 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. 8. 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.
9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. In circumstances where there has been a change of intention in respect of a property from holding the asset as a long term capital asset, to one of selling the asset for a profit the question which arises is whether the sale was a 'mere realisation' of capital asset. Paragraph 13 of TR 92/3 lists some of the matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction, they include: • 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. 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. At paragraph 41 the taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.
Further at paragraph 43 if a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. Application to your circumstances In your case, in determining whether the proposed sale of the property would be viewed as a profit-making undertaking, the following observations have been made: • The property subdivision was a one-off activity. You have not previously undertaken any development activities. • You became involved in the subdivision process after you inherited the Property from your parent. The works on the Property involved no more than is necessary to complete the subdivision and sale of the subdivided lots. • Your involvement was minimal, limited to submitting final plans to the local council and paying the required contributions. • The total monetary outlay was relatively small.
Based on the above, the Commissioner has considered that the proposed sale of the subdivided lots will not constitute an isolated profit-making transaction. There is lack of profit-making motive. Hence, the income from the sale of the subdivided lots will not be assessable income under section 6-5. Question 3 Will the sale of the property constitute a mere realisation of a capital asset and be subject to the capital gains tax (CGT) provisions under section 104-10 of ITAA 1997? Summary The proposed sale of the subdivided lots represents a mere realisation of capital assets. The proceeds from the sale of these lots will give rise to CGT event A1 under subsection 104-10(2). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act, event or by operation of law. Detailed reasoning Under section 6-10 of the ITAA 1997, assessable income also includes statutory income. Capital gains are included as assessable income under section 102-5.
Section 102-20 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. CGT event A1 under section 104-10 happens if you dispose of a CGT asset. Subsection 104-10(4) provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if the capital proceeds from the sale of a CGT asset are less than the asset's reduced cost base. As a general rule, taxpayer is required to include in their assessable income any capital gain they make from a CGT event that happens to a CGT asset the taxpayer acquired on or after 20 September 1985. Pursuant to section 108-5 of the ITAA 1997, a CGT asset is any kind of property, or a legal or equitable right that is not property. Land, or an interest in land, is a CGT asset. Application to your circumstances As previously discussed, and considering the facts and circumstance, the Commissioner has determined that you are not carrying on a business of land development. The proposed sale of the subdivided lots is also not considered an isolated profit-making undertaking.
The Commissioner has determined that the proposed sale of the subdivided lots constitutes a mere realisation of a capital asset. The sale of these lots is a disposal which gives rise to CGT event A1 under subsection 104-10(2). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act, event or by operation of law. You will make a capital gain from the disposal of each subdivided lot if the capital proceeds from the sale exceed the relevant cost base of each lot. Issue 2 - GST In this section, • unless otherwise stated, all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act. • all reference materials, published by the Australian Taxation Office (ATO), that are referred to are available on the ATO website ato.gov.au Question 1 Will the supplies of the subdivided lots be a taxable supply in accordance with section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Summary
No, your activities were limited to completing the subdivision of the Property and do not constitute an enterprise under paragraph 9-20(1)(a) or paragraph 9-20(1)(b) of the GST Act. They lack key business indicators such as continuity and repetition and were limited to actions necessary to finalise a process initiated by your parent. You did not enhance the property beyond preparing it for sale, so these actions were solely to complete the subdivision and facilitate sales. 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 is not a *taxable supply to the extent that it is *GST-free or *input taxed. In the event where a seller makes a supply that does not satisfy the requirements of section 9-5, the supply would not be a taxable supply.
There are no provisions in the GST Act under which your supply of the subdivided lots will be GST-free or input taxed under Division 38 and 40 respectively. 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, and you are registered for GST. As such, subsections 9-5(a), (c) and (d) are satisfied. Therefore, we must determine is whether the supply of the lots will be made in the course or furtherance of an enterprise that you carry on. Enterprise The term 'enterprise' for GST purposes is defined in subsection 9-20(1) and states the following: An enterprise is an activity, or series of activities, done: (a) in form of a *business; or (b) in the form of an adventure or concern in the nature of trade; or (c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or [...] 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 paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Paragraph 180 of MT 2006/1 explains that small scale activities can still constitute an enterprise: Small scale activities 180. An enterprise can be conducted in a small way. [62]
The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise. In the form of an adventure or concern in the nature of trade 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 264 of MT 2006/1 discusses two seminal cases in this area: Statham & Anor v Federal Commissioner of Taxation 89 ATC 4070 ( Statham ) and Casimaty v FC of T 97 ATC 5135 ( Casimaty ).
Paragraph 265 of MT 2006/1 extracts the key elements of both cases and provides a list of factors that can be used to assist in determining whether isolated property transactions are an adventure or concern in the nature of trade or a mere realisation of a capital asset: 265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows: • there is a change of purpose for which the land is held; • additional land is acquired to be added to the original parcel of land; • the parcel of land is brought into account as a business asset; • there is a coherent plan for the subdivision of 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, 253and266 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. Application in your circumstances Based on the facts of this case, we do not consider the activities you undertook to facilitate the completion of the subdivision of the Property to amount to an enterprise in the form of a business under paragraph 9-20(1)(a). The activities do not exhibit the key indicators of a business, which include, among other things, transactions entered into on a continuous and repetitive basis. The indicators outlined in paragraph 178 of MT 2006/1 are not present to a sufficient degree to support the conclusion that you were carrying on an enterprise in the form of a business.
In addition, the facts indicate that when you inherited the property, the subdivision activities were already in progress, having been initiated from your parent. The actions you undertook were necessary to enable the subdivision to continue and be completed. You did not improve the property beyond what was necessary to prepare it for sale. We consider these activities to have been required solely to bring the subdivision to completion and facilitate the sale of the subdivided lots. Accordingly, after weighing all the facts and for the reasons outlined above, we consider your activities do not amount to an enterprise in the form of an adventure or concern in the nature of trade under section 9-20(1)(b). However, if you were to undertake future property subdivisions, the outcome could be different. Further issues for you to consider GST registration You are registered for GST therefore, paragraph 9-5(d) is satisfied. The supply of the subdivided lots is neither GST-free nor input taxed, so your supply would be a taxable supply under section 9-5.
However, you have indicated that your GST and ABN registration may not be necessary and that, pending the outcome of this ruling, your BAS will be amended. This should not impact the outcome of the private ruling. You have asked whether you are required to be registered for GST, and if we determine that you are not required to be registered, you may apply to cancel your GST registration. Section 23-5 provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold. In this case, we have determined that the supply of the subdivided lots is not in the course or furtherance of an enterprise that you are carrying on, as defined in section 9-20. The supply of the subdivided lots will be a transfer of a capital asset. As you are not carrying on an enterprise, you are not required to be registered for GST.
If you remain registered for GST at the time of settlement of the subdivided lots, then you will satisfy all requirements of section 9-5, and the sale will be a taxable supply. However, since you are not required to be registered for GST, you may choose to apply to cancel your GST registration. If you are not registered for GST at the time of settlement, you will not satisfy paragraph 9-5(d), and your supply of the subdivided lots will not be a taxable supply. Claiming input taxed credits In relation to the statement that you have claimed GST credits for the invoice issued by Company A for all the subdivision works, please refer to the following information and take appropriate action accordingly. An entity that is registered for GST is entitled to input tax credits for creditable acquisitions made in carrying on its enterprise. The amount of the GST credit you are entitled to can claim depends on the extent to which your acquisition is for a creditable purpose. Under sections 11-15, the Commissioner's view is that the creditable purpose test focuses on your intended use of the acquisition at the time you make it or, in other words, an entity's planned use.
After the acquisition is made, the extent to which it is actually applied or used for a creditable purpose may be different from the intended use. In your case, you are not entitled to GST credits because: • You did not make a creditable acquisition. • You were not carrying on an enterprise at the time of the acquisition (see our response to Question 1 of Issue 2). As a result, Division 129 (Change in creditable purpose) does not apply. Division 129 only applies where an acquisition was initially creditable and its use later changes. Since your acquisition was never creditable, this provision is not relevant.