1 Will the proceeds from the sale of the Property be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2 Will the proceeds from 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 Part 3-1 of the ITAA 1997? Answer Yes. Question 3 If the answer to Question 2 is yes, does the CGT discount apply to the capital gain you make on the disposal of the Property under Subdivision 115-A of the ITAA 1997? Answer Yes. Issue 2 - GST Question 1 Will the sale of the Property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Answer No. This ruling applies for the following period : XX/XX/20XX to XX/XX/20XX The scheme commenced on: XX/XX/20XX
You have never held an ABN and have never been registered for GST. You are also a partner in a partnership with Entity A. The partnership is registered for GST. You purchased vacant land jointly with Entity A. Your intention regarding the use of the land at the time of acquisition was uncertain; either to build a home to occupy as your main residence and sell your existing home, or to resell. You did not consider resale value during planning, did not consider other sites before purchase, and did not prepare a business plan. The acquisition was funded from personal savings. You have not engaged in any property activity aside from this. Construction of a single dwelling commenced and the Property was completed. You engaged a private builder and other trades. The build plans did not change during construction. Construction was funded by personal savings and loans. Financing arrangements were structured on the basis that the Property would become your primary residence. You advised another entity during construction that you had decided to move into the Property. No significant resources of the partnership were used to construct the Property.
An Occupancy Certificate was issued. You changed your mind about moving into the Property around this time. You had not commenced any process of moving in to the Property, or moving out of your main residence. The Property was marketed for sale following issue of the Occupancy Certificate. You expect to make a profit on sale of the Property.
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 40-65 A New Tax System (Goods and Services Tax) Act 1999 section 40-75 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 Income Tax Assessment Act 1997 Subdivision 115-A Income T
Income 1 - Income tax In this section, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Question 1 Will the proceeds from the sale of the Property be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary No. The Commissioner has determined that you are not carrying on a business of property development. The activities involved only one property and do not exhibit significant commercial character or profit-making purpose. Your involvement was limited to engaging builders and tradespeople to construct the dwelling, with both you and Entity A undertaking work to reduce costs. Accordingly, the income from the sale of the Property will not be assessable as ordinary income under section 6-5. 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 sale of the Property is 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 organisation of operations in a businesslike manner - are not individually decisive but are assessed collectively to form an overall picture. Carrying on a business of property development 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. Profits from an isolated transaction Profits 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 (TR 92/3) provides guidance in determining whether the profits from isolated transactions are assessable under section 6-5 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. 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, you and Entity A jointly purchased vacant land with the intention of constructing a dwelling either for your personal occupation or resale. You advised another entity during construction that you intended to move into the Property. However, after the construction was completed, you and Entity A decided to sell the Property. In considering the factors outlined in TR 97/11 and TR 92/3, we have made the following observations: • The activity was not planned or organised and not carried on in a businesslike manner. Resale value was not considered during planning and no other sites were considered before purchase. No business plan or financial analysis was undertaken. • The activity was not carried in a manner similar to other property development businesses. You have engaged a builder and tradespeople to construct the dwelling. • The scale of the activity is small and has not been of significant commercial character. • The construction was funded by a mix of personal savings and loans.
• There was no repetition or regularity as the activity involved only a single project and there was no intention to undertake similar activity. You have not been engaged in property development activities. Based on the above, the Commissioner has determined that you are not carrying on a business of property development. The Commissioner has also considered that the sale of the Property will not constitute an isolated profit-making transaction. Whilst profit will result in the sale of the Property, the scale and complexity of your activities in relation to the purchase and sale of the Property is more in line with the realisation of a capital asset. Accordingly, the Commissioner has determined that the proceeds from the sale of the Property will not be assessable as ordinary income under section 6-5. Question 2 Will the proceeds from 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 Part 3-1 of the ITAA 1997? Summary
Yes. The sale of the Property represents a mere realisation of capital asset and subject to the capital gains tax provisions under section Part 3-1. The sale of the Property is a disposal of a CGT asset that will give rise to CGT event A1 under subsection 104-10(2). Detailed reasoning Section 102-5 includes in assessable income an amount that is a net capital gain. Under section 102-20, 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, a 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, 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 You and Entity A have jointly purchased the vacant land with no clear intention as to its use upon acquisition. You advised another entity of your intention to move into the Property. However, you have made the decision to sell the Property in or around the time the Occupancy permit was issued. Although a profit will be realised on the sale of the Property, the Commissioner has considered that you are not carrying on a business nor engaged in a profit from isolated profit-making transaction. The sale of the Property 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 takes place from you to another entity, whether through an act, event, or operation of law. Question 3 If the answer to Question 2 is yes, does the CGT discount apply to the capital gain you make on the disposal of the Property under Subdivision 115-A of the ITAA 1997? Summary Yes. You will be eligible to apply the 50% CGT discount on your share of any capital gain resulting from the sale of the Property pursuant to section 115-5 as you have owned the Property jointly with Entity A for more than 12 months.
Detailed reasoning Subdivision 115-A sets out the requirements for a capital gain to be a discount capital gain. Relevantly, to be a discount capital gain: • the gain must be made by, an individual, a complying superannuation entity, a trust, or a life insurance company (section 115-10) • the CGT event must happen after 11.45am on 21 September 1999 (section 115-15) • the cost base must be calculated without reference to indexation (subsection 115-20(1)), and • the CGT asset must have been acquired at least 12 months before the CGT event (subsection 115-25(1)). In determining whether you acquired the CGT asset at least 12 months before the CGT event, you exclude both the day of acquisition and the day of the CGT event. Under the discount method you reduce your capital gain by the discount percentage after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. For individuals, the discount percentage is 50% (section 115-100). Application to your circumstances
You and Entity A jointly acquired vacant land. A residential dwelling was constructed and completed. The Property is marketed for sale, and you expect a profit. You and Entity A jointly owned the Property for more than 12 months and as you are an Australian resident for tax purposes, you are entitled to apply the CGT discount to reduce your share of any capital gain by 50%. As the Property was acquired after 21 September 1999, indexation is not available. Issue 2 - GST Question 1 Will the sale of the Property be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? Summary No. You will not make a taxable supply under section 9-5 of the GST Act because the sale will not be made in the course or furtherance of an enterprise that you carry on and you are not registered, or required to be registered, for GST. A supply is taxable under section 9-5 of the GST Act 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. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. You will satisfy subsections (a) and (c) of section 9-5 of the GST Act because you will receive consideration from the sale of the Property and the supply will be connected with the indirect tax zone. No GST-free provision applies. The supply will be of new residential premises within the meaning of section 40-75 of the GST Act, and therefore will not be input taxed under section 40-65 of the GST Act. Accordingly, the remaining issues are whether the sale will be made in the course or furtherance of an enterprise that you carry on, and whether you are registered, or required to be registered, for GST. Course or furtherance of an enterprise Section 9-20 of the GST Act provides that an enterprise includes activities done in the form of a business or done in the form of an adventure or concern in the nature of trade. Our views on the meaning of 'carrying on an enterprise' are outlined in Miscellaneous Taxation Ruling MT 2006/1
The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1). Although MT 2006/1 concerns the Australian Business Number framework, those views apply equally for GST purposes through 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? . Paragraphs 170 to 176 of MT 2006/1 describe the expression 'in the form of a business' as widening the enquiry beyond the concept of 'carrying on a business'. Relevant indicators include purpose and intention, the degree of organisation, scale, repetition, and whether the activities resemble ordinary trade practices. Paragraphs 234 to 244 explain that isolated transactions may amount to an adventure or concern in the nature of trade, but that the fact an asset is sold for a profit is not sufficient to give the activities a business or commercial character.
Paragraph 265 of MT 2006/1 sets out factors relevant to determining whether a one-off real property transaction has a business or trading character, including whether the use or purpose of land changes, whether additional land is acquired, whether borrowed funds are used, whether a subdivision plan exists, and whether development extends beyond what is necessary to secure council approval. You acquired vacant land, and engaged a builder and various tradespeople. The Property was constructed to completion and marketed for sale following the issue of the Occupancy Certificate. You expect to sell the Property for a profit. There was organisation in your activities and they will culminate in a sale at a gain. These activities are indicators of development in the nature of trade. However, there are a number of counteracting factors which do not favour an enterprise being carried on. First, your motive at acquisition was uncertain between building to live in or resale. There was no business plan, no feasibility study or resale modelling, no search for alternative sites, and you have no broader program of development.
Secondly, the scale of the activity was limited to constructing a single dwelling on a single lot. Your personal involvement and in your capacity as partner in a partnership is consistent with private construction and is not determinative of a trade or development enterprise. Thirdly, the funding was by personal savings and loans, with the financing documented on the basis that the Property would become your main residence. Fourthly, the timeline does not point to a commercial plan to capture market conditions. Finally, the change of purpose occurring before any move-in process commenced was due to personal reasons. The sale upon completion is a mere realisation of a newly constructed home that was intended to be privately occupied, rather than as the implementation of a profit-making plan conceived or pursued throughout the project. The activities do not have the character of a business or of an adventure or concern in the nature of trade for the purposes of section 9-20 of the GST Act. The sale will, therefore, not be made in the course or furtherance of an enterprise that you carry on. Registered, or required to be registered, for GST
A supply is only taxable under section 9-5 of the GST Act if you are registered, or required to be registered, for GST. You are not registered. Under section 23-5 of the GST Act, you can only be registered if you are carrying on an enterprise. You are not carrying on an enterprise in relation to the Property; therefore, you are not required to be registered for GST. Conclusion You will not make a taxable supply under section 9-5 of the GST Act because the sale will not be made in the course or furtherance of an enterprise that you carry on and you are not registered, or required to be registered, for GST.