Edited version of private ruling

Authorisation Number: 1011522132826

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Ruling

Subject: Subdivision of land

Question

Is a fixed entitlement of derived from a developer in relation to the subdivision and sale of your farming land assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer

No. Any entitlements will be considered capital gains and not assessable as they relate to pre capital gains tax (CGT) assets.

This ruling applies for the following period

1 July 2010 to 30 June 2013

The scheme commenced on

1 July 2008

Relevant facts

You sought and were granted a ruling by the ATO. The facts, as expressed in the application for that ruling, are essentially unchanged. The ruling granted was to the effect that the proposed arrangement would not generate assessable income.

Since that time, intermittent production has continued. Production had ceased but, following no action from the developer, further crops were grown and sold.

The developer indicated that they were ready to commence. Sales are expected to commence. You state that the delay of the development commencing is due to the impact of certain financial circumstances.

Relevant legislative provisions

Section 6-5 Income Tax Assessment Act 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

We consider that the facts of your case, as outlined in this ruling, do not provide for an arrangement in which you are considered to be carrying on a business in partnership with the developer for income tax purposes. As a consequence, any entitlements will be considered capital gains and not assessable.

Detailed reasoning

Section 6-5 states that assessable income includes income according to ordinary concepts. In determining whether an isolated transaction amounts to a business operation or commercial transaction, and therefore ordinary income, paragraph 13 of Taxation Ruling TR 92/3 outlines a number of factors which must be considered. Those factors 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 involved the acquisition and disposal of property, the nature of that property; and

- the timing of the transaction or the various steps in the transaction.

The factors pertain to the present case as follows:

The sale of the subdivided land was precipitated by your inability to maintain the acreage. You are seeking to maximise the realisation of your asset for retirement purposes.

The land was originally purchased for the purpose of conducting farming activities many years ago and was used for that purpose until recently.

You have no previous involvement in subdividing, developing and selling land, and other than having obtained initial council approval you will have no direct involvement in this project at any level. A developer has been engaged to employ all sub contractors, liaise with council and fulfil all other responsibilities associated with the subdivision, development and marketing.

Under the arrangement with the developer you will be paid a deposit at the commencement of the project. The balance will be paid intermittently as the individual lots are sold. Regardless of the price at which the lots are sold your payments are guaranteed under the contract and you will not be entitled to further profits, or exposed to any expenses or risks.

Only a small number of lots will be developed for sale on a relatively small site. The council requirements only extend to electricity and telephone connections. Other than bitumen sealing of some minor carriageways the developer will not exceed council requirements.

The facts in this case compare favourably to the facts in leading cases Casimaty v. FC of T (1997) 151 ALR 242, 97 ATC 5135, 37 ATR 358, McCorkell & Federal Commissioner of Taxation, AAT Case 13, 136, Re39 ATR 1112; 98 ATC 2199 and Statham v. Federal Commissioner of Taxation (1988) 16 ALD 723; 20 ATR 228; 89 ATC 4070, all of which found that the proceeds were not income according to ordinary concepts, but constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price.

Consequently, the profit derived from the subdivision and sale of the land is not assessable income under section 6-5. Further, the profits will not be considered capital gains as they relate to pre CGT assets.

Carrying on a business in partnership

In some instances an agreement may be entered into by two or more parties whereby the relationship constitutes a partnership for tax purposes. If the partners are deriving income from a business activity carried on by the partnership then the distributions to each of the partners may be assessed as ordinary income under section 6-5.

The Commissioner's position in respect of whether a business is carried on in partnership is discussed in Taxation Ruling TR 94/8. Its application to your circumstances was addressed in some detail in the original ruling.

Under the proposed agreement you have no involvement in the day to day activities undertaken by the other party in relation to this project and receive only a fixed entitlement with no prospect of sharing in any expenses, losses or additional profits. For that reason we consider that the facts of your case, as outlined, do not indicate the existence of an arrangement in which you are considered to be carrying on a business in partnership with the developer for income tax purposes.

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