Edited version of private ruling

Authorisation Number: 1011556173520

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Ruling

Subject: Income - subdivision

Question

Will any profit arising from the sale of the subdivided blocks of land be considered assessable income under either section 6-5 or 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You acquired two lots of land prior to September 1985. You have leased the land back to the previous owner since the purchase.

During this time the land has been used in the lessee's business. The business premises is now completely rundown and an application to upgrade the premises was lodged with the local council. The council supported the rezoning of the land to allow the redevelopment, and invited the applicant to discuss the proposal as they could not approve the upgrade under the non conforming provisions. As a result of the negotiations the council has approved the rezoning of the land.

Due to the costs of improving the land, you could only afford to do this by developing and selling the residential blocks. This proposal was driven by the local council due to extreme shortage of residential blocks.

This is a relatively small subdivision. Roads and services will need to be completed. You have obtained finance for the subdivision from the bank.

You will not be involved in the day-to-day management of the project. Consequently, you have instructed your planner to engage other professionals such as surveyors and engineers. A real estate agent will sell the blocks on your behalf.

Neither of you, or any related entities, have been involved in any other development or subdivision projects. You do not have any plans to do any other development project in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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

Legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

Section 6-5 provides your assessable income includes income according to ordinary concepts. This is called ordinary income.

An amount which is not assessable as ordinary income under section 6-5 may be included in your assessable income under section 15-15 if the profit arises from the carrying on or carrying out of a profit making undertaking or plan.

The decisions in Casimaty v. FC of T (1997) 97 ATC 5135; 37 ATR 358 (Casimaty) and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 demonstrate that if a taxpayer does not intend to make a profit when he or she acquires land then the likelihood that any profit made on the eventual sale of land is ordinary income is greatly diminished.

However, the profits made on the sale of subdivided land can still be ordinary income or be the result of a profit making undertaking or plan, if the activities become a separate business operation or commercial transaction. For example, in Case W59 89 ATC 538; 20 ATR 3728 Deputy President Mr I.R. Thompson considered the appellant was carrying on a business of subdividing, developing and selling land. This was because the appellant had a significant degree of personal involvement in the planning, negotiating with local councils and other bodies, obtaining finance, employing contractors, marketing of the blocks and the actual sale of the blocks. In addition to this the subdivision and development was substantial (the land had been divided into over 180 small blocks).

The Commissioner considers that the following matters (listed at paragraph 13 of Taxation Ruling TR 92/3) may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

· 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.

The factors are related to the present case as follows:

· you have held the land for many years to derive rental income,

· you have no other business relating to property development,

· residential services and earthworks will be carried out.

· your best option was to sell the subdivided land because the council would not allow you to repair the business premises without the whole of the two lots being improved,

· you will not be involved in the day-to-day management of the project.

The facts in your case are materially similar to the facts in Casimaty where the proceeds were held to not be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price.

Accordingly the proceeds from the sale of the subdivided land will not be assessable under section 6-5 because the proceeds are not ordinary income nor will they be assessable under section 15-15 because they will not arise from the carrying on or carrying out of a profit making undertaking or plan.

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