Edited version of private ruling

Authorisation Number: 1011566350919

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Subdivision

1. Will the proceeds from the sale of subdivided land be a assessed as a capital gain under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No, as the profit will be assessed as income.

2. Will the proceeds from the sale of subdivided land be assessable income under section 6-5 of the ITAA 1997?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer acquired farm land after September 1985.

The land was situated on the outskirts of a town and near an existing low density residential estate.

They advised that it was their intention to farm the land and build a residence on it.

They were aware that the block was not large enough to be viable for the type of farming planned. They advised that they intended to buy further land to make the farm viable.

They advised they were not aware that the area was to be rezoned low density residential at the time. The area had not been rezoned at the time of purchase.

No further land was acquired to expand the farm.

They built a residence on the farm close to the existing road.

A couple of years after purchase of the land the council released a document indicating that the block and surrounding area was planned to be rezoned low density residential.

Their neighbour discussed the possibility of sub-dividing the property.

A developer put forward a proposal to the taxpayer that if three adjoining properties were developed at once they would undertake a large scale subdivision project.

A number of reports were prepared and submitted to council by professionals to have the properties rezoned and address other matters required for the estate.

Council approved the rezoning of the land for the estate.

Plans for the subdivision were lodged with council.

The estate involves xxx lots in total. The taxpayer's block will be divided into x lots plus xx acres left over with their residence on it. One of the estate roads leads into this xx acre block.

The block will be developed in stages.

An estimate of building costs has not been provided, but the Developers' preliminary reports indicate that the taxpayer may receive approximately $X per stage.

The development will be a lengthy process.

The developer advises that it will construct or provide roads, drainage, power, telecommunication and water services. Individual purchasers will be required to install their own sewerage package treatment plants.

They have stated the land has always been used for primary production and continues to be used for primary production. Income tax returns show there was no primary production income returned until the X and X income years and the amount of primary production income was relatively small in those years.

If the land had been in a recognised development area, the taxpayer could not have afforded to purchase it. They confirmed their intention of settling on the land and farming it for the long term by building their home on the land and developing it extensively for farming purposes.

Accordingly, it is now the intention of the Taxpayer to enter into an agreement on an arms length basis with the developer, to arrange for the development and subdivision of the land, and for the proceeds of sale to be used for the purchase of a larger farm in another location.

The taxpayer has been involved in a previous small subdivision.

The taxpayer's attempt to support their family from farming activities was not successful and returned to non farm work. They continue to farm the land on a part time basis.

The taxpayer's partner became involved in a primary production business and used the land.

The developer will be responsible for all works associated with the development and subdivision of the land. The Taxpayer will not be involved in dealings with council, architects, engineers, or contractors and will not be a party to any works relating to the development or subdivision of the land.

The developer will fund the development and subdivision of the Land and can register a mortgage over the Land with the taxpayer's written agreement. The taxpayer has not entered any agreement with the developer yet and lodgement of the plans with Council does not oblige the taxpayer to proceed with the development.

You advise that the taxpayer intends to purchase a large farming property which can be farmed profitability. Once a larger farm is found the taxpayer has no intention to subdivide it or any other land in the future.

Relevant legislative provisions

Section 6-5 Income Tax Assessment Act 1997

Section 104-10 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

Proceeds from the sale of property for tax purposes are treated as either:

· income according to ordinary concepts under section 6-5 of the ITAA 1997 derived:

- in the course of carrying on a business, or

- from an isolated transaction for the purpose of profit making, or

· subject to capital gains tax.

Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case.

The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's 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 the taxpayer's business (Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5 of the ITAA 1997.

The sub-division and sale of land is outside the ordinary course of the activities from which you derive your income. The transaction will not occur within the ordinary course of a business being carried on by you. Therefore, the activity would be best described as an isolated transaction.

According to Paragraph 1 of TR 92/3, 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. 

Paragraphs 15 and 16 of TR 92/3 provide that if a business or non-business taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

· the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

· the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

If the 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, but this is not always the case (paragraph 41). For example where the asset is not acquired for a profit making purpose but is later committed to a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction.

The Taxpayer has advised that they did not buy the property with the intention to subdivide it. There are facts that support this and facts that do not support this. We will therefore consider whether the activity is a profit-making undertaking or scheme with the characteristics of a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. A transaction of 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 is does not occur as part of repetitious or recurring transactions or operations.

The Commissioner's guidelines in this regard are set out in paragraph 13 of Taxation Ruling TR 92/3.

Paragraph 13 of TR 92/3 lists the following factors:

a. the nature of the entity undertaking the operation or transaction 

b. the nature and scale of other activities undertaken by the taxpayer

c. the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d. the nature, scale and complexity of the operation or transaction

e. the manner in which the operation or transaction was entered into or carried out

f. the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g. if the transaction involves the acquisition and disposal of property, the nature of that property, and

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

In applying these principles to your case, the following factors have been considered:

· The estate project is a joint venture between the owner of the land, the owner of the neighbouring lands and the developer rather than individuals.

· The taxpayer has carried out a previous small subdivision.

· The proceeds of sale are to be paid into a trust account to be held in trust for the developer and the owners for distribution as follows:

First, if the developer makes an election for reimbursement of principal and interest instalments on any loan obtained to fund development costs. Secondly in payment of development costs and third, as to the balance, X% to the developer and Y% to the land owners.

· Expected profit to be made by the taxpayer is $X.

· The estate project includes the development of the taxpayer's land. The developer will construct or provide roads, drainage, power, telecommunication and water services.

· An estimate of costs of the project has not been provided, but it would be expected that it would be significant.

· Professional advisors have prepared reports for council and plans for the subdivision and blocks will be sold to the public market.

· The subdivision is not a family dealing.

· The farm land has uses other than as an object of trade.

· You will not be actively involved in the work required to complete the subdivision.

· The land was only held for two years before the owners contemplated subdividing the land and has only recently has some minor farming activity.

Based on the above factors the involvement of the taxpayer in the subdivision is considered to be a profit making isolated transaction as the activity is business or commercial in character and beyond the mere realization of an asset.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).