Edited version of private ruling

Authorisation Number: 1011570172532

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Ruling

Subject: Subdivision and sale of pre-CGT Land

Is your activity of subdividing and selling subdivided lots a realisation of a capital asset?

Yes.

This ruling applies for the following period

30 June 2013

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You operate a business as a retailer.

You purchased land adjacent to your home before 20 September 1985. This land was used for cattle grazing.

At the time you purchased the land, you intended to use it only to build your home and graze cattle.

After 20 September 1985 your Council approved subdivisions.

You lodged a new development application with your Council. The application was approved.

You appointed an urban management group to oversee the subdivision. The urban management group will liaise with the council and call for tenders for road works, underground electricity and water.

You will not build anything on the land or perform any works beyond the minimum requirements of the development application.

You have no business organisation for the subdivision.

You intend to advertise the sale of the land through local real estate agents.

You have not claimed any expenses in relation to the subdivision as expenses for income tax purposes.

You have not claimed any GST input tax credits in relation to the subdivision.

You do not, and did not have, any other property holdings subject to development or subdivision.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Reasons for decision

Profits or gains in isolated transaction

A profit from an isolated transaction is generally assessable income when both of the following elements are present:

· the intention or purpose of the 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 or in carrying out a business operation or commercial transaction.

The proceeds from the mere realisation of a capital asset or from the change of an investment do not give rise to income according to ordinary concepts within the meaning of section 15-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997), even if the realisation or change is carried out in the most advantageous manner.

Where a transaction has the characteristics of intention to make profit and the profit is in the course of business, it is generally not a mere realisation of an investment.

In your case, the land undergoing development had no connection with your business of retailing, the land under subdivision was used for cattle grazing. Consideration is therefore required as to whether financial gain from the subdivision is a profit made in the course of cattle grazing.

Views of subdivided grazing land

The subdivision of grazing land has come before the Federal Court and the view is formed that gradually reducing grazing activities, and subsequently selling off portions of land does not indicate that a business is being conducted or a profit-making scheme being carried out.

In the case of Statham & Anor v. FC of T 89 ATC 4070; (1988) 20 ATR 228, the Full Federal Court concluded that where the owner sells subdivided grazing land because they choose not to persist with farming the land, the proceeds of realisation are then not assessable.

In the case of Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358, the proceeds of farming land were held not to be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset which was carried out in an enterprising way so as to secure the best price. In your case, this is demonstrated by:

· the land being originally purchased for the purpose of cattle grazing

· the land being used for farming activities for an extensive period prior to subdivision

· your reliance on an urban development firm to design, plan and construct the lots

· your appointment of real estate agent to sell the completed subdivisions

· not having not claimed GST input credits for expenses associated with the development

· no history of subdividing other lots of land.

As you will have little involvement in the actual redevelopment activities, your actions will not constitute a profit-making undertaking nor will the proceeds be income under ordinary concepts.

Your activities do constitute the mere realisation of a capital asset and therefore does not give rise to income in accordance with the definition of sections 6-5 and 15-15 of the ITAA 1997.

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