Edited version of private ruling

Authorisation Number: 1011576530112

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Ruling

Subject: Income Tax: Capital gains tax (CGT): Subdivision of Land

Is the profit derived from the subdivision and sale of rural land assessable income in the hands of the taxpayer under section 6 -5 of the Income Tax Assessment Act 1997 (ITAA 1997) or is it a mere realisation of an asset?

No, it is a realisation of an asset.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

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 inherited rural land from their spouse upon their death after 19 September 1985. The land was initially purchased by the taxpayer's spouse before 20 September 1985 and a business of primary production was carried upon the land until their death. The taxpayer continued to carry on a business of primary production for a number of years until the point in time where the taxpayer's health failed to a state where the business of primary production could no longer be carried on.

The taxpayer has now entered into an agreement to with a property developer to have the land rezoned, subdivided, roads constructed and power installed with a view to selling the land as residential blocks of land. The taxpayer has engaged the property developer with a view to using their experience and expertise to develop the land in the most efficient and prudent manner.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Parts 3-1 & 3-3

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

Summary

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

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.

In this case, the facts indicate that the taxpayer had no intention or purpose to make a profit or gain from developing the land at the time they inherited the rural land from their spouse upon their death, and the subsequent transactions do not have the character of business operations or commercial transactions.

Accordingly, the proceeds from the sale of subdivided land is not ordinary income and not assessable under sections 6-5 of the ITAA 1997. Any proceeds would represent a mere realisation of capital assets and would fall for consideration under the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997

Detailed reasoning

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

Profit from an isolated transaction will be ordinary income when:

· 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 or in carrying on a business operation or commercial transaction.

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.

Profits on isolated transactions and the application of the principles outlined in the decision of the Full High Court of Australia in Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium).

The view of Mason J was accepted by and elaborated on by the Full High Court in Myer Emporium at 163 CLR 209-210, 87 ATC 4366-7, 18 ATR 697:

Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayers intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayers business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a one-off transaction preclude it from being properly characterized as income (FCT v.Whitfords Beach Pty Ltd (1982)150 CLR 355 at 366-367; 82 ATC 4031 at 4036-4037, 4042; 12 ATR 692 at 695-696, 705). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Taking the comments from the High Court in Myer Emporium into account, we can ascertain that for a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature.

If a taxpayer acquires an asset with the intention of using it for personal enjoyment but later decides to commit the asset, either:

· as the capital of a business; or

· into a profit-making undertaking with the characteristics of a business operation or commercial transaction,

this activity constitutes the carrying on of a business, or a business operation or commercial transaction. The profit from such activity is income even though the taxpayer did not have the purpose of profit-making at the time of acquiring the asset.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of Taxation Ruling TR 92/3. They are:

· 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.

Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

The case of Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) considered the sale of farming land. 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. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997.

In this case, the facts indicate that the taxpayer had no intention or purpose to make a profit or gain from developing the land at the time they inherited the rural land from their spouse upon their death, and the subsequent transactions do not have the character of business operations or commercial transactions. There is no indication that the taxpayer's subdivisional activity has become a separate business operation or commercial transaction, or that the taxpayer were carrying on or carrying out a profit-making undertaking or plan.

The activities involved in the sale of the land do not amount to carrying on a business. The transactions do not have the character of business operations or commercial transactions. There is no indication that the sale of the taxpayer's property became a separate business operation or commercial transaction, or that you were carrying on or carrying out a profit-making undertaking or plan.

The proceeds are therefore not ordinary income and not assessable under section 6-5 of the ITAA 1997. Any proceeds would represent a mere realisation of capital assets and would fall for consideration under the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997.

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