Edited version of private ruling

Authorisation Number: 1011586420529

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Ruling

Subject: Subdivision of land

1. Will the land become trading stock of the taxpayer when they venture it into a business of land development?

Yes.

2. Is the taxpayer able to elect to acquire the land as trading stock at market value under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997)? If so, can the valuer take into account the likelihood and potential for subdivision when valuing the land?

The land can be converted to trading stock at market value with such value adjusted appropriately to reflect the likelihood and consequences of subdivision.

3. Will section 15-15 of the ITAA 1997 apply to the activities if the taxpayer treats the land as trading stock on hand?

Section 15-15 of the ITAA 1997 will not apply.

4. If the taxpayer brings the land into account as trading stock as part of a business of land development will there be capital gains tax (CGT) implications under section 108-70 of the ITAA 1997?

No.

This ruling applies for the following period

1 July 2010 - 30 June 2011.

1 July 2011 - 30 June 2012.

The scheme commenced on

1 July 2010.

Relevant facts

You carry on a business of primary production in partnership. You purchased a property prior to September 1985. You have used the property to carry on a business of primary production during your ownership period.

Plans are currently being prepared to subdivide the property and develop it. You expect the project would take one to two years to complete. You do not have specialist knowledge or skills in land development. You carry on a business as a builder however you will use a project manager to carry out the activities. You will have very little personal involvement in the activities.

You do not have plans to be involved in any further land development. You also own other farm land which cannot be developed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Section 108-70

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 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 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

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Question 1

In some instances, the subdivision and sale of land previously used for primary production purposes will be treated as simply the realisation of a capital asset. In other circumstances, the disposal of the land will constitute the conduct of a business of development and sale of land.

Whether such activities amount to the conduct of a business depends on a weighing of all the relevant factors. The factors to consider in arriving at a conclusion as to whether a business is being conducted are discussed in detail in Taxation Ruling TR 97/11.

In the present case, a number of factors would support a conclusion that the activities in question constitute the undertaking of a business of subdivision, development and sale of land and that the land ventured into that enterprise should be considered trading stock. Amongst other factors, the disparity between the cost of the subdivided land and the estimated proceeds on its disposal is indicative of a profit-making purpose.

Taxation Determination TD 92/124 states that land will be treated as trading stock for income tax purposes if it is held for the purpose of resale and a business activity which involves dealing in land has commenced. Where such a business exists, the proceeds from the sale will be assessable under section 6-5.

As to when such a business is taken to have commenced, TD 92/124 also states that a business activity is taken to have commenced when a taxpayer embarks on a "definite and continuous cycle of operations designed to lead to the sale of the land." That is, the land will become trading stock when you are demonstrably fully committed to the business of land development. When that occurs is determined by a consideration of the facts of the case. For present purposes, it may reasonably be taken to be the point at which the land is ventured into the business.

Question 2

Sub-section 70-30(1) expressly provides that if you start to hold as trading stock an item which you already held in another capacity, one of the methods which you may use to value it is its market value just before it became trading stock. Taxation Determination TD 97/1 indicates that an appropriate valuation for farming land converted to trading stock would include the land's "value as broadacres but taking into account its potential for subdivision and the probability of consent being given for such potential use."

The land can be converted to trading stock at market value with such value adjusted appropriately to reflect the likelihood and consequences of subdivision.

Question 3

Section 15-15 provides that the assessable income of a taxpayer includes the profit arising from the carrying on or carrying out of a profit-making undertaking or plan. The section does not apply to a profit that is assessable as ordinary income under section 6-5 or a profit that arises in respect of the sale of property acquired on or after 20 September 1985.

In the present case, the profit from the sale of the land will be assessable as ordinary income under section 6-5. As a consequence, section15-15 will not be applicable.

Question 4

Section 118-25 states that a capital gain or loss is disregarded if the asset in question is trading stock at the time of the relevant event. As a result, in the present case any implications of section 108-70 are not applicable.

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