Edited version of private ruling

Authorisation Number: 1011592079703

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Ruling

Subject: Income - land subdivision

1. Are the proceeds from the sale of the subdivided land considered to be assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Is the sale of the subdivided land subject to the capital gains tax (CGT) provisions?

Yes.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a privately owned investment company in the process of a member's voluntary liquidation (the company).

The company owned and operated a hotel. That hotel and the surrounding land were acquired by the State Government prior to 1985. The company ceased operating the hotel at that time.

An existing and unrelated company was formed prior to 1985 which held large parcels of vacant land and operated a private hotel.

Prior to 1985 the company acquired the shares and corresponding assets in this unrelated company, thus obtaining a freehold interest in a number of vacant parcels of land near to the hotel (the land).

The land was used to secure a source of firewood to heat the hotel premises. There has been no other commercial use of the land. At times the company has allowed local farmers to graze cattle on parts of the land, but for no material compensation.

The company sold a number of parcels of the land prior to 1985. Post 1985 the company has progressively sold off a number of undeveloped parcels of the land.

For one of the disposals the company sought a rezoning application and development application to subdivide that parcel into a number of titles, this was then on sold to a developer. The application was handled by external consultants.

The company has applied the proceeds from these sales to purchase liquid assets such as shares or has placed the proceeds in bank interest bearing bank deposits pending the final winding up of the company.

The company has not acquired any other land, and has no intention to acquire any other land holdings.

The company is currently being wound up under a member's voluntary liquidation.

The only land the company now owns is a remaining parcel of the land. The company intends to subdivide this remaining parcel into a number of blocks, complete capital works to prepare them for development and to sell them.

The process will require local council approval of a rezoning application and plan of subdivision.

The company will hire professional external contractors to carry out the subdivision and selling process (for example, surveyors, engineers and so on, real estate agents as required).

The subdivision will be financed with existing company funds.

Apart from the previous subdivision, the company has not undertaken any subdivision or property development of any other land holdings in any capacity.

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.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Reasons for decision

Income according to ordinary concepts

Under section 6-5 of the ITAA 1997 assessable income is made up of ordinary income and statutory income. Generally, income is derived periodically from activities of the recipient or from investments that the recipient holds. However, in some restricted circumstances, the profit from an isolated transaction may be regarded as the income of the recipient.

Taxation Ruling TR 92/3 sets out the Commissioners view on whether profits made from isolated transactions are ordinary income. 'Isolated transaction' 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.

Whether a profit from an isolated transaction is income according to the ordinary concepts depends very much on the circumstances of the case. However, where a taxpayer who does not carry on a business makes a profit from an isolated transaction, that profit is income if:

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

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

Generally, where the transaction is the sale of property, the time that the purpose or intention of the seller is relevant is at the original acquisition. However, in cases where the seller made major developments to the property at an interval after its acquisition, the seller's purpose when the developments are commenced may be relevant (Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031; (1982) 12 ATR 692 (Whitford's case)).

In this case, the land was acquired prior to 1985. Over time the company allowed local farmers to graze livestock. The land was not used for any other purpose. The company disposed of a small number of blocks prior to 1985. Post 1985 the company has progressively sold off the land. Other than the single subdivision of one block into a number of blocks, the company did not develop any other land that it disposed of. The remaining land is to be subdivided into a number of blocks and sold. This course of action will require a rezoning application.

In these circumstances, this could not be regarded as constituting a major development of the property. On the basis of the facts the land will merely be realised in the most advantageous way. The transaction was not carried out as part of the company's business activities, it could not be said the transaction was entered into with a profit making purpose; therefore the gain on it is not income according to ordinary concepts in the rulee's hands. For this reason, the gain is not included in the assessable income of the company under section 6-5 of the ITAA 1997.

Profit-making undertaking

If a gain on a transaction is not income according to ordinary concepts, it can still be included in the assessable income where it is a profit from a profit-making undertaking (section 15-15 of the ITAA 1997).

Generally, where the transaction is the sale of property, the time that the purpose of the seller is relevant is at the original acquisition. However, in cases where the seller made a major development to the property at an interval after its acquisition, the seller's purpose when the developments are commenced may be relevant (Whitfords Beach).

As discussed above, in the course of the rulee's ownership of the land there have been a series of disposals, with the final remaining land to be subdivided and sold. The rulee held the land for a significant period of time, indicating that it was not acquired for resale at a profit. In the circumstances it could not be regarded as amounting to significant development of the property.

As there is little to evidence that the transaction was entered into as a profit-making undertaking, the gain on the sale of the property is not included in the rulee's assessable income under section 15-15 of the ITAA 1997.

The sale of the subdivided land is subject to the CGT provisions under part 3-1 of the ITAA 1997.

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