Edited version of private ruling

Authorisation Number: 1011592225801

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Ruling

Subject: Land subdivision

1. Are the proceeds from the subdivision of your land assessable under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Are the proceeds from the subdivision of your land subject to the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997?

No, providing the capital improvement expenditure applicable to each block of land is less that the improvement threshold for the relevant year.

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commenced on;

1 July 2010

Relevant facts and circumstances

You are intending to subdivide three allotments of land (allotment one, two and three - the property). 

The property is zoned to allow residential lots.

The property was initially inherited prior to 20 September 1985.

You were approached by the council's local planning department prior to 20 September 1985, in relation to a shortage of land for urban expansion. This planning scheme sought a quantity of lots. As a result you provided some lots.

Prior to 20 September 1985, you intended to sell an additional allotment of land to a relative however, an error occurred and allotment one and two was also transferred.

The relative died prior to 20 September 1985 and allotment one and two was subsequently transferred from their estate to you and your spouse as tenants in common, being the next of kin.

In the interest of the proposed subdivision the ownership structure of allotment three was changed after 20 September 1985 to include your spouse as a joint owner with you as tenants in common.

After inheriting the land you carried on the business of primary production in partnership with your spouse, until you retired. Since your retirement the property has been used for agistment purposes.

Since inheriting the land you have sold off various parcels of land as a mere realisation of a capital asset. In addition, considerable land has been compulsorily acquired by government departments and subsequently re-acquired.

This subdivision was instigated by the planning schemes formulated by the council's local planning department. A draft rural living study was commissioned by the council in response to the lack of an adequate strategic framework for rural living in the municipality. The study anticipated a number of lots could be supplied from the property. However, the subdivision as designed by consultants contains less lots then anticipated.

The subdivision is in the preparation stages and is intended to be carried out over a number of stages.

Once each stage is completed the land sales from that stage will fund the consecutive stage to commence.

Due to the location and nature of the subdivision, you will incur costs, however; it is your intention to incur minimum expenditure to comply with local government regulations. To date expenditure has been limited to consultant and adviser fees. The total construction cost for the first stage includes all headwork charges, council fees and GST.

The land sales will occur through real estate agents.

Your will have minimal involvement during the subdivision process primarily consisting of meetings with consultants and advisers.

The connection between you and the consultants/advisers is of a commercial nature only. All appointed consultants are independent to the developers and have no financial involvement with this development.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 subsection 108-70(3)

Income Tax Assessment Act 1997 section 108-80

Income Tax Assessment Act 1997 subsection 108-85(3)

Income Tax Assessment Act 1997 subsection 112-25(2)

Reasons for decision

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation are references to sections of the ITAA 1997 unless otherwise stated.

Under section 6-5 your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year. Additionally, section 15-15 includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

Isolated transactions

Taxation Ruling TR 92/3 discusses profits on isolated transactions and states that profits on an isolated transaction may be income.

Profit from an isolated transaction will be ordinary income when:

(a)  the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and

(b)  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.

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 TR 92/3. They are:

(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

(h) 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, or as a profit making undertaking or plan within section 15-15, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

In deciding your case, it is useful to look at some of the court decisions in similar cases.

In Scottish Australian Mining Co. Ltd v. Federal Commissioner of Taxation (1950) 81 CLR 188; (1950) 9 ATD 135; (1950) 4 AITR 443 his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said:

The facts would, in my opinion, have to be very strong indeed before a court could be induced to hold that a company which had not purchased or otherwise acquired land for the purpose of profit-making by sale was engaged in the business of selling land and not merely realizing it when all that the company had done was to take the necessary steps to realize the land to the best advantage, especially land which had been acquired and used for a different purpose which it was no longer businesslike to carry out.

In Federal Commissioner of Taxation v. Williams (1972) 127 CLR 226; 72 ATC 4188; (1972) 3 ATR 283 (Williams) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income.

In Statham & Anor v. FC of T 89 ATC 4070; (1988) 20 ATR 228 (Statham) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over, to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means.

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.

In Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282; 91 ATC 4476; (1991) 22 ATR 56 the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amounted to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks.

In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031; (1982) 12 ATR 692 the court found that the taxpayer's activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot.

Application to your circumstances

The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to your subdivisional activities to determine whether your subdivisional activities amount to the carrying on of a business:

(a) the nature of the entity undertaking the operation or transaction

You and your spouse own the property as tenants in common and operate an agistment business on the property as a partnership.

(b) the nature and scale of other activities undertaken by the taxpayer

You are a retired primary producer. Over the years you have sold off various parcels of the inherited land as a mere realisation of a capital asset.

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

To date you have only spent money on consultant fees and have estimated the cost for the first stage of the subdivision. The land sales from the first stage will fund the consecutive stage to commence. This process will continue through to the last stage. Therefore the amount of money involved is minimal as the sale of land will pay for the next stage to commence. As a result the profit sought is only in line with realising a capital asset.

(d) the nature, scale and complexity of the operation or transaction

The first stage of the subdivision will only require the necessary works to comply with local government regulations. The proposed subdivision will be conducted over a number of stages. Therefore, it is a large scale subdivision that will be conducted over an indefinite amount of time which involves minimal development of the land to satisfy the local council regulations.

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

The property was obtained prior to 20 September 1985 and was used for primary production purposes, until your retirement. After your retirement the property has been used for agistment purposes. The property was already zoned as low density residential and as a result the local council proposed the land subdivision in relation to future rural living development. 

Consultants will be engaged to carry out the necessary work for the subdivision as required by the council and real estate agents will be engaged to arrange for the marketing and sale of the blocks.

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

The Council approached you regarding a potential subdivision of the property that could meet the needs of future strategic expansion of the municipality. You will engage professionals in a commercial nature to undertake all necessary work involved in the subdivision, including the sale of the blocks. Your involvement will be limited to meetings with consultants and advisers.

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

The property to be subdivided is allotment one, two and three. The property was inherited prior to 20 September 1985 and was used for primary production purposes, until your retirement. After your retirement the property has been used for agistment purposes.

(h) the timing of the transaction or the various steps in the transaction

The proposed subdivision will take place in a number of stages with construction on each subsequent stage only commencing after the previous stage has been completed and blocks sold. Therefore no time frame for completion can be provided.

Summary

The property was originally inherited prior to 20 September 1985 and subsequently used for primary production purposes.

The Council approached you regarding a potential subdivision of the property that could meet the needs of future strategic expansion of the municipality. You had also been approached by the local council prior to 20 September 1985 where you also provided some land for subdivision.

You will have no direct involvement in the planning and contracting work for the subdivision or in selling the lots. A firm will be engaged as project managers for the subdivision. The lots will be sold through a real estate agent.

Although the size and scale of the subdivision is large, the activities involved in the subdivision will be limited to the minimum requirements to enable the property be ready for sale.

Therefore:

· the facts in this case do not indicate that your intention in entering into the relevant transaction was to make a profit from any future sale of the lands. You wish to merely realise a capital asset, and

· the transactions do not have the character of business operations or commercial transactions. There is no indication that your subdivisional activities became a separate business operation or commercial transaction, or that you were carrying on or carrying out a profit-making undertaking or plan.

As a result the proceeds from the subdivision of the property are not ordinary income and not assessable under sections 6-5 and 15-15. They represent a mere realisation of capital assets as per the established principles in the Scottish Australian Mining Co Ltd, Williams, Statham and Casimaty cases, and will fall for consideration under the CGT provisions.

Capital gains tax

As discussed above, the subdivision of the property is a realisation of capital assets, and therefore the proceeds from the lands subdivision will fall for consideration under the CGT provisions.

CGT event A1 in section 104-10, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. Under subsection 104-10(4), you make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block.

However, subsection 104-10(5) contains an exception, where any capital gain or capital loss made is disregarded if the asset was acquired before 20 September 1985 (pre-CGT). Where pre-CGT land is subdivided after 19 September 1985, the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event under subsection 112-25(2).

Under subsection 108-70(3) capital improvements to a pre-CGT asset that are related to each other may be treated as a separate CGT asset if the total of their cost bases when a CGT event, for example a disposal, happens in relation to the asset, is:

(a)   more than the improvement threshold for the relevant income year; and 

(b)   more than 5% of the capital proceeds from the event.

The capital improvement threshold under subsection 108-85(3) for the year ended 30 June 2010 is $124,258.

Application to your circumstances

In your case, the total subdivision and land development costs are considered related to each other in accordance with section 108-80. The total cost of these improvements is to be allocated over all the subdivided blocks.

Accordingly, if the capital improvement expenditure applicable to each subdivided block is less than the improvement threshold for the relevant year then, for the purposes of any subsequent disposal by you of any of the blocks of land, the capital improvement is not taken to be a separate CGT asset.

As you acquired the property before 20 September 1985, the subdivided blocks maintain the pre-CGT acquisition dates. The capital improvement expenditure was less than the improvement threshold for the 2009-10 income year. The subdivided blocks are not taken to be a separate CGT asset therefore the gains on the sale of the blocks are not subject to CGT.

Conclusion

From the facts provided the proceeds from the subdivision of the property will not be assessable income under sections 6-5 and 15-15 as it is a mere realisation of a capital asset. The property and the subdivided blocks, maintain their pre-CGT asset status and any capital gain made on the sale will be disregarded under subsection 104-10(5), providing the capital improvement expenditure applicable to each block of land is less that the improvement threshold for the relevant year.

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