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Ruling

Subject: Subdivision of land

Question 1

Will the proceeds from the sale of separate blocks of land be assessable as ordinary income?

Answer

No.

Question 2

Will the proceeds from the sale of separate blocks of land be considered to be a realisation of a capital asset?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

You are your spouse are primary producers. Prior to 20 September 1985 you purchased several acres of land for the sole purpose of primary production.

You and your spouse now wish to sell your land which has always been used in your primary production activities. You and your spouse are considering subdividing the land into separate blocks of land. This will require the land to be rezoned from rural to residential.

You and your spouse previously applied for a private ruling stating that you would not develop the property yourself. However you and your spouse now plan to develop the property yourselves in order to gain best value after offers from developers required a delayed settlement.

You and your spouse have never developed land before and never plan to do it again.

You and your spouse will not undertake any activities in relation to the subdivision. All activities will be contracted out to professionals i.e. engineers, planners, real estate agents, earthmovers etc. You and your spouse will not be providing finance to purchasers of individual blocks.

You and your spouse are providing all of the funding for the project out of your savings.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 108-70

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

Reasons for decision

Question 1

The proceeds from the sale of each of the separate blocks of land you subdivide will not be assessable as ordinary income.

Proceeds from the sale of a subdivision will be considered ordinary income and not capital when they constitute a business or commercial transaction with a profit making intention.

Taxation Ruling TR 92/3 states the Commissioner of Taxation's views on whether profits on isolated transactions are assessable income.

An 'isolated transaction' is defined as:

· those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

· those transactions entered into by non-business taxpayers.

Generally, a profit from an isolated transaction will be income when both of the following are present:

· the intention or purpose of 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.

In your case, your land was acquired for farming and has been used for this purpose for decades. There was no profit making intention in regards to future subdivision when you acquired the land.

Profits on the sale of subdivided land can still be income according to ordinary concepts if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction.

The following are considered relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

· 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.

In respect of your proposed activities the following points can be noted:

· you are a primary producer;

· you will not personally undertake any of the activities involved in the; subdivision of your land as all activities will be contracted out to professionals;

· you will not be involved in the marketing and sale of the individual blocks, this will be undertaken by a local real estate agent;

· you will not be providing finance to purchasers of the individual blocks;

· you have never undertaken this type of activity in the past;

· you will be developing the property yourself in order to gain best value.

In your circumstances, the proceeds from the subdivision and sale of the individual blocks will not constitute proceeds from a business or commercial transaction and will not be assessed as ordinary income.

Question 2

The proceeds from the sale of each block will represent the proceeds from the realisation of a capital asset.

A capital gain or capital loss is made from the difference between what it costs to receive the asset and what is received when the asset is dispose of. A capital gain or loss will be disregarded for taxation purposes if the asset is acquired before 20 September 1985, unless capital improvements result in separate capital gains tax (CGT) assets.

A capital improvement made to a CGT asset acquired before 20 September 1985 will be treated as a separate (post) asset if the following conditions are met when a CGT event happens to the original asset and the cost base of the capital improvements is:

· more than the improvement threshold for the year in which the event happens, and

· more than 5% of the amount of money and property you receive from the event.

The improvement thresholds for years past 1985-86 can be found on our website; www.ato.gov.au.

Your land was acquired before 20 September 1985 and therefore any capital gain or loss will be disregarded unless expenditure on capital improvements result in each individual block becoming a separate post CGT asset.

In determining how you would apportion the proceeds on the disposal of a composite asset (pre CGT land/post CGT improvements) you can obtain an independent valuation or do you own apportionments. If you chose to do your own apportionments you need to be in a position to justify the estimates made.

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