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Ruling
Subject: Capital gains tax - subdivision of land
Question 1
Is the sale of your subdivided land, acquired prior to 20 September 1985, subject to the capital gains tax (CGT) provisions?
Answer
No.
Question 2
Are the proceeds from the sale of your subdivided land, acquired prior to 20 September 1985, considered to be assessable income?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
01 July 2012
Relevant facts and circumstances
You acquired land prior to 20 September 1985.
You have subdivided some of the land into house blocks.
You have sold some of these lots.
Subdivision on some of the land has yet to be undertaken.
You intend to sell further housing blocks in the future.
You did not buy the land with a profit making intention.
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(5)
Reasons for decision
Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.
Question 1
Section 104-10 provides that a CGT event A1 occurs if you dispose of a CGT asset. However, subsection 104-10(5) states that if the CGT asset is acquired prior to 20 September 1985 then any capital gain or capital loss made is disregarded.
Taxation Determination TD 97/3 states that the effect of registering new titles under the subdivision is, for the purposes of the CGT provisions, to divide the original land parcel into two or more assets. Additionally, subdivided blocks are taken to have been acquired by the owner of the original land parcel when the original land parcel was acquired.
Accordingly, subdivision of land does not constitute the disposal of a CGT asset under section 104-10.
In your case you acquired land prior to 20 September 1985. Since this time you have subdivided the land and sold some of the housing blocks. You also intend to sell further housing blocks in the future.
Therefore, as you acquired the land prior to the 20 September 1985, the capital gain or capital loss made on the disposal of the subdivided land is disregarded under subsection 104-10(5).
Question 2
When a profit arises from the carrying on or carrying out of a profit making undertaking then it may be considered assessable income under section 6-5.
The decision in Casimaty v. FC of T (1997) 97 ATC 5135, 37 ATR 358 established that if a taxpayer does not purchase the land with the intent to make a profit, on the sale of that land, then the likelihood that any profit made on the eventual sale of land would be considered as ordinary income is greatly diminished.
The Courts and the AAT have also found that the profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. Gibbs CJ in Federal Commissioner of Taxation v. Whitfords's Beach Pty. Ltd. (1982) 150 CLR 355 made the following observation about the disposal of surplus at CLR 367:
If the taxpayer does no more than realise an asset, the profits are not taxable. It does not matter that the taxpayer goes about the realisation in an enterprising way, so as to secure the best price. As I have said in FCT v Williams (1972) 127 CLR 226 at 249: 'The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road building and the provision of reticulation for water and power to enable the land to be sold to its best advantage'
In your case, it is accepted that your original intention when you purchased the land was not to make a profit on the sale of that land. As such the subdivision undertaken by you will not amount to the carrying on of a business or a profit making undertaking.
The proceeds from the sale of the subdivided land will be the mere realisation of a capital asset.
Accordingly, as these proceeds are considered to be of a capital nature they will not be assessable as ordinary income.
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