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Edited version of your private ruling
Authorisation Number: 1012363374587
Ruling
Subject: subdivision of land
Question
Will the profit derived by you from the sub-division and sale of land be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
No.
Will the sale of sub-divided land be subject to the capital gains tax provisions under section 102-5 of the ITAA 1997?
Answer:
Yes
This ruling applies for the following period
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commenced on
1 July 1990
Relevant facts and circumstances
You are currently subdividing land.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act Section 102-5
Reasons for Decision
There are three ways profits from a land sub-division can be treated for taxation purposes:
(1) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business of property development, involving the sale of land as trading stock.
(2) As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of an isolated business transaction entered into by a non-business taxpayer or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit making purpose.
(3) As statutory income under the capital gains tax (CGT) legislation, (sections 10-5 and 102-5 of the ITAA 1997), on the basis that a mere realisation of a capital asset has occurred.
Carrying on a business of property development
The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11, which uses the following indicators to determine whether a taxpayer is carrying on a business:
· whether the activity has a significant commercial purpose or character
· whether there is repetition and regularity of the activity
· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business
· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit
· the size, scale and permanency of the activity
· whether the activity is better described as a hobby, a form of recreation or a sporting activity.
In your situation, the Commissioner is satisfied you are not carrying on a business of property development. However, whilst you are not carrying on a business of property development, the proceeds from the sale of your subdivision may still be assessable as ordinary income, if those proceeds are considered to be from an isolated business transaction.
Isolated business transactions
The Commissioners view on whether profits from isolated transactions are assessable as ordinary income is found in Taxation Ruling TR 92/3. The term 'isolated transactions' refers to:
· those transactions outside the ordinary course of business of a taxpayer carrying on a business
· those transactions entered into by non-business taxpayers.
TR 92/3 states profits on an isolated transaction will be ordinary income when:
· the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain
· the transaction was entered into, and the profit was made in the course of carrying on a business operation or commercial transaction.
For a one-off land subdivision to be considered to be of a business or commercial nature, it is usually necessary that a taxpayer has the purpose of profit-making at the time of acquiring the property.
In your situation, the Commissioner is satisfied proceeds from the sale of your subdivision will not be those from an isolated business transaction and will not be assessable as ordinary income under section 6-5 of the ITAA 1997.
Conclusion
The Commissioner is satisfied the proceeds from the sale of your subdivision will not be assessable as ordinary income under section 6-5 of the ITAA 1997. As the Property was acquired after 20 September 1985, the proceeds from the sale of your subdivision will be assessable as capital gains under section 102-5 and any other relevant capital gains tax provisions of the ITAA 1997.
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