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Ruling

Subject: CGT - land subdivision

Question 1

Will the proceeds from the sale of the subdivided land be assessable income under section 6- 5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proceeds from the sale of the subdivided land be accounted for under the capital gains tax provisions?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You purchased a property and built a dwelling on it prior to 1985.

The dwelling has been your main residence.

The property was used to run a business for a short period of time. Since then the property has been used privately.

You are both over the age of 60 and intend to retire.

Following your retirement, you wish to downsize but still wish to remain in your family home.

In recent years, health issues have made it difficult to maintain the property as required.

You have engaged a consultant to subdivide the property yet enable you to remain living there. The consultant has lodged an application with your local council.

The plan is for a number blocks plus the existing dwelling block.

The council has issued a "Notice of Determination" to issue a permit. However, there has been an objection raised.

You expect that regardless of the outcome of the objection, you will develop the property with approximately the same amount of blocks as planned.

When a permit is issued, the consultant will be engaged to seek suitable contractors, monitor and supervise the works, make payment and gain certification from the council.

Following the receipt of the 'Certificate of compliance', you will engage a real estate agent and legal associates to sell and finalise the payment and conveyancing of the blocks.

The development will be fully funded from your self managed superannuation fund.

You have not been involved in any other land development projects, nor is it your intention to do so in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Reasons for decision

Summary

The proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sales will be considered a capital transaction subject to the capital gains tax provisions. As the property was purchased prior to 20 September 1985, any capital gain made from the sale of the blocks will be disregarded.

Detailed reasoning

Under section 6-5 of the ITAA 1997, the assessable income of an Australian resident includes ordinary income derived both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

In FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693 (Myer Emporium), the Full High Court expressed the view that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable income.

Taxation Ruling TR 92/3 considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium. According to Paragraph 1 of TR 92/3, the term isolated transactions 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.

Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present:

· your intention or purpose in 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 contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. However, if a transaction satisfies the elements set out above it is generally not a mere realisation of an investment.

In your case, you do not carry on a business of buying, selling or developing land. You purchased the initial property primarily for domestic use and have held the property for that use for an extended period of time. Due to your health, it has become difficult for you to manage such a large property. You intend to retain your residential property on one of the subdivided blocks and engaged professionals to carry out the council application process and construction works.

Accordingly, the proceeds from the sale of the subdivided blocks will not be included in your ordinary income. Rather, the sale will be considered a capital transaction subject to the capital gains tax provisions in Part 3-1 of the ITAA 1997. As you purchased the property prior to 20 September 1985, any capital gain made on the sale of the blocks will be disregarded.

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