Edited version of your private ruling

Authorisation Number: 1012511623386

Ruling

Subject: Am I a business

Questions and answers:

1. Will the proceeds from the sale of subdivided vacant blocks of land be regarded as ordinary income under section 6-5 of the ITAA 97, on revenue account, as a result of carrying on a business?

No.

2. If the proceeds from the sale are regarded as ordinary income as a result of carrying on a business, will the cost of the subdivided blocks be deemed to be the market value of the land, given that the land was initially purchased and held as an investment property on capital account?

Not applicable.

3. If so, at what point will the nature of the land be deemed to have changed from capital account to revenue account?

Not applicable

4. Will the proceeds from the sale of subdivided vacant blocks of land be regarded as ordinary income under section 6-5 or section 15-15 of the ITAA 97, on revenue account, as a result of an isolated profit-making business transaction entered into by a non-business taxpayer?

No.

5. If the proceeds from the sale are regarded as ordinary income as a result of an isolated profit-making transaction, will the cost of the subdivided blocks be deemed to be the market value of the land, given that the land was initially purchased and held as an investment property on capital account?

No.

6. If so, at what point will the nature of the land be deemed to have changed from capital account to revenue account?

Not applicable.

7. Will the proceeds from the sale of subdivided vacant blocks of land be regarded as capital in nature and be exempt from income tax for the purposes of section 102-5 of the Income Tax Assessment Act 1997 (ITAA 97), where the land was acquired before 30 September 1985 and the subdivision was undertaken merely in the course of realising a capital asset?

Yes.

8. Will you be subject to capital gain tax provisions if you exceed the capital improvements threshold?

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts

Prior to 20 September 1985, you and your then spouse jointly purchased a vacant block of land in X

You and your then spouse purchased the block with the view of building a factory or factories on the land and using the rental income to support your retirement.

Your spouse passed away prior to 20 September 1985.

Your spouses' share of the land was transferred to you after probate was granted.

You intended to dispose of the land with the view to realising the investment asset.

You intended to sell the land as is, with no construction of buildings on the property.

You attempted to sell the land as a whole at auction; however there was no interest in the parcel due to the restrictions on the land.

Some years later you subdivided the property with the sole intention of realising the asset.

The subdivision was entered into with the sole intention of dividing the land into smaller parcels to facilitate the sale of the land.

Based on the market demand at the time for similar properties, you decided to undertake a minimum level of subdivision with the belief that this would assist the sale of the property.

The basic minimum activities were undertaken for this purpose under the town planning regulations.

The land was subdivided a number of blocks.

You incurred some expenses as a result of the subdivision.

Once again there was minimal interest in the subdivided blocks with the offers being well below what you considered to be a fair price for the land.

For a number of years there was some interest in the land but no sale eventuated. Throughout this time, the taxpayer incurred costs of ownership and maintenance (i.e. council rates, slashing, etc).

After a further number of years with a continued view of realising the investment property for retirement purposes, you undertook a further subdivision of the land into smaller parcels.

In order to proceed with the disposal and subsequent disposal of the land, you engaged a land surveyor to advise on and conduct the subdivision and required capital works activities.

The surveyor was engaged verbally, and is remunerated on a fee for service basis.

The surveyor has autonomy in all subdivision/development decisions. The Surveyor engaged an external firm of engineers to carry out the works required to the land. This was undertaken independently based the surveyors previous experience and without your involvement or direction.

The basic activities undertaken were limited to the minimum requirements of the planning permit.

This subdivision is a standard industrial subdivision undertaken to comply with the local council planning.

The subdivision is an industrial subdivision as the land is now zoned "commercial".

There was one additional item undertaken, which was works to upgrade the sewer system with the cost being borne by the water and sewerage company.

The cost of the subdivision is in line with the size and nature of the subdivision.

You undertook all of the capital works in order for the subdivision to gain final approval from the council and other relevant authorities.

You engaged the services of a real estate agent to market and sell the subdivided blocks of land.

Other than stipulating a minimum sale price, have had no other involvement with the advertising, pricing or marketing of the subdivided blocks, or with any prospective purchasers.

The real estate agent has autonomy in all other decisions relating to the advertising, marketing and sale of the subdivided blocks.

You have not borrowed funds to finance any of the subdividing activities.

The land is vacant and has not been used for any purpose throughout its ownership.

Your intention of undertaking the subdivisions has always been the mere realisation of the investment asset at the best possible price and at no point in time did you intend to engage in the business of property development or undertake a one-off adventure in the nature of trade or business.

You have been previously employed in the retailing industry and have never before been involved in the subdividing property or property development.

Due to your advanced years you intend to sell the land as soon as possible so that you can organise your financial affairs.

The subdivision works are still ongoing at the time of this Private Ruling application.

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 102-5

Income Tax Assessment Act 1997 Section 104-10

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

Income Tax Assessment Act 1997 Section 108-5

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

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

Reasons for decision

Section 6-5 of the ITAA 1997 includes in a taxpayer's assessable income, where the taxpayer is an Australian resident, all ordinary income derived by the taxpayer both in and out of Australia during an income year. Ordinary income is defined as income according to ordinary concepts.

There have been a number of Court and AAT cases, which have dealt with the issue of property development and whether the profits from this activity are assessable as income under ordinary concepts or whether the profit can more properly be characterised as a capital gain. As a general principle, if the sale of the land constitutes a business, or part of a business, then the proceeds will be assessable as ordinary income. On the other hand, if the sale is a mere realisation of the land, the proceeds will be a capital amount.

Carrying on a business of property development

The Commissioners view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Although Tax Ruling TR 97/11 deals with the issues of determining whether a taxpayer is carrying on a business of primary production, the same principles can be applied to the question of whether a taxpayer is in the business of property development. Paragraph 13 of TR 97/11, 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; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavor.

In your situation, you have undertaken a subdivision of a block of land that was initially purchased with the intention of building a factory and using the rental income to support you and your late spouse's retirement. In considering the facts of your case the Commissioner is satisfied that you are not carrying on a business of property development as you do not intend to undertake any further developments in the future, and there is no permanency or regularity of the activity. Further the scale and volume of your activity is not of the same nature as is ordinarily carried on by a property developer that is carrying on a business.

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

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income, discusses the Commissioners view on whether profits from isolated transactions are assessable as ordinary income.

Paragraph 1 of Taxation Ruling TR 92/3 provides that the term isolated transactions refers to:

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

b) those transactions entered into by non-business taxpayers.

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

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 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 the legal case Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693, the Full High Court said the following about the nature of profits from isolated transactions and the purpose of profit-making at the time of acquisition:

It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realisation. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

In general, whether a profit from an isolated transaction is income according to ordinary concepts depends very much on the individual circumstances of the case.

Paragraph 13 of TR 92/3 lists the following factors which are relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction include:

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

the nature and scale of other activities undertaken by the taxpayer;

b) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

c) the nature, scale and complexity of the operation or transaction;

d) the manner in which the operation or transaction was entered into or carried out;

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

f) if the transaction involves the acquisition and disposal of property, the nature of that property; and

g) the timing of the transaction or the various steps in the transaction.

In your situation, the Commissioner is satisfied proceeds from the sale of your subdivision will not be those from an isolated business transaction for the following reasons:

· you and your late spouse did not purchase the property with a view of making a profit by sale. You are not in the business of property development,

· you have not previously had business interests connected with property development and you have not entered into any other similar land development activities.

· your intention is to merely realise this asset which was purchased for the purpose of earning rental income to finance your retirement.

· your level of involvement in the development has been limited to engaging external consultants who have had full autonomy in all associated activities in relation to the subdivision or sales activities.

· your level of involvement in the sub-division lacks the repetition and regularity of activities of a person conducting a business operation.

· you have engaged professionals to undertake the sub-division and market the sale of lots.

· the sub-division is simple and has been undertaken in stages due the lack of interest from buyers, and therefore has few of the usual features of a business enterprise.

· only limited clearing and earthworks will be involved in the sub-division and all clearing and earthworks will be in accordance with the minimum council requirements.

· you will not be actively involved in the marketing and selling of the sub-divided lots.

Profit from the carrying on or carrying out of a profit-making undertaking or plan

Section 15-15 of the ITAA 1997 includes in assessable income all profit from the carrying on or carrying out of a profit-making undertaking or plan. 

Case law has concluded that the mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within the meaning of section 15-15(ITAA 1997), even though the realisation is effected in the most advantageous manner: Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188; White v FC of T (1968) 120 CLR 191; McClelland v FC of T 70 ATC 4115; FC of T v NF Williams 72 ATC 4188; (1972) 127 CLR 226; Steinberg; FC of T v Whitfords Beach Pty Ltd 82 ATC 4031. 

In Stratham v FCT (1988) 20 ATR 228, the Full Federal Court confirmed this approach. The court held that the subdivision in question was only a mere realisation and not a profit-making undertaking or scheme. Some of the factors considered were: 

· the subdivision and development occurred over a long period of time;

· the work proceeded methodically over this extended period, and

· the size of the subdivision; were not sufficient to indicate a business venture or profit-making scheme.

In your case, the action to subdivide and develop for the purpose of gaining council approval and sell the land lacks the features of a profit-making plan or carrying on a business. The land was acquired for the purpose of building a factory and using the rental income derived to fund your retirement and not with the intention of reselling at a profit. Therefore, profit from the sale of the land would not be assessable as income according to ordinary concepts. On the basis of the information provided, it is concluded you are merely realising an asset in the most advantageous manner.

Capital gains tax

Land, or an interest in land, is a CGT asset under section 108-5 of the ITAA 1997.

The sale of the land is a disposal which gives rise to CGT event A1. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

When CGT event A1 happens to a CGT asset which was acquired before 20 September 1985, any capital gain or capital loss you make will be disregarded (section 104-10 of the ITAA 1997).

Therefore you as you acquired ownership of the land prior to 20 September 1985 you are entitled to disregard any capital gain or loss that results from the disposal of the blocks of land.

Capital improvement threshold

Where pre-CGT land is subdivided after 20 September 1985, the land will maintain its pre-CGT acquisition date, as the subdividing of the land is not itself a CGT event. However, 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 happens, is:

· more than the improvement threshold for the relevant income year; and

· more than 5% of the capital proceeds from the event.

The capital improvement threshold for the year ended 30 June 2013 is $134,200.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).