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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012539076736

Ruling

Subject: Property development

Question 1

Will the proposed subdivision of your business property be the carrying on of a business of property development and result in the property becoming trading stock and result in the happening of CGT event K4?

Answer

No.

Question 2

If you realise a capital gain as a result of CGT event K4 because you commence to hold the property as trading stock, are you able to disregard the capital gain under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

This question is not applicable because CGT event K4 will not happen.

Question 3

If (a) you subdivide the property and sell the subdivided lots and (b) the sales of the subdivided lots are not completed within the period ending two years after you commence to hold the property as trading stock, will the Commissioner exercise the power under subsection 152-125(4) of the ITAA 1997 to extend the time limit under paragraph 152-125(1)(b) of the ITAA 1997 to such time as you have sufficient net proceeds of sale of developed lots to enable you to make the payments to your shareholders?

Answer

This question is not applicable because CGT event K4 will not happen.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are a post-CGT company with two issued ordinary shares.

You acquired a property. There are two houses on the property which are occupied by your shareholders

You have conducted a business on the property for the entire period that you have owned the property. You are still conducting this business on the property during the early preliminary stages of developing the property. However, you are winding down this business and will cease to conduct this business altogether as the work involved in developing the property becomes more intensive. This business is not related to property development.

One of your shareholders is no longer able to work in the business due to a medical condition.

One of your shareholders had for a number of years been monitoring the state of land development in the area. They had been doing this through discussions with other land owners, local real estate agents and people involved in the business of developing property. As a result of this, you had a reasonable feel for the state of property development in the area, and the possible profits that could be generated from the property.

You entered into an arrangement with a property development company that had the necessary experience in developing property to assist you in developing the property.

You had an ongoing involvement in the development of the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 104-220

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

CGT event K4 under section 104-220 of the ITAA 1997 happens if:

Section 70-10 of the ITAA 1997 provides that trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Determination TD 92/124 discusses in what circumstances land will be treated as 'trading stock' in relation to property development. TD 92/124 states:

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

No one factor is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

The Full High Court in Federal Commissioner of Taxation v. St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210; 78 ATC 4104; (1978) 8 ATR 452 (St Hubert's Island) considered whether the taxpayer was carrying on a business when determining whether land was trading stock of the taxpayer. Jacobs J stated that:

In FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer), the Full High Court stated:

Profits on the sale of subdivided land can be income according to ordinary concepts if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction. Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) and McCorkell v. FC of T 98 ATC 2199; (1998) 39 ATR 1112 (McCorkell) demonstrate that in circumstances where there is an absence of profit making intention when farming land is acquired, the likelihood of any profit made on the eventual sale of land being income according to ordinary concepts is greatly diminished.

In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355; 82 ATC 4031; (1982) 12 ATR 692, the taxpayer company purchased land in 1954 for the purpose of the shareholders having access to shacks on a beachfront and not for the purpose of profit-making by sale or any business purpose. In 1967, the shareholders sold their shares to three companies who had the intention that the taxpayer would cause the land to be developed, subdivided and sold at a profit. Gibbs CJ, in deciding what the intention or purpose of the taxpayer company was, stated that:

Gibbs CJ concluded:

In Stevenson v FC of T 91 ATC 4476 (Stevenson), the taxpayer, who owned and worked a family farm, decided to sell most of the land. After failing to find an interested developer, the taxpayer himself commenced subdivision of the land. The taxpayer was the sole decision-maker in respect of all matters of consequence in relation to the subdivision, although professional advice was obtained. The taxpayer organised the finance and marketing aspects of the development. The Administrative Appeals Tribunal found that the taxpayer had committed the land to a business. In distinguishing between a mere realisation and carrying on a business, it was relevant that the taxpayer undertook the planning and management of the activities.

In Casimaty, the proceeds were held not to be income according to ordinary concepts, but rather constituted the mere realisation of a capital asset, carried out in an enterprising way so as to secure the best price.

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. Paragraph 49(g) of TR 92/3 states:

Applying the above to your circumstances

The overall impression in this case is that you are not carrying on a business as a property developer. You are simply entering into a management agreement with a property developer for the management of the development of your property. Apart from this agreement and development, you are not currently involved in any land developments, although we accept that you are actively involved in the current development.

You have also not previously been involved in any land developments and there is no indication that you intend to carry out any further land development in the future. These facts indicate that you have no intention to engage in business. There is a lack of regularity and repetition of the activity as there is no trading pattern of buying, developing and selling land, and the development of the property appears to be as a result of one of the shareholders being unable to work in the market garden business for medical reasons and the winding down of this business.

Additionally, the decisions in St Hubert's Island, Myer, Casimaty and McCorkell confirm that one of the factors to be considered in determining whether a business of property development is carried on is whether the land was acquired for the purposes of resale. In your case, you did not acquire the land for the purpose of resale. There is no indication in this case that you will be undertaking any activities beyond the subdivision of the land such as constructing buildings, and the development of the land is simply a realisation of an existing asset held by you. The property also had uses other than as the subject of trade as discussed above in Taxation Ruling TR 92/3, that is, for business purposes and for private residential purposes.

Your circumstances can be distinguished from those in Stevenson as you are not carrying out the development activities yourself and you are not the sole decision maker in respect of all matters of consequence in relation to the development even though you are involved in the development activities.

Conclusion

As you are not carrying on a business in relation to the subdivision and development, the property will not be trading stock in your hands under section 70-10 of the ITAA 1997 and CGT event K4 under section 104-220 of the ITAA 1997 will not happen in this case.

Questions 2 and 3

These questions are not applicable because CGT event K4 will not happen.


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