Edited version of your private ruling

Authorisation Number: 1012566168863

Ruling

Subject: capital gains tax

Question 1

Will a CGT event occur when the land is subdivided into lots A and B?

Answer

No.

Question 2

Will a CGT event occur when you and your spouse dispose of your interests in lot B and become the sole owners of lot A?

Answer

Yes.

Question 3

Are the proceeds from the sale of the subdivided land considered a mere realisation of a capital asset for income tax purposes?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the further information provided.

You and your spouse purchased land prior to 20 September 1985. The land was purchased as joint tenants by you, your spouse and two other individuals.

The land has been used as your main residence.

You and your spouse intend to subdivide the original block of land into two lots (lots A and B).

You and your spouse will become the sole owners of lot A.

The other two individuals will become the sole owners of lot B

You and your spouse will continue living at your main residence on lot A.

Lot A is approximately X square metres.

Lot A will be subdivided into Y lots, and these lots will be sold in due course.

Several lots will be retained by you and your spouse.

You and your spouse have not previously been involved in subdividing and developing land.

Activities such as building roads and connecting power will be completed as part of the subdivision.

Contractors will be employed to undertake these activities.

Buildings will not be constructed on the lots prior to their sale.

You and your spouse do not intend to engage the services of a real estate agent to assist in the sale of the lots.

You and your spouse intend to borrow funds to pay for the costs of the subdivision.

Reasons for decision

Question 1

If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a capital gains tax (CGT) event if you retain ownership of the subdivided blocks.

Therefore, you and your spouse will not make a capital gain or a capital loss at the time of the subdivision.

Question 2
Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset.

CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.

Joint tenants and tenants in common

Under section 108-7 of the ITAA 1997, if you are a joint tenant you are treated as if you are a tenant in common owning equal shares in the asset for CGT purposes.

Application to your circumstances

In this case, you, your spouse and two other individuals hold a property as joint tenants. For CGT purposes it is treated as if you, your spouse and the other two individuals are tenants in common owning equal shares.

When the property is subdivided into lots A and B, you, your spouse and the two other individual will hold an ownership interest in both lots. Although the act of subdividing the land does not trigger a CGT event, when a transfer occurs so that you and your spouse become the owners of lot A and the other two individuals become the owners of property B, a CGT event will occur.

As each interest in the original property was acquired before 20 September 1985, any capital gain can be disregarded at this point. However, as a result of the change in ownership, you and your spouse will hold both pre and post CGT interests in lot A.

Question 3

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

· the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

· the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of subdivided land can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

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

b) the nature and scale of other activities undertaken by the taxpayer

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

d) the nature, scale and complexity of the operation or transaction

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

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

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

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

Miscellaneous Taxation Ruling MT 2006/1 provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

· there is a change of purpose for which the land is held;

· additional land is acquired to be added to the original parcel of land;

· the parcel of land is brought into account as a business asset;

· there is a coherent plan for the subdivision of the land;

· there is a business organisation - for example a manager, office and letterhead;

· borrowed funds financed the acquisition or subdivision;

· interest on money borrowed to defray subdivisional costs was claimed as a business expense;

· there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

· buildings have been erected on the land.

No single factor is determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Application to your circumstances

In this case, the property was originally purchased by you, your spouse and two other individuals prior to 20 September 1985. You and your spouse have lived on the property and treated it as your main residence. Once the lot is subdivided and you and your spouse become the owners of lot A (holding both pre and post CGT interests), the intention is to subdivide the land into Y lots.

You and your spouse will retain several lots. One of these lots will be your main residence. You and your spouse were granted permission to subdivide the land by the local development authority. The plans are with the local council and are pending approval. You and your spouse will have minimal involvement in the subdivision and there is no intention to construct buildings on the lots prior to their sale.

Having regards to your circumstances and the factors outlined above, we consider that any proceeds from the sale of the subdivided land will represent a mere realisation of a capital asset which will fall for consideration under the capital gains tax provisions of the ITAA 1997.

Note that as you and your spouse hold both pre and post CGT interests in lot A, a portion of the capital proceeds received from the sale of the subdivided lots will be assessable income.

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