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Edited version of your private ruling
Authorisation Number: 1012570731363
Ruling
Subject: subdivision of land
Questions
1. Will the sale of lots subdivided be assessable to the taxpayers on capital account as the mere realisation of an asset and therefore assessable as a capital gain under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)
Answer: Yes
2. Will the profit from the sale of lots subdivided be assessable to the taxpayers on revenue account from an isolated business transaction under section 6-5 of the ITAA 1997?
Answer: No
3. If the taxpayers are carrying on a business in respect of the subdivision when will the land owned by the taxpayers become trading stock for the purposes of section 70-30 of the ITAA 1997?
Answer: Not applicable as the taxpayers are not considered to be carrying on a business
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 September 1988
Relevant facts
The taxpayers subdivided some land.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1936 section 25A
Income Tax Assessment Act 1997 section 104-10(5)
Income Tax Assessment Act 1997 Division 70
Part 3-1
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.
The proceeds from the mere realisation of an asset are not ordinary income, even though the realisation is carried out in an enterprising way so as to secure the best price. However, an isolated business transaction entered into with a view to making a profit may give rise to income according to ordinary concepts. This would also apply if a capital asset is ventured in an undertaking or scheme which involves more than the mere realisation of the asset.
Profit arising from the sale of property acquired prior to 20 September 1985 is assessable under the provisions of section 25A of the Income Tax Assessment Act 1936 (ITAA 1936) if the property was acquired for the purpose of profit making by sale. Profits arising from a profit-making undertaking or plan may also be assessable under section 15-15 of the ITAA 1997.
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, 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.
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.
Trading Stock
If a taxpayer is considered to be carrying on a business of property development or conducting an isolated business transaction, land and property may be considered trading stock under section 70-10(a) of the ITAA 1997. Any proceeds from sale are then treated as ordinary income, and the business enterprise may be required to register for GST. This could happen even for a one-off transaction.
Application to the current circumstances
The issue currently under consideration is whether your activities in subdividing the original lot and subdividing it into various lots will amount on the one hand, merely to the advantageous realisation of a capital asset or on the other hand, to a business of land development or to an undertaking or concern in the nature of trade carried on by the taxpayers.
In view that the taxpayers have never carried out a subdivision before and weighing up all considerations including the size and scale of the activity, we do not consider that the taxpayers are carrying on a business of property development. However as previously stated, the proceeds from the subdivision may still be assessable under section 6-5 of the ITAA 1997 as an isolated business transaction.
Paragraph 265 of MT 2006/1 provides that if several of the following factors are present it may be an indication that a business activity or an adventure in the nature of trade (a profit-making undertaking or scheme) is being carried on.
- There is a change of purpose for which the land is held.
- Additional land is acquired to be added to the original parcel.
- 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 letter head.
- 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.
- Buildings have been erected on the land.
An analysis of the indicators above leads us to form the conclusion that the activities carried out by the taxpayers amount to no more than the mere realisation of an asset.
As such the sale of the lots will be assessable to the taxpayers on capital account and therefore assessable as a capital gain.
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