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Edited version of private advice

Authorisation Number: 1012643538909

Ruling

Subject: Subdivision of land

Questions and answers:

Yes

No

This ruling applies for the following period:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

Company A is a family owned private company which was originally involved in a manufacturing business.

Company A purchased a block of land with a few houses (dwellings) on it before 20 September 1985. One of the dwellings was used for business purposes and the other dwellings were used to derive rental income.

Over time and at different stages, all the dwellings were demolished and a new dwelling (dwelling M) was built prior to 20 September 1985. Part of dwelling M was used for business purposes and part of it was rented out.

After 20 September 1985, the council re-zoned the land.

Following the council's re-zoning and the relocation of the business premises, it was decided to maximise the use of the land by undertaking the development for capital growth and to receive investment income.

Company A decided to subdivide and develop the land and build a number of dwellings for rental purposes.

Company A was not carrying on a property development business nor did it ever intend to commence one. The development comprised the construction of x dwellings.

Company A has not been involved in any other development or subdivision activities.

Company A engaged an arm's length developer to plan, oversee and complete all subdivision work. The developer was responsible for hiring any sub-contractors, engineers and architects

The developer as part of the engagement erected the x dwellings and connected utilities.

Company A engaged a registered real estate agent to sell the properties and was not involved in any marketing or selling of the dwellings.

The x dwellings derived rental income for many years from the date of completion.

Following a significant number of years, as the dwellings required significant maintenance after many years of renting, Company A decided to sell the dwellings. All dwellings were sold to third parties and there was no residual land owned by Company A.

Company A has not since undertaken any other forms of development activities.

Dwelling M was not sold.

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

Reasons for decision

There are three ways profits from a land development, subdivision and sale of house and land packages can be treated for taxation purposes:

Under section 6-5 of the ITAA1997, a taxpayer's assessable income includes the ordinary income that is derived directly or indirectly from all sources during the income year. If the proceeds from the sale of the subdivided lots that are the subject of this ruling are ordinary income, the proceeds will be assessable under this section.

Although the tax legislation does not provide specific guidance on what is meant by 'income according to ordinary concepts', a substantial body of case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts.

Is Company A carrying on a business of property development?

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 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 indicator 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.

In your case

It is considered that Company A was not carrying on a business of property development, and therefore the proceeds from sale of the lots are not ordinary income as per section 6-5 of the ITAA 1997.

Are the disposals of the dwellings a result of an isolated profit making undertaking?

Taxation Ruling TR 92/3 discusses profits on isolated transactions and states that profits on isolated transaction may be ordinary income.

In most circumstances, profit from an isolated transaction will be ordinary income when:

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient that the transaction is business or commercial in nature.

Some of the factors to consider when looking at whether an isolated transaction is business or commercial in nature are listed at paragraph 13 of TR 92/3. They are:

Profits of the sale of subdivided land can be income

Profits on the sale of subdivided land can be income according to ordinary concepts within section 6-5 of the ITAA 1997, if the taxpayers' subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

In Scottish Australian Mining Co Ltd v. FC of T (1950) 9 ATD 135; (1950) 81 CLR 188 (at ATD p 140; CLR p195) his Honour, Williams J, in considering whether the subdivision of land was a profit making venture, said:

In Statham & Anor v FC of T 89 ATC 4070 (Statham) the Full Federal Court considered the subdivision of rural land which involved a large scale subdivision of 105 lots with a substantial outlay to obtain a large profit. It was considered that the mere magnitude of the realisation does not convert the activity into a business, undertaking or scheme. The Court considered the size of the subdivision, the amount of money involved, the involvement of the parties and the length of time the subdivision was to be developed over to determine whether the activities amounted to more than a mere realisation of assets. The Court determined that the owners were not in the business of selling land and that the activities amounted to a mere realisation of the asset by the most advantageous means.

In FC of T v. Williams 72 ATC 4188; (1972) 127 CLR 226 (Williams) the High Court considered that development carried out on land to be subdivided, such as grading, levelling, road building and provision for water and power, was to enable the owner to secure the best price for the land and did not amount to carrying out a profit making scheme. The proceeds resulted from the mere realisation of a capital asset and were not income.

Casimaty v. FC of T 97 ATC 5135; (1997) 37 ATR 358 (Casimaty) considered the sale of farming land. The proceeds were held to not 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. Consequently, the profit derived from the subdivision and sale of the land by the taxpayer was not assessable income under section 6-5 of the ITAA 1997.

In Stevenson v. FC of T 91 ATC 4476; (1991) 22 ATR 56; (1991) 29 FCR 282 (Stevenson) the court considered that the magnitude of the subdivision and the degree of involvement in the planning and managing of the subdivisional activities amount to the carrying on of a business. The facts in this case involved a 220 block subdivision and the taxpayer was actively involved in the planning, employment of contractors and marketing of the blocks.

In FC of T v. Whitfords Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355; (1982) 12 ATR 692; (1982) 39 ALR 521; (1982) 56 ALJR 240 (Whitfords) where the court found that the taxpayer's activities in relation to the subdivision of the land amounted to more than realisation of a capital asset and constituted the carrying on of a business of land development. The taxpayer in this case was a company which was originally formed to acquire land to secure the shareholders continued access to their properties and at some stage subdivide the land and give each shareholder a separate title to a lot.

Application to your circumstances

The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to Company A's activities in subdividing the land and erection of dwellings to determine whether the proceeds are income in nature. The relevant factors are:

Applying the above cases and the factors outlined in TR 92/3, and the principle in Myer Emporium that there 'was no profit making intention at the time of acquisition, the land development activities and subsequent disposals by Company A were not activities which were entered into with a profit-making purpose of commercial like transaction.

Therefore, the disposal of the dwellings amounts to the 'mere realisation of a capital asset' and is subject to the CGT provisions in Part 3-1 of the ITAA1997.

Conclusion

The capital gain from the sale of the subdivided land and dwelling M will be disregarded as the land and dwelling were acquired before 20 September 1985. Any capital gain from the sale of the x dwellings will be assessable under sections 10-5 and 102-5 of the ITAA 1997 as they were constructed after 20 September 1985 and are separate assets from the land.

The proceeds from the sale of the subdivided land, together with the x dwellings will not be assessable, on revenue account, under section 6-5 or section 15-15 of the ITAA 1997 as income from an isolated profit making transaction. In addition, the proceeds from the sale of dwelling M, acquired before 20 September 1985, will not be assessable under section 6-5 or section 15-15 of the ITAA 1997 as income from an isolated profit making transaction.


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