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Edited version of private advice

Authorisation Number: 1012651491139

Ruling

Subject: Capital gains tax

Question and answer

Will the sale of the subdivided blocks of land be subject to the capital gains tax provisions of the Income Tax Assessment Act 1997?

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

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You and a relative own a 50% share each in a parcel of rural land.

You purchased the land over 50 years ago.

Your relative carries on a business on the land.

You and your relative were approached by a company (the company) with a proposal to develop a section of the land.

It is proposed that the company will develop the land to create a substantial number of lots.

You and your relative have signed a property development agreement with the company under which the company will:

The company will be paid:

The property development agreement states that nothing in the agreement will be construed or deemed to constitute a partnership or joint venture between you and the company.

All expenditure on the project, including fees, will be financed by a bank under a loan obtained by the company, with you and your relative providing a third party mortgage over the site, and then ultimately from the project funds as sales are made and debt is repaid.

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 104-10

Reasons for decision

Your assessable income for an income year includes any net capital gain you make and any ordinary income you derive in the year.

Any capital gain realised from the sale of a capital asset is usually assessable under the capital gains tax provisions and not as ordinary income.

In your case, we note that you acquired your interest in the land prior to the commencement of the capital gains tax provisions on 20 September 1985.

Where a property acquired before 20 September 1985 is sold, section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies that your assessable income includes any profit arising from the carrying on or carrying out of a profit making undertaking or plan. However, this provision does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997.

Case law has established that profits made by a taxpayer who enters into an isolated transaction with a profit making purpose can be assessable as ordinary income (FC of T v The Myer Emporium (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) considers the assessability of profits on isolated transactions. According to paragraph 1 of TR 92/3, the term 'isolated transactions' refers to:

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

The courts have often found 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 (paragraph 36 of TR 92/3).

Where the transaction involves the sale of property, it is usually necessary that the taxpayer has a profit-making purpose at the time of acquiring the property for the proceeds to be considered as being income. However, this may not always be the case (paragraph 41 of TR 92/3).

Paragraph 49 of TR 92/3 states that the following factors may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: 

In your case, you have a 50% interest in a parcel of land that you purchased over 50 years ago. Your relative also has a 50% interest in the land and has been carrying on a business on the land.

The application of the factors listed in paragraph 49 of TR 92/3 to your circumstances is as follows:

Although the subdivision of the land is a substantial development, it is considered that the subdivision and sale of the blocks will constitute a mere realisation of an asset rather than the carrying out of a business operation or commercial transaction because of the following:

You have effectively engaged another party to improve the value of your land holding prior to realising its value by sale. Therefore, the proceeds you receive from the subdivided blocks of land will be subject to the capital gains tax provisions of the ITAA 1997.


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