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Edited version of private advice
Authorisation Number: 1012655105841
Ruling
Subject: Capital gains tax
Question 1
Will the proceeds from the subdivision and sale of part of your property be assessable as ordinary income?
Answer
No.
Question 2
Will the proceeds from the subdivision and sale of part of your property be assessable as a capital gain?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on
1 July 2014
Relevant facts and circumstances
You purchased a property prior to 20 September 1985. The property is more than 2 hectares and has one residential house on it.
The government is seeking to acquire part of the property to build on.
You intend to subdivide the property into several parcels and sell the vacant land to the government.
Alternatively, the government will organise the subdivision of the land.
You will retain the portion of the land with the main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 paragraph 104-10(5)(a)
Income Tax Assessment Act 1997 section 120-2
Reasons for decision
Question 1
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 Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income.
Having regards to your circumstances and the factors outlined in TR 92/3 we do not consider that the proceeds from the sale of the subdivided lot are assessable under section 6-5 of the ITAA 1997. We accept that the subdivision and sale of a portion of your property is a mere realisation of a capital asset.
Question 2
Under section 120-20 of the ITAA 1997, an entity will make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset. 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.
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 CGT event if you retain ownership of the subdivided blocks.
In this case, you intend to subdivide the land into two blocks. There is no CGT event when the subdivision occurs, therefore the blocks will retain their pre CGT status.
When you sell the vacant land there will be no capital gains tax consequences as it is considered a pre CGT asset.
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